Silicon Valley Bank’s mismanagement led to failure

Federal Reserve Vice Chairman of Oversight Michael Barr appeared before Congress last year. Photo: Ting Shen/Bloomberg via Getty Images

Silicon Valley Bank was a “textbook example of mismanagement,” the Federal Reserve’s chief banking regulator will tell lawmakers this week — a key reason for the bank’s failure.

Why it matters: The Fed official is one of the regulators set to appear before Congress for the first hearing on the collapse of Silicon Valley Bank, which sparked panic over the health of the financial system.

  • The officials, including those from the Federal Deposit Insurance Corporation and the Treasury Department, will appear as questions swirl about whether stricter rules and oversight could have prevented the collapse.

Details“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,” said Michael Barr, the Fed’s vice chairman for oversight. Tell the Senate tomorrow, according to the prepared text.

  • Barr is leading an investigation by the Fed into potential regulatory and regulatory missteps that failed to prevent the bank’s bankruptcy. The results will be announced on May 1.
  • The FDIC also plans to release a report next month on deposit insurance with “policy options for consideration” around insurance coverage levels, FDIC Chairman Martin Gruenberg will tell Congress this week, according to the text of prepared remarks.
  • As part of a stopgap measure, FDIC expanded the deposit guarantee to all depositors at Silicon Valley Bank, as well as those at the failed Signature Bank — including those who exceeded the $250,000 limit.

The big picture: Democratic lawmakers, including Sen. Elizabeth Warren (D-Mass.), have pointed to relaxed regulations as one of the reasons Silicon Valley Bank’s problems flew under the radar.

  • “We are evaluating whether the application of stricter standards would have prompted the bank to better manage the risks that led to the bankruptcy,” Barr plans to say.
  • “We are also assessing whether SVB would have had a higher level of capital and liquidity under those standards, and whether such a higher level of capital and liquidity would have prevented the bank from failing or made the bank more resilient.”

The intrigue: Barr will also issue repeated warnings from Fed regulators that were ignored by the bank, including a meeting with bank officials late last year where regulators expressed “concerns about the bank’s interest rate risk profile.”

  • Silicon Valley Bank’s bond investments had lost significant value as interest rates rose, leaving the bank with a huge hole in its balance sheet as deposits began to flee.

What they say“It’s not the job of regulators to fix the problems identified; it’s the job of senior management and the bank’s board of directors to fix the problems,” Barr plans to say.

Worth nothing: Gruenberg will also tell Congress about similar circumstances that led to the series of collapses of Silicon Valley Bank, Signature Bank and crypto bank Silvergate in recent weeks.

  • For example, both Silicon Valley Bank and Signature Bank had large volumes of uninsured deposits, which “creates liquidity risks that are extremely difficult to manage, especially in the current environment where money can flow out of institutions at incredible speed in response to news amplified by social media.” ” media outlets,” said Gruenberg’s prepared remarks.
  • Gruenberg will also say that banks with assets of $100 billion or more have major implications for financial stability: “The prudential regulation of these institutions deserves extra attention, especially with regard to capital, liquidity and interest rate risks.”

Editor’s Note: This story has been updated throughout with additional details.





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