Fed report on SVB collapse blasts bank executives — and central bank regulators


Silicon Valley Bank’s dramatic failure in early March was the product of mismanagement and oversight missteps, compounded by a dose of social media frenzy, the Federal Reserve concluded in a much-anticipated report released. Friday.

Michael Barr, the Fed’s Vice Chairman for Oversight appointed by President Joe Biden, said in the comprehensive investigation into the March 10 SVB collapse that a myriad of factors came together to bring down what was the 17th largest bank in the country.

Among them were bank executives who committed “classic” failures in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and then were too slow to react, and a social media frenzy that may have accelerated the institution’s demise.

Barr called for big changes in how regulators approach the country’s complex and intertwined financial system.

“After the failure of Silicon Valley Bank, we need to strengthen Federal Reserve supervision and regulation based on what we learned,” he said.

“As risks in the financial system continue to evolve, we must continually assess our supervisory and regulatory framework and be humble about our ability to assess and identify new and emerging risks,” added Barr.

A Silicon Valley Bank security guard watches a line of people outside the office on March 13, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

A senior Fed official said increased capital and liquidity could have helped SVB survive. Central bank officials will likely turn their attention to cultural shifts, noting that risks at SVB have not been thoroughly examined. Future changes could see standardized liquidity requirements for a wider range of banks and tighter oversight of bank manager compensation.

Bank stocks were higher after the report was released, with the SPDR S&P Bank ETF up about 1.3%.

The report “paves the way for far-reaching re-regulation and tighter supervision of mid-sized banks,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI, said in a statement. a customer note. “However, apart from a reference to a possible tightening of executive compensation rules that may or may not be enforced, there are few big surprises here.”

In a stunning move that continues to ripple through the banking system and financial markets, regulators shut down SVB following a run on deposits triggered by liquidity concerns. To meet capital needs, the bank was forced to sell long-term Treasuries at a loss as rising interest rates ate away at principal value.

Barr noted that SVB’s run for deposits was exacerbated by widespread fear on social media that the bank was in trouble, combined with the ease of withdrawing deposits in the digital age. The phenomenon is something regulators should note for the future, he said.

“[T]The combination of social media, a highly connected and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Barr said in the report. immediate funding withdrawals.”

He used a broad brush to discuss Fed failures, without mentioning San Francisco Federal Reserve Chair Mary Daly, under whose jurisdiction the SVB sits. Senior Fed officials, speaking on condition of anonymity in order to speak candidly, said regional presidents are generally not responsible for direct oversight of banks in their districts.

Fed Chairman Jerome Powell said he welcomed the Barr investigation and its internal critique of the Fed’s actions during the crisis.

“I agree with and support his recommendations regarding our supervisory rules and practices, and I am confident that they will lead to a stronger and more resilient banking system,” Powell said in a statement.

SVB was a tech industry darling as a place to turn for high-flying companies in need of growth funding. In turn, the bank used billions in uninsured deposits as a lending base.

The collapse, which happened in just a few days, sparked fears that depositors could lose their money, as many accounts exceeded the $250,000 threshold for Federal Deposit Insurance Corp. Signature Bankwhich used a similar business model, also failed.

As the crisis unfolded, the Fed implemented emergency lending measures while ensuring depositors would not lose their money. Although these measures have largely stemmed the panic, they have boosted comparisons with the 2008 financial crisis and led to calls for the reversal of some of the deregulation measures taken in recent years.

Senior Fed officials said changes in the Dodd-Frank reforms helped spur the crisis, though they also acknowledge the SVB affair was also a failure of supervision. A change approved in 2018 reduced the stringency of stress tests for banks under $250 billion, a category SVB fell into.

“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” Barr wrote. “In the case of SVB, supervisors delayed action to gather more evidence even though the weaknesses were clear and growing. This meant that supervisors did not force SVB to address its issues, even though those issues were were getting worse.”

Areas the Fed is likely to focus on include the types of uninsured deposits that raised concerns during the SVB drama, as well as a general focus on capital needs and the risk of unrealized losses the bank had. on its balance sheet.

Barr noted that the supervisory and regulatory changes likely won’t take effect for years.

The General Accountability Office also released a report on bank failures on Friday that found “risky business strategies and weak liquidity and risk management” that contributed to the collapse of SVB and Signature.

Correction: The General Accountability Office also released a report on Friday. An earlier version had an error in the name of the agency.

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