The management and board of Silicon Valley Bank (SVB), regulators, and social media should take some blame for the collapse of the firm, according to a report released Friday by the Federal Reserve.
- Fed report says Silicon Valley Bank board of directors and management failed to manage the bank's risks.
- The regulator admits Fed officials did not recognize vulnerabilities as SVB grew too fast. By the time problems were noticed, they weren't addressed quickly enough.
- A change in Fed rules reduced supervisory standards for SVB.
- Social media fanned the flames of a bank run and technology allowed quick withdrawal of funds.
Silicon Valley Bank failed in March after reporting unrealized losses on its balance sheet. The losses sparked a run on the bank, as depositors and investors lost faith. The Federal Reserve, led by Vice Chair for Supervision Michael S. Barr, has been investigating what caused the collapse.
The Federal Deposit Insurance Corporation (FDIC) took control of the bank after the run and in conjunction with Federal Reserve, came up with emergency measures to make depositors whole again. Assets of SVB were sold to First Citizens Bank (FCNCA).
SVB's collapse triggered months-long turmoil in the regional banking sector. The repercussions of SVB's failure are still being felt by First Republic Bank (FRC) which, itself, is on the brink.
The 118-page review of the supervision and regulation of SVB cited four key factors that led to the second-largest bank failure in U.S. history:
Silicon Valley Bank's board of directors and management failed to manage risks.
SVB executives failed to manage interest rate and liquidity risks. Simply put, the bank invested in longer-term U.S. Treasuries that created a gap on its balance sheet as interest rates rose. The company's board, which is supposed to keep a check on the management, "failed to oversee senior leadership and hold them accountable."
The report also said SVB "failed its own internal liquidity stress tests and did not have workable plans to access liquidity in times of stress."
Fed officials tasked with supervising SVB didn't recognize vulnerabilities as the bank quickly grew.
SVB grew quickly, almost tripling its assets to $211 billion in the two years between 2019 and 2021. Some vulnerabilities Fed officials failed to appreciate included "widespread managerial weaknesses, a highly concentrated business model, and a reliance on uninsured deposits." That reliance left the bank exposed in an environment of rising rates and a slowdown in the tech sector in which most of the firm's clients worked.
When Fed official found problems, they didn't address them fast enough.
Fed officials found problems with SVB's interest rate risk management strategies in examinations held in 2020, 2021, and 2022, but didn't issue a report.
"The supervisory team issued a supervisory finding in November 2022 and planned to downgrade the firm’s rating related to interest rate risk, but the firm failed before that downgrade was finalized," the report said.
SVB had 31 open supervisory findings against it when it failed in March. That's three times the number for any similar bank.
Change in Fed rules reduced supervisory standards for SVB.
Over the past five years, the Fed has changed the way it supervises banks based on the assets they have. Based on its assets, SVB was considered a Regional Banking Organization (RBO), subject to less stringent standards compared to institutions with greater assets.
"Following Silicon Valley Bank's failure, we must strengthen the Federal Reserve's supervision and regulation based on what we have learned," Vice Chair for Supervision Barr said. "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."
While the regulator found faults within the company's management and its own supervisory system, it also placed partial blame on social media for sparking a bank run.
"[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," the report said.