Failure SVB is ‘textbook example’ of mismanagement’

Less than three weeks after Silicon Valley Bank collapsed, Federal Reserve vice chairman of oversight Michael Barr will tell lawmakers on Tuesday that the collapse was a textbook example of mismanagement after the nation’s 16th lender went into receivership within days .

“The failure of the SVB is a textbook example of mismanagement,” Barr testified. “The bank had a concentrated business model, serving the technology and venture capital industries.”

Barr’s testimony comes just a day after First Citizens announced a deal to acquire Silicon Valley Bank’s loans and deposits from the FDIC, which has run the bank since March 10.

Barr notes that the company grew “extraordinarily fast” during the pandemic, with deposits rising rapidly and these returns largely flowing into long-term securities such as government bonds and mortgage-backed securities.

“The bank has not effectively managed the interest rate risk of those securities or developed effective tools, models and metrics for measuring interest rate risk,” Barr will say.

“At the same time, the bank failed to manage the risks of its liabilities. These liabilities largely consisted of deposits from venture capital firms and the technology sector, which were highly concentrated and could be volatile.”

“The bankruptcy of the SVB requires a thorough review of what happened, including the Federal Reserve’s oversight of the bank,” Barr will tell lawmakers. “I am committed to ensuring that the Federal Reserve fully accounts for any oversight or regulatory shortcomings, and that we fully address what went wrong.”

Barr’s key message that the failure of the SVB lies with the company’s management echoes what Fed Chairman Jerome Powell told the media at a news conference last week: “[At] a base level, Silicon Valley Bank’s management failed badly, they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, [and] not cover that risk.”

A social media run

This is the first time investors and lawmakers have heard from Barr — who will testify before the Senate Banking Committee on Tuesday, followed by the House Financial Services Committee on Wednesday — about why Silicon Valley Bank failed and the response from regulators.

The Fed was responsible for overseeing the SVB.

SVB was placed in receivership by the FDIC on March 10, just two days after the bank announced it would take a $1.8 billion loss on the sale of some securities and attempt to raise another $2.25 billion in capital. to strengthen the balance.

More than $40 billion was withdrawn from the bank on March 9, coinciding with the botched capital raise that eventually brought the bank down. Barr also points to the role social media played in fueling what ended up being a fatal run on the bank.

“Uninsured savers interpreted [SVB’s losses and capital raise] as a signal that the bank was in distress,” Barr will tell lawmakers.

“They turned their attention to the bank’s balance sheet, and they weren’t happy with what they saw. In response, social media saw a flurry of rumors of a run, and uninsured savers quickly rallied to flee.”

What regulators knew

Barr’s appearance before lawmakers on Tuesday will also raise questions about what the Federal Reserve and other regulators knew, when they knew, and what mistakes were made.

According to Barr’s testimony, by the end of 2021, regulators discovered deficiencies in the bank’s liquidity risk management, resulting in six regulatory findings related to the bank’s liquidity stress testing, emergency funding and liquidity risk management.

Michael Barr is sworn in as Federal Reserve Vice Chairman for Oversight by U.S. Federal Reserve Chairman Jerome Powell in the press room of the William McChesney Martin Federal Reserve Board Building in Washington, U.S., July 19, 2022. U.S. Federal Reserve Board/ handout via REUTERS

In May 2022, regulators released three findings related to ineffective supervision by the board, weaknesses in risk management and the bank’s internal audit function.

The bank waited too long to address its problems, and ironically, the overdue measures it eventually took to strengthen its balance sheet led to the run on uninsured depositors that led to the bank’s bankruptcy. Barr’s testimony.

“The picture that has emerged so far shows that SVB had inadequate risk management and internal controls that struggled to keep pace with the bank’s growth.”

In October 2022, regulators spoke to the bank’s senior management to express concerns about the bank’s interest rate risk profile. The following month, regulators delivered an oversight finding on interest rate risk management to the bank.

In mid-February 2023, Fed staff emphasized SVB’s interest rate and liquidity risk and said they are actively involved with SVB. As it turned out, the full extent of the bank’s vulnerability only became apparent during the unexpected bank run on March 9.

“We have to ask why the bank was unable to resolve and address the issues we identified in a timely manner,” Barr will say. “It is not the job of regulators to solve the problems identified; it is the job of senior management and the bank’s board of directors to solve the problems.”

‘Our banking system is healthy’

Barr says the Fed is focusing on whether its oversight was appropriate for the bank’s rapid growth and vulnerabilities, with the Fed also assessing whether higher levels of capital and liquidity would have prevented SVB’s failure or made the bank more resilient. have given.

On Sunday, March 12, Treasury Secretary Janet Yellen, with a unanimous recommendation from the Fed and the FDIC, approved systemic risk exemptions for the failure of SVB and Signature, allowing the FDIC to underwrite all deposits from both banks.

In addition, with Treasury approval, the Fed has created a temporary credit facility to provide additional liquidity to banks to meet unexpected demand from depositors.

U.S. Treasury Secretary Janet Yellen testifies before a Senate Appropriations Financial Services and General Government Subcommittee hearing on President Biden's proposed budget request for the Treasury Department for fiscal year 2024, on Capitol Hill in Washington, U.S. , March 22, 2023 REUTERS/Evelyn Hockstein

U.S. Treasury Secretary Janet Yellen testifies before a Senate Appropriations Financial Services and General Government Subcommittee hearing on President Biden’s proposed budget request for the Treasury Department for fiscal year 2024, on Capitol Hill in Washington, U.S. , March 22, 2023. REUTERS/Evelyn Hockstein

“It seemed that contagion from the bankruptcy of the SVB could be far-reaching and damage the broader banking system,” says Barr’s testimony. “The prospect of uninsured depositors being unable to access their funds may lead depositors to question the overall safety and soundness of U.S. commercial banks.”

Barr will say these actions show regulators are committed to ensuring all deposits are safe.

“Our banking system is sound and resilient, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are ready to use all our tools for institutions of all sizes, if necessary, to keep the system safe and sound .”

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