very prospective a report on breakdown Silicon Valley Bank, the Federal Reserve admits it probably shouldn’t have paid a little more attention to the technology-focused bank before it unceremoniously imploded last month. At the same time, the Fed report also reveals what everyone could already have guessed: SVB was a poorly run bank.
Long the headquarters for tech startup money and venture capital, SVB collapsed in March as a result of a number of corrupt financial decisions that diminished confidence in the bank, eventually leading to its collapse. run on his deposit. After its collapse, SVB was later taken over by the California government but later by the Federal Reserve Bank She decided to basically save him, in a decision some have described as questionable. Since then, everyone’s needed a little clarity on how all this happened — a question Friday’s report attempts to answer.
As previously noted, the report isn’t kind to anyone involved—neither the bank managers who ran the financial entity on the ground, nor the Federal Reserve’s regulators, who were supposed to keep an eye on this sort of thing.
“After the Silicon Valley bank failure, we must strengthen the Fed’s supervision and regulation based on what we’ve learned,” said Fed Vice Chairman of Supervision Michael S. Barr on Friday. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the circumstances that led to the bank’s failure, including the Fed’s supervisory and regulatory role.”
Here are some points learned from the report.
SVB was working poorly
This may not come as a huge surprise but one of the main takeaways from the Fed’s report is that SVB wasn’t a particularly good bank. The report indicates that the bank’s board and managers were not good at negotiating – or communicating about – risks in the bank’s business strategy. At the same time, the bank reportedly had no real plan for what if things went south – like they did last month. In fact, it “failed its own internal liquidity stress tests” and also had no functional plans to “access to liquidity in times of distress”. The report sums up:
Silicon Valley Bank was a very weak company in ways that its board of directors and senior management never fully appreciated. These weaknesses — institutional and widespread management weaknesses, a highly concentrated business model, and reliance on uninsured deposits — left the Silicon Valley bank highly vulnerable to the specific combination of rate hikes and slowdowns in technology that materialized in 2022 and early 2023.
The Fed admits it was a sleepy watcher
A refreshing if slightly insane admission in the Fed’s report is that it pretty much dropped the ball when it came to monitoring the situation in the SVB. Indeed, despite acknowledging that the bank served as the “primary federal supervisor” of the SVB, the Fed notes that the bank failed anyway. So uh what happened guys? Were you taking a nap while all this was going on?
According to the Fed, they missed some warning signs of SVB problems. Or alternatively, even though they’ve seen some things that don’t look so hot, they decide it’s no big deal. The report stated:
The Fed did not recognize the seriousness of critical deficiencies in the company’s management, liquidity, and interest rate risks. These rulings meant that Silicon Valley Bank remained in good shape, even as conditions deteriorated and significant risks to the integrity and safety of the company emerged.
At the same time, the Fed admits it, when it does an act Seeing the red flags, he was slow to act on them:
Overall, Silicon Valley Bank’s supervisory approach has been very deliberate and focused on the continuous accumulation of supporting evidence in a consensus-driven environment.
In other words, federal regulators felt they needed to have an open and shut case before taking action against SVB.
Important tip: Indeed, regulations are good!
One reason the SVB has gotten away with making so many stupid decisions is that the banking industry has seen deregulation over the past decade, largely at the behest of corporate lobbyists. This means that financial regulators have less of an obligation to closely monitor what a bank does.
After 2008 financial crisisCongress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was supposed to put in place protections that would prevent bank failures of the kind that characterized the ’08 crisis. However, in 2018, after A.J Great lobbying effortA new banking law was passed that removed some of these protections. The Economic Growth Regulatory Relief and Consumer Protection Act (EGRRCPA) did a number of things, but one of them was that it lowered the level of supervision of banks the size of the SVB. In its report, the Fed noted that the rollback of Dodd-Frank protectionism contributed to the SVB’s collapse, as the EGRRCPA “led to lower supervisory and regulatory requirements, including lower capital and liquidity requirements” for banks like SVB. It also changed the culture at the Federal Reserve, leading to “changes in expectations and practices, including pressure to reduce the burden on firms, meet a greater burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions.” In other words, employees were pressured to go easy on the banks.
Appropriately, he was one of the figures in the industry who pushed hard for a shift in regulations SVB CEO, Greg Baker, who argued that failure to facilitate SVB-sized banks would “strangle our ability to extend credit to our clients”. That’s funny because you know what negatively affects credit for customers? Your bank’s existence is falling apart.
The Fed’s most important suggestion for avoiding future failure: We’ll try to do our job more often
In concluding the report, the Fed admits that there are a few things it could probably do to make sure this type of thing doesn’t happen again. These suggestions include “a shift (in) the culture of supervision towards a greater focus on inherent risk, and more willingness to form provisions that challenge bankers with a prudential perspective.” In addition, Barr’s vice president of supervision said he wanted to see an increase in the “speed, strength, and flexibility of supervision” of banks. Whatever that means, I hope it means better regulations, yeah? Yes.