The Federal Reserve admitted on Friday it failed to address problems that it saw at Silicon Valley Bank (SVB) before it collapsed last month.
Michael Barr, the vice chair of supervision for the Fed, said in a report that supervisors did not appreciate the full scale of the vulnerabilities at the bank and when they found problems, they did not take adequate steps to address them.
“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” the report reads. “Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework.”
The report calls the failure a “textbook case of mismanagement by the bank” and says its leadership “failed to manage basic interest rate and liquidity risk.” The Fed raised interest rates throughout 2022 and into 2023 in an attempt to tame high inflation. Meanwhile, SVB eliminated some of its hedges against raising interest rates, assuming they would soon fall and when that didn’t happen they were unable to deal with the financial losses stemming from its large investments in fixed-rate securities.
In 2021, the Fed determined that SVB’s hedges against raising interest rates were sufficient, but the bank started removing those hedges shortly before that report.
SVB’s failure also spread like a contagion to other banks, particularly Signature Bank, which like SVB, required intervention by regulators to cover their uninsured deposits.
A separate report by the Federal Deposit Insurance Corporation (FDIC) on Signature Bank, likewise said its regulators were too slow in escalating issues it had identified. It also blamed the bank’s management for growing too fast and not being responsive enough to the issues the FDIC brought to its attention.
Meanwhile, the Government Accountability Office likewise said regulators found problems at both banks but failed to react quickly enough to prevent them from failing.
The Fed also blamed its own bureaucratic structure and a culture of a soft hand approach as contributing factors to its failure to prevent the SVB collapse. Regional offices are supposed to be in charge of regulating banks but in practice, the Washington, DC, headquarters has significant input and needs to approve some actions.
The San Francisco office of the Fed had issued 31 warnings for SVB that remained open and gave the bank a failing rating in August 2022. Those issues included liquidity and technology risks. The branch warned at the time that SVB “did not maintain a risk management function commensurate with the growing size and complexity of the firm.”
Signature Bank also received warnings from the FDIC but said in its report it should have gone further. The bank had high concentrations of large deposits, including 60 depositors with balances over $250 million which made up around 40% of its total deposits. Signature Bank also had too much exposure to cryptocurrencies, the FDIC said, and when prices were high that covered some of its liquidity issues by being listed as cash. But when the prices of cryptocurrencies dropped, the bank’s liquidity evaporated.
Barr called for revamping the range of regulations for banks with more than $100 billion in assets and how large uninsured deposits are handled. Both SVB and Signature banks had significant deposits over the FDIC limit of $250,000 which led to account holders fleeing the bank once issues became apparent.
Fed Chair Jerome Powell said he will support Barr’s proposed changes in a statement that accompanied Barr’s report. The moves will reverse changes made earlier in Powell’s tenure as Fed Chair. During the Trump administration, Powell supported moves to ease regulations on midsized banks, saying at the time that it would lead to “a stronger and more resilient banking system.”