Silicon Valley Bank is Back in the News as the Fed Explains the Mess
Silicon Valley Bank’s management, the board of directors, and Federal Reserve supervisors all ignored banking basics. At least that is the determination of the Federal Reserve itself. The review and report of the situation, created by the Federal Reserve Board of Governors, relieve fears that the broader U.S. banking system is fragile. But it does highlight other problems that may need to be addressed by those responsible for a sound U.S. banking system.
Silicon Valley Bank was considered the “go-to bank” for venture capital firms and technology start-ups. But it failed spectacularly in March which set off a crisis of confidence toward the banking industry. Federal regulators seized Silicon Valley Bank on March 10 after customers withdrew tens of billions of dollars in deposits in a matter of hours. The speed of withdrawals was attributed to high levels of communication through social media.
The opening paragraph of the introductory letter by the Federal Reserve in DC said:
“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. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful action, as detailed in the report.”
The plain-spoken letter and more formal report was critical of all involved, including regulators who are supposed to be evaluating bank management and processes for adequacy.
The lengthy report has four key takeaways:
- “Silicon Valley Bank’s board of directors and management failed to manage their risks.”
[Editor’s note] Banks present-value their assets (investments and loans) and their liabilities (deposits) then report valuations at regular Asset/Liabilty management meetings. When a depositor locks in a CD and rates rise, the value to the bank of that deposit rises as it is present valued to higher market rates. The same for loans, and the investment portfolio if it is designated marked-to-market. Proper interest rate risk management for banks is stress testing for risk and profitability if rates rise or fall.
- “Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.”
[Editor’s note] Regulators don’t tell banks how to manage their business, but regulators are supposed to check that a suitable plan is in place, it was created by competent managers considering the bank’s complexities, and that it is being followed.
- “When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”
- “The board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
[Editor’s note] SVB’s CEO lobbied for this roll back of Dodd Frank which set ratios and loosened the reigns on regulatory scrutiny of larger banks.
In its criticism of its own lack of oversight, the report stated “The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management. These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged.”
The Fed also said, based on its report, it plans to reexamine how it regulates banks the size of SVB, which had more than $200 billion in assets when it failed.
The Fed’s release, which includes internal reports and Fed communications, is a rare look into how the central bank supervises individual banks as one of the nation’s bank regulators. Other regulators include the Office of the Controller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Typically these processes are confidential and rarely seen by the public, but the Fed chose to release these reports to show how the bank was managed up to its failure.
It probably won’t be long before Silicon Valley Bank is used as a college case study in what not to do.
Managing Editor, Channelchek
Source
https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180706b.htm