Fed Blames Oversight, Management for Silicon Valley Bank’s Collapse

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Silicon Valley Bank (SVB) failed due to a perfect storm of incompetent management, insufficient supervision and weak regulations, the Federal Reserve said in a report on Friday.

The autopsy tries to explain how federal regulators failed to prevent the second banking meltdown in US history, which caused a banking crisis that increased the chances of a recession.

“After the failure of Silicon Valley Bank, we need to strengthen Federal Reserve supervision and regulation based on what we’ve learned,” said Michael Barr, the Fed’s vice chairman for supervision, who led the internal investigation.

SVB failed to manage the risk

The Fed wrote that SVB’s downfall can be attributed to “widespread managerial weaknesses” and its reliance on uninsured deposits from technology and venture capital customers.

That left the bank “extremely exposed to the specific combination of rising interest rates and slowing activity in the technology sector,” the Fed wrote in its report.

When the Fed raised interest rates, SVB’s holdings of long-term Treasuries fell in value, leaving the bank with huge unrealized losses. This made it difficult for SVB to cope with a slowdown in filings driven by the difficulties in the technology sector.

When SVB’s tech-dominated depositors caught wind of the bank’s troubles, they coordinated the first-ever online banking run, withdrawing $40 billion in a single day. Regulators quickly closed SVB and later guaranteed uninsured deposits to prevent further bank runs.

“Silicon Valley Bank managed interest rate risk with an emphasis on short-term profits and protection against potential rate declines, and removed interest rate hedges, rather than managing long-term risks and the risk of rising rates,” the report noted.

Supervisors did not act quickly enough

The report found that SVB earned strong ratings from supervisors even as its balance sheet fell from $71 billion to $211 over two years and despite “repeated observations of weakness in risk management”.

Supervisors identified SVB’s “interest rate risk deficiencies” as early as 2020. But they did not release findings on this until November 2022. SVB went bankrupt before supervisors control demote the bank.

Fed regulations were too weak

Former President Trump in 2018 signed a bipartisan bill to ease regulations on midsize banks such as SVB, which had lobbied lawmakers to implement weaker standards. The law exempted these banks from stress tests and capital requirements aimed at preventing bankruptcy.

Under the law, the Fed had the ability to implement tougher standards on banks like SVB, but did not. Congressional Republicans and bank lobbyists have pushed the Fed to keep the standards narrowly tailored to the biggest banks.

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“While higher supervisory and regulatory requirements may not have prevented the company from failing, they likely would have made Silicon Valley Bank more resilient,” the report said.

The report noted that around the same time, Fed policy “placed greater emphasis on reducing the burden on businesses” by increasing the burden of proof on supervisors to sue banks. .

“Although the stated intention of these policy changes was to improve the effectiveness of supervision, in some cases the changes also led to a slowdown in the action of supervisory staff and a reluctance to escalate the problems,” the Fed wrote.

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