The dramatic collapse of the Silicon Valley bank in early March was the result of mismanagement and regulatory missteps compounded by a dose of social media madness, the Federal Reserve concluded in a much-anticipated report released on Friday.
Michael Barr, the Fed’s vice chairman-appointed by President Joe Biden, said in the March 10 comprehensive investigation into the SVB collapse that myriad factors conspired to bring down the country’s 17th largest bank.
Among them were bank executives who made “textbook” lapses in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and then reacted too slowly, and a social media frenzy that spelled the institution’s demise may have accelerated.
Barr called for sweeping changes in the way regulators approach the country’s complex and interdependent financial system.
“After the failure of the Silicon Valley bank, we need to strengthen Federal Reserve oversight and regulation based on what we’ve learned,” he said.
“As risks in the financial system evolve, we must continually assess our supervisory and regulatory framework and be humble in our ability to assess and identify new and emerging risks,” added Barr.
A Silicon Valley Bank security guard monitors a line of people outside the office March 13, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
A senior Fed official said increased capital and liquidity may have helped SVB survive. Central bank officials are likely to turn their attention to cultural shifts and find that risks at SVB have not been thoroughly researched. Future changes could lead to standardized liquidity requirements for a wider range of banks and tighter monitoring of bank managers’ remuneration.
Bank shares were higher after the report was released SPDR S&P Bank ETF up about 1.3%.
The report “sets the stage for far-reaching new regulation and tighter supervision of mid-sized banks,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI, in a note to clients. “However, apart from a hint of a possible tightening of executive compensation rules, which may or may not be acted upon, there are few big surprises here.”
In an impressive move that continues to resonate across the banking system and financial markets, regulators shut down the SVB following a deposit rush spurred by liquidity concerns. To meet capital needs, the bank was forced to sell long-dated Treasury bills at a loss as rising interest rates hurt capital values.
Barr noted that SVB’s deposit run was exacerbated by fears circulating on social media that the bank was in trouble, combined with the ease of withdrawing deposits in the digital age. The phenomenon is something regulators will need to be aware of going forward, he said.
“[T]The combination of social media, a highly connected and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Barr said in the report, promptly withdrawing funding.”
He used a broad brush to discuss the failures of the Fed, not to mention Mary Daly, the chair of the San Francisco Federal Reserve, under whose jurisdiction the SVB sat. Senior Fed officials, speaking on condition of anonymity to speak frankly, said regional presidents are generally not responsible for direct oversight of banks in their districts.
Fed Chair Jerome Powell said he welcomed the Barr investigation and its internal criticism of the Fed’s actions during the crisis.
“I agree and support his recommendations to address our rules and supervisory practices, and I am confident they will result in a stronger and more resilient banking system,” Powell said in a statement.
SVB has been a darling of the tech industry as a one stop shop for high profile companies in need of growth financing. In return, the bank used billions of dollars in uninsured deposits as a basis for lending.
The collapse, which happened within days, sparked fears that depositors would lose their money as many of the accounts above the $250,000 threshold were eligible for Federal Deposit Insurance Corp. insurance. lay. signature bankwhich used a similar business model also failed.
As the crisis unfolded, the Fed instituted emergency lending measures while guaranteeing that depositors would not lose their money. While the measures have largely contained the panic, they have spurred comparisons to the 2008 financial crisis and prompted calls to reverse some of the deregulation measures of recent years.
Senior Fed officials said changes to the Dodd-Frank reforms fueled the crisis, although they also acknowledged that the SVB case was also an oversight failure. An amendment approved in 2018 reduced the severity of stress tests for banks under $250 billion, a category into which the SVB fell.
“We need to develop a culture that empowers leaders to act in the face of uncertainty,” Barr wrote. “In the case of SVB, regulators delayed action to gather more evidence, even though weaknesses were evident and growing. This meant that regulators were not forcing SVB to fix their problems even as those problems got worse.”
Areas the Fed is likely to focus on include the types of uninsured deposits that have been a concern during the SVB drama, as well as a broader focus on capital requirements and the risk of unrealized losses that the bank is in had their balance sheet.
Barr noted that prudential and regulatory changes are unlikely to come into effect for years.
The General Accountability Office also released a report on the bank failures on Friday, which found “risky business strategies along with weak liquidity and risk management” that contributed to the collapse of SVB and Signature.
Correction: The General Accountability Office also released a report on Friday. In a previous version, the agency name was incorrect.