The report which was announced on Tuesday by the Federal Reserve, contains a detailed analysis into the causes of SVB’s collapse.
The US Federal Reserve released, on Friday, its report on the review of the supervision and regulation of Silicon Valley Bank (SVB). The review was constituted to find the reason behind the rapid collapse of the SVB, and the Federal Reserve’s shortcomings in the matter. The review was led by Vice Chair for Supervision Michael S Barr. According to him, the review takes an unflinching look at the circumstances which led to the bank’s failure, including the problems with the bank’s senior management and the weakness in the Federal Reserve supervision.
Key takeaways from the report
The report contains four key takeaways. Firstly, the Silicon Valley Bank’s board of directors failed to manage its risks. The review found that the SVB was a highly vulnerable firm which left it severely exposed to the risks of rising interest rates and a slowdown in the technology sector in 2023. These weaknesses include managerial weaknesses, uninsured deposits, and a very concentrated business model.
Secondly, Fed supervisors did not appreciate the vulnerabilities of the SVB even as it grew rapidly. The firm grew from USD 71 billion in 2019 to USD 211 billion in 2021, however, the Federal Reserve did not pay enough attention to the glaring deficiencies in the governance, liquidity, and interest rate risk management of the bank. This meant that the firm received good ratings from the Fed even as its conditions kept deteriorating and the firm faced severe risk.
Thirdly, though the supervisors did identify vulnerabilities, they did not take steps to ensure that the problems were fixed by the bank. The supervisory approach to the bank was overall deemed too deliberative. When the bank rapidly grew, its initial ratings projected the image of a well-managed bank.
Fourthly, and lastly, a shift in the stance of the Federal Reserve’s supervisory policy resulted in lower supervisory and regulatory requirements for SVB which led to slower action by the supervisory staff. The federal reserve had also tailored requirements for large banks which led to lower capital requirements and liquidity rates that supported SVB’s collapse.
Suggestions for the Federal Reserve
The report has suggested certain key areas where the Fed must take action.
It must have a stronger supervisory framework and a stronger regulatory framework. It was found in the report that the fed’s existing framework was insufficient and needed to be changed and made more adaptable to the risks posed by various quarters.
The report has suggested greater continuity between supervisory portfolios for the various bank sizes and is especially attentive to the specific risks posed by firms with business models similar to that of SVB.
The report has also suggested that it is better to have a stronger set of standards apply to a broad range of firms. Rules regarding interest rate risk, liquidity risk, capital requirements, and stress testing, some of the key supervisory tools, also need to be revisited and made better.
What was the SVB collapse?
The Silicon Valley Bank was a commercial bank founded in 1983 that mainly served technology companies and clients. It catered to venture-backed companies while also providing personal credit lines and private banking to tech entrepreneurs.
On March 10, 2023, SVB collapsed after a bank run, wherein customers of the bank rapidly withdrew their deposits with the bank en masse. The bank run was primarily caused due to the consecutive rate hikes by the Federal Reserve, a slowdown in the tech sector caused by a funding winter, and the bank’s massive investments in long-term securities.
The report has said that the changes it mentions must be considered even as implementation may take years.
