California-based Silicon Valley Bank was not subject to heightened supervisory or regulatory standards by the US Federal Reserve and “significant risk” to the bank's safety and soundness was missed, leading to its collapse, a review report released on Friday shows.
SVB's failure was due to a “textbook case of mismanagement”, with its senior leadership failing to manage basic interest rate and liquidity risk and its board of directors not holding them accountable, the report said.
But Fed supervisors failed to take forceful enough action, Michael Barr, the Fed’s vice chair for supervision, said.
“While the firm was growing rapidly from $71 billion to over $211 billion in assets from 2019 to 2021, it was not subject to heightened supervisory or regulatory standards. The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management,” he said.
“These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged.”
For governance, SVB was rated “satisfactory” in terms of management from 2017 through 2021 — despite repeated observations of weakness in risk management. In terms of liquidity, it was rated strong during that period.
The collapse of SVB in March sparked a turbulent period, which stoked fears of a global banking crisis similar to when Washington Mutual collapsed in 2008.
In the days after SVB's collapse, mid-size lenders Signature and Silvergate Bank both failed and shares tumbled at other regional banks.
Contagion fears even spread to Europe, where Credit Suisse was acquired by UBS.
However, the report once again stressed that the US banking system is “sound and resilient, with strong capital and liquidity”.
Mr Barr called for comprehensive changes and reassessment of how the institution manages US financial companies.
“Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learnt,” Mr Barr said.
Last week, SVB’s senior officials resigned, amid efforts to turn around the collapsed US lender, a regulatory filing showed.
Chief executive Gregory Becker, who is also a director at SVB, left his post on April 19, while chief financial officer Daniel Beck quit on April 18, SVB said in its filing to the US Securities and Exchange Commission on April 21.
Mr Becker agreed to provide consulting services to SVB “on an as-needed basis, at no cost to the company”, according to the filing.
In the 102-page review, Mr Barr also highlighted potential issues exposed by the failure of SVB.
He said social media enabled depositors to instantly spread concerns about a bank’s operations, and technology enabled immediate withdrawals of funding.
“A firm’s distress may have systemic consequences through contagion … where concerns about one firm spread to other firms … this experience has emphasised why strong bank capital matters.”
SVB was the go-to bank for technology entrepreneurs and start-ups and had about $209 billion in assets at the end of last year. At its peak, it was the 16th-largest bank in the US and the biggest in Silicon Valley.
Following its collapse in March, it was placed in receivership with the US Federal Deposit Insurance Corporation, which later confirmed that North Carolina-based First Citizens Bank and Trust would acquire SVB's assets.
“Contagion from the failure of SVB threatened the ability of a broader range of banks to provide financial services and access to credit for individuals, families, and businesses. Fast and forceful action … helped to contain the damage, but weaknesses in supervision and regulation must be fixed,” Mr Barr said.
At the time of its failure, SVB had 31 unaddressed safe and soundness supervisory warnings — triple the average number of its peer banks.
Mr Barr said as risks in the financial system continue to evolve, the Fed needs to “evaluate supervisory and regulatory framework and be humble about our ability to assess and identify new and emerging risks”.
“That is why we need to bolster resiliency broadly in the financial system, and not focus solely on specific risk drivers,” he said.
Fed chairman Jerome Powell said he agreed with Mr Barr’s recommendations.
“I welcome this thorough and self-critical report on the Federal Reserve,” Mr Powell said.
“I agree with and support his [Mr Barr’s] recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.”