The US Federal Reserve acknowledged its own shortcomings and called for increased banking oversight in a report published on Friday regarding the collapse of Silicon Valley Bank (SVB) last month. The Federal Reserve’s much-anticipated review attributed the collapse of Silicon Valley Bank to a combination of factors, including inadequate bank management, relaxed regulations, and insufficient government supervision. The report highlights how the US Feds failed to adequately oversee the bank prior to its collapse early last month.
“While the firm was growing rapidly from $71 billion to over $211 billion in assets from 2019 to 2021, it was not subject to heightened supervisory or regulatory standards. The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management. These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged,” the report, authored by Federal Reserve staff and Michael Barr, the Fed’s vice chair for supervision, said.
Michael Barr, in a statement accompanying the report, said, “Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned.” Additionally, the report said that the US Federal Reserve intends to review its regulatory practices for banks the size of Silicon Valley Bank, which had over $200 billion in assets before its collapse.
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The report highlights criticism that regulators, including the Fed, adopted a more relaxed approach to supervising midsize banks after the passage of a banking law in 2018, which eased some of the stricter regulations implemented in response to the 2008 financial crisis.
“While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” the report said.
On March 10, Silicon Valley Bank’s collapse due to excessive interest-rate risk sent shockwaves throughout the banking industry. It also resulted in the failure of another US regional bank and the forced merger of Credit Suisse, a Swiss investment banking giant, under significant pressure.
The Fed’s report is also critical of how the bank managed executive compensation. The report indicates that executive compensation at the bank was geared toward short-term profits and stock prices.
A trio of regulators oversees the regulation of US banks, including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. These regulators have all faced criticism for potentially overlooking warning signs that could have indicated the financial troubles of Silicon Valley Bank and Signature Bank.
For years, Silicon Valley Bank had been a popular choice among venture capital firms and tech start-ups. However, its spectacular collapse in March triggered a crisis of confidence within the banking industry. Two days after the SVB’s collapse, Signature Bank of New York was also seized. Despite regulators’ guarantee of all the banks’ deposits, customers at other midsize regional banks quickly withdrew their funds.
The Fed will also look to strengthen the regulatory framework for banks and consider toughening the rules around interest-rate risk, liquidity and capital requirements, and stress-testing, the report said.
Fed chair Jerome Powell said in a statement that he welcomed Michael Barr’s “self-critical” report into SVB’s collapse.
“I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system,” he said.