SVB's risk model 'not aligned with reality', Fed official says

US regulators criticise Silicon Valley Bank and say new rules for lenders are now being reviewed

US Federal Reserve vice chairman for supervision Michael Barr at a Senate committee hearing on March 28. EPA

In the first congressional hearing into the collapse of two US regional lenders and the ensuing market chaos, the top banking regulator at the Federal Reserve criticised Silicon Valley Bank on Tuesday over its faulty risk modelling.

"They were issued a matter requiring immediate attention based on the inaccuracy of their interest rate risk modelling," Michael Barr, the Federal Reserve's vice chairman for supervision, told legislators.

"Essentially, the risk model was not at all aligned with reality."

Mr Barr said he was first made aware of the interest rate risk-related issues at Silicon Valley Bank in mid-February, just weeks before its failure.

"The staff highlighted the interest-rate risk that was present at Silicon Valley Bank and indicated that they were in the middle of a further review," he said.

Supervisory staff at the Fed had previously raised serious concerns over SVB's interest-rate risk and liquidity management, and demanded fixes from the bank in November 2021, Mr Barr said.

In mid-2022, Fed staff deemed the bank's management to be deficient and barred the lender from growing through mergers or acquisitions, he said.

Fed supervisors took those issues to SVB's chief financial officer in October 2022, Mr Barr said, and raised other concerns to SVB management in November.

"I believe that is the first time that I was told about interest-rate risk at Silicon Valley Bank."

Mr Barr and Federal Deposit Insurance Corporation chairman Martin Gruenberg indicated that they were looking into tightening rules for banks and applying stricter oversight for companies similar to SVB.

The hearing was the first of what is expected to be several into the banking tumult.

The House financial services committee will hear from the same regulators on Wednesday, and congressional leaders have already said they want to question former chief executives of the two banks on what went wrong.

Reuters contributed to this report