In a hotly anticipated banking report released Friday morning, the Federal Reserve said it failed to take sufficient action to prevent the collapse of Silicon Valley Bank, while detailing serious management oversights by the lender’s executives.
The Fed, which is SVB’s primary regulator, took responsibility for its own lapses, saying that supervisors “did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity” and “did not take sufficient steps” to ensure that SVB address its problems quickly.
Silicon Valley Bank’s collapse on March 10 — followed two days later by that of Signature Bank — sent shock waves through the global banking system. Regional banks have been hit especially hard, and investors are still bracing for pain six weeks later as First Republic Bank teeters on the edge.
“Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” the Fed report states.
It recommended a sweeping re-evaluation of its regulatory and supervisory functions.
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” said Michael Barr, the Fed’s vice chair for supervision. “This review represents a first step in that process.”
Barr, who oversaw the Fed’s self-assesment, said that the central bank would welcome external reviews of SVB’s failure, including from Congress.
The report offers four key takeaways:
- Silicon Valley Bank’s leadership failed to manage risks.
- The Fed’s own supervisors didn’t fully appreciate SVB’s vulnerabilities.
- Supervisors were too slow to act on problems.
- A 2019 shift in Fed policy “impeded effective supervision.”
The Federal Deposit Insurance Corporation released a similar report on Signature Bank, blaming its demise on “poor management.”
Supervisory shortcomings
The Fed report adds greater detail to many of SVB’s shortcomings that became apparent soon after the bank’s collapse, including its highly concentrated business model that catered to the tech and venture capital industries, lax risk management practices, and its reliance on uninsured deposits.
But the report is perhaps most notable for its recognition of the Fed’s own institutional flaws. In a letter accompanying the report, Vice Chair Barr offers a frank critique of his own agency.
“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” he wrote.
He warned that the Fed must “guard against complacency” after more than a decade of banking stability that “may have led bankers to be overconfident and supervisors to be too accepting.”
The report notes that SVB’s breakneck growth — it more than tripled in size between 2019 and 2021 — far outpaced the abilities of its board of directors and senior management.
“They failed to establish a risk-management and control infrastructure suitable for the size and complexity of SVBFG when it was a $50 billion firm, let alone when it grew to be a $200 billion firm,” the report states.
Supervisors put in place by the Fed, meanwhile, continued to assess the board of directors and senior management as “effective” despite clear signs that governance and risk management were not matching the bank’s growth.
At the time of its failure, SVB had 31 unaddressed “safe and soundness supervisory warnings” — triple the average number of peer banks, according to the Fed.
Rethinking deregulation
As SVB was growing rapidly, its own executives and other banking leaders lobbied Congress to roll back regulations that would have increased scrutiny on banks of certain size.
A 2010 law signed by President Barack Obama, widely known as Dodd-Frank, created stricter regulations for banks with at least $50 billion in assets. Those banks were required to undergo an annual “stress test,” maintain certain levels of capital and liquidity (to be able to absorb losses and quickly meet cash obligations), among other things.
The 2018 rollback got rid of the $50 billion threshold, and made the enhanced regulations standard only for banks with at least $250 billion in assets.
SVB, which had $211 billion in assets by the time it collapsed, became exempt from those tougher regulations — a fact that has renewed calls from lawmakers on the left to reinstate the 2010 regulations.
The Fed’s report doesn’t directly blame SVB’s collapse on the 2018 bill, but it notes that the policy changes had unintended, negative consequences that led some supervisors to drag their feet when reporting problems.
“While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” Barr said in the report.
