The Fed Admits It Played a Role in SVB Crisis

In a much-anticipated report at the collapse of Silicon Valley Bankthe Federal Reserve admits that should have paid a little more attention to the tech-focused bank before it unceremoniously collapsed last month. At the same time, the Fed’s report also reveals what anyone could already have guessed: SVB was a badly run bank.

Long a headquarters for tech startup money and venture capital, SVB collapsed in March as a result of a series of insane financial decisions that reduced, and ultimately led to, trust in the bank a run on his deposits. After the collapse, the SVB was later seized by the California government but later by the Fed decided to essentially salvage it, in a decision some have called questionable. Since then, everyone has been wanting a little clarity on how it all happened — a question Friday’s report attempts to answer.

As noted, the report is not kind to everyone involved — neither the managers at the bank who wrecked the financial institution, nor the Fed regulators, who are supposed to be watching such things.

“After the failure of the Silicon Valley bank, we need to strengthen Federal Reserve oversight and regulation based on what we have learned,” Fed Vice Chairman for Oversight Michael S. Barr said Friday. “This review represents a first step in that process — a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of the Federal Reserve’s oversight and regulation.”

Here are a few takeaways from the report.

The SVB was poorly managed

This may not come as a huge surprise, but one of the key takeaways from the Fed’s report is that SVB was not a particularly well-run bank. The report finds that the bank’s board of directors and its managers were not very good at negotiating — or communicating — the risks in the bank’s business strategy. At the same time, the bank is said to have had no real plan in case things went wrong – as they did last month. In fact, it “failed its own internal liquidity stress tests,” nor did it have functional plans to “access liquidity in times of stress.” The report summarizes:

Silicon Valley Bank was a highly vulnerable company in a way that both its board and senior management failed to fully appreciate. These vulnerabilities — fundamental and pervasive managerial weaknesses, a highly concentrated business model, and reliance on uninsured deposits — left Silicon Valley Bank acutely exposed to the specific combination of rising interest rates and slowing tech-sector activity that hit 2022 and early 2023

The Fed admits it was a sleeping watchdog

A refreshing, if slightly irritating, admission in the Fed’s report is that it has largely left the ball rolling in monitoring the situation at the SVB. In fact, the Fed notes that despite admitting that it served as the “primary federal regulator” for the SVB, the bank failed nonetheless. So, uh, what happened folks? Did you take a nap while this was all happening?

According to the Fed, they missed some of the warning signs related to the SVB’s problems. Or rather, even though they saw some stuff that didn’t look that hot, they decided it wasn’t that big of a deal. The report states:

The Federal Reserve failed to recognize the seriousness of critical deficiencies in the company’s corporate governance, liquidity and interest rate risk management. Those judgments meant that Silicon Valley Bank remained well valued even as conditions deteriorated and significant risks to the company’s safety and health emerged.

At the same time, the Fed admits that when they did see red flags, it was slow to respond:

Overall, the supervisory approach at Silicon Valley Bank was too deliberative and focused on the continuous collection of supporting evidence in a consensus-driven environment.

In other words, federal regulators felt they needed to have an open case before taking action against the SVB.

Important insight: Regulations are actually good!

One of the reasons the SVB has gotten away with so many stupid decisions is that the banking industry has slowly been deregulated in recent years, mostly at the behest of corporate lobbyists. This meant that financial regulators were less obliged to closely monitor the bank’s activities.

After 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to introduce safeguards designed to prevent bank failures of the kind that characterized the ’08 crisis. However, in 2018, after a significant lobbyinga new banking law was passed that reversed some of these protections. The Economic Growth, Regulatory Facilitation and Consumer Protection Act (EGRRCPA) has done a number of things, but one of them is that it has lowered the bar for supervision of banks the size of the SVB. In its report, the Fed notes that the removal of such Dodd-Frank safeguards contributed to the SVB’s collapse, as the EGRRCPA “resulted in lower prudential and regulatory requirements, including lower capital and liquidity requirements” for banks like the SVB. It also changed the culture at the Fed, leading to “changes in expectations and practices, including pressure to ease the burden on firms, meet a higher burden of proof for a prudential conclusion, and demonstrate due process in examining prudential actions.” In other words, employees were pressured to take it easy on the banks.

Fittingly, was one of the industry figures who has been a strong advocate for changing the regulations SVB CEO Greg Becker, who argued that failure to relax banks from the size of the SVB “would stifle our ability to lend to our customers”. That’s funny because you know what also negatively impacts customers’ credit scores? let your bank implode.

The Fed’s main suggestion to avoid future failures: We’ll try to do our job more often

At the end of the report, the Fed concedes that it could probably do something to ensure something like this doesn’t happen again. These proposals include a “shift [in] regulatory culture toward a greater focus on inherent risk and a greater willingness to make judgments that challenge bankers with a precautionary perspective.” Additionally, vice chairman for oversight Barr has said he would like to see “speed increase , Power and Agility of Bank Supervision”. Whatever that means, hopefully it means better regulations, yes? Yes.