The Federal Reserve’s said in a postmortem that the collapse of Silicon Valley Bank represented failure across the board, including at the central bank.
In the much-anticipated report, released on Friday morning, the Fed said that, while the United States banking system is “sound and resilient,” the SVB collapse demonstrated weakness in both regulation and supervision. The 118-page report is the culmination of an investigation spearheaded by Michael Barr, the Fed’s vice chair for supervision.
“Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk,” central bank investigators concluded. “Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report.”
The report found that SVB executives failed to manage their risks at the bank, which became the second-largest failure in U.S. history after ballooning in size and complexity over the years. Fed supervisors didn’t properly identify vulnerabilities amid that growth and, when vulnerabilities were identified, officials didn’t take enough steps to make sure SVB mitigated those problems efficiently.
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In March, just after SVB unexpectedly announced that it needed to raise capital, clients began to pull money from the financial institution, which had a big chunk of deposits in excess of the Federal Deposit Insurance Corporation’s $250,000 insurance limit. On Friday, March 10, the FDIC announced that the bank had failed and regulators took control of the firm.
Amid growing panic from depositors and investors fearing the collapse could evolve into full-on banking crisis, the government announced that weekend that all of the bank’s depositors would be made whole, even those who banked in excess of the federally insured $250,000. The Fed also formed the Bank Term Funding Program as a new source of funding for banks that might face depositor runs.
The resulting pandemonium spooked the markets, changed the expected trajectory of the Fed’s agenda for tightening monetary policy, and even resulted in other dominoes falling, for instance, the buyout of Switzerland-based megabank Credit Suisse by competitor UBS with the support of Swiss authorities.
In its Friday report, Fed investigators said that bank runs, like the one that brought down SVB, are now different than ones in the past, given the rapid proliferation of technology in recent years. The combination of social media and boosted technological progress “may have fundamentally changed the speed of bank runs.”
Barr also noted how interconnected the banking system is and how the failure of one institution, regardless of size, can ripple through the financial ecosystem. He said that “a firm’s distress may have systemic consequences through contagion — where concerns about one firm spread to other firms — even if the firm is not extremely large, highly connected to other financial counterparties, or involved in critical financial services.”
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“Our first area of focus will be to improve the speed, force, and agility of supervision,” he added of the Fed’s forward-facing goals. “As the report shows, in part because of the Federal Reserve’s tailoring framework and the stance of supervisory policy, supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough.”
Even seven weeks after SVB’s dramatic collapse (and the subsequent failure of crypto lender Signature Bank), officials are still grappling with the fallout. First Republic Bank’s stock has plunged more than 90% this year and there are reports that government officials are convening meetings with other banks to craft a rescue plan for First Republic.
