The collapse of Silicon Valley Bank in March was due to a “textbook case of mismanagement,” coupled with Federal Reserve supervisors failing to take forceful enough action, according to a Fed report released Friday.
The report, spearheaded by Michael S. Barr, the central bank’s vice chairman for supervision, outlined four key takeaways from the high-profile venture capital and startup lender’s demise:
- Silicon Valley Bank’s board of directors and management failed to manage their risks.
- Supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity.
- When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough.
- The Fed’s tailoring framework and its stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity and promoting a less assertive supervisory approach.
At the time of its failure, SVB had 31 unaddressed safe and soundness supervisory warnings — triple the average number peer banks have, according to the report.
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Mr. Barr said in an accompanying news release. “This review represents a first step in that process — a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation.”
The report said the Fed should evaluate how it supervises and regulates a bank’s interest rate risk and liquidity risk management, and assess ways to improve capital requirements. Moreover, with respect to bank manager incentives oversight, the
Fed should consider setting tougher minimum standards for incentive compensation programs and ensure banks comply with the standards it already has, the report said.
The report also said the combination of “social media, a highly networked and concentrated depositor base and technology may have fundamentally changed the speed of bank runs. Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding.”
But overall, the nation’s banking system is sound and resilient, with strong capital and liquidity, the Fed said. While SVB was an outlier in some ways because of its highly concentrated business model, interest rate risk and high level of reliance on uninsured deposits, the bank’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed, the report noted.
“I welcome this thorough and self-critical report on Federal Reserve supervision from Vice Chair Barr,” Federal Reserve Chairman Jerome H. Powell said in the news release. “I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.”