Top Fed official blasts SVB collapse as ‘textbook example of mismanagement’

The Federal Reserve’s top banking oversight official has attributed the collapse of Silicon Valley Bank to a “textbook example of mismanagement,” saying the U.S. central bank board had been made aware of troubles at the California bank in mid-February. lender.

Michael Barr, the Fed’s vice chairman for oversight, criticized the bank’s “concentrated business model” in a hearing statement released Tuesday ahead of an anticipated criticism of the SVB’s failure by US lawmakers.

He also suggested a possible tightening of banking rules to prevent similar incidents in the future, and said US regulators are ready to intervene again if necessary.

“We will continue to closely monitor conditions in the banking system and are prepared to use all our tools for institutions of all sizes, if necessary, to keep the system safe and sound,” Barr said.

The Fed has launched an assessment of the SVB’s collapse, due to be released May 1, but Barr suggested the bank had made some critical mistakes during its growth in recent years.

“During the early stages of the [coronavirus] pandemic, and with the booming technology sector, SVB saw significant deposit growth. The bank invested the proceeds from these deposits in longer-term securities to increase returns and increase profits. However, the bank did not effectively manage the interest rate risk of those securities and did not develop effective tools, models and metrics for measuring interest rate risk

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

The Fed has already received criticism that it was not fast enough to detect the vulnerabilities at SVB. Barr said regulators had found “deficiencies” with the lender dating back to late 2021, and met with the bank’s management in November 2022 “to raise concerns about the bank’s interest rate risk profile.” However, Fed staff had not informed the central bank’s board of governors until mid-February of this year.

“Employees discussed the issues broadly, highlighting in particular SVB’s interest rate and liquidity risk,” said Barr. “Employees said they were actively involved with the SVB, but it turned out that the full extent of the bank’s vulnerability only became apparent during the unexpected bank run on March 9.”

Barr said: “SVB’s failure illustrates the need to continue our work to improve the resilience of the banking system”.

He said it was “critical that we propose and implement the Basel III endgame reforms,” ​​referring to rules that would require banks to maintain certain leverage ratios and keep certain amounts of capital on hand.

He said such reforms would “better reflect trade and operational risk in our measure of banks’ capital needs.”

Barr said the Fed planned to “propose a long-term debt default for big banks that aren’t [globally systemic] so that they have a buffer of loss absorbers to aid their stabilization.”

He said the Fed should “improve our stress testing with multiple scenarios so it captures a wider range of risks and exposes contagion channels, as we saw in the recent chain of events.”






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