SVB collapse a 'textbook case of mismanagement', Fed vice chair says

Executives at federal regulators to reassure Congress of US banking system's resiliency

Federal Reserve vice chairman Michael Barr called the collapse of Silicon Valley Bank a 'textbook case of mismanagement'. Reuters

The collapse of Silicon Valley Bank this month was a “textbook case of mismanagement” that will require stricter regulation, Federal Reserve vice chairman Michael Barr will tell Congress on Tuesday.

“SVB's failure demands a thorough review of what happened, including the Federal Reserve's oversight of the bank,” Mr Barr will say before the Senate banking committee

He will say that SVB grew exceedingly quickly and saw its deposits grow significantly as the tech sector boomed during the Covid-19 pandemic.

During this time the bank invested in long-term securities but failed to manage interest-rate risks.

“The bank waited too long to address its problems, and ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank's failure,” Mr Barr will say.

The collapse of SVB initiated a turbulent period that 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 had even spread into Europe where Credit Suisse was acquired by UBS.

Still, US President Joe Biden and federal regulators have sought to reassure Congress and the American public of the US banking system's strength.

"Our banking system is sound and resilient,” Mr Barr will say, a familiar refrain that has also been recited by Treasury Secretary Janet Yellen and Fed chairman Jerome Powell in recent weeks.

Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, will appear alongside Mr Barr on Tuesday to tell politicians that most banks are not experiencing a significant run on deposits.

Mr Gruenberg said the FDIC would release a report in May on the deposit insurance system.

The collapse of SVB and the ensuing fallout has prompted Mr Biden's administration and regulators to reconsider how banks are supervised.

Mr Biden has called on Congress to grant the FDIC more authority to go after failed bank executives, while Mr Powell indicated that he would welcome independent investigations.

“The failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system,” Mr Barr will say.