Federal Reserve’s top banking regulator cites mismanagement as the primary reason for Silicon Valley Bank’s failure; regulation and oversight also to be improved. Fed Governor Michael Barr stated in a prepared speech to two congressional panels that while regulators had raised concerns over SVB’s risk management, the bank failed to take prompt action.
The bank eventually took steps to address its issues, but it was too late and sparked the uninsured depositor run, leading to the bank’s collapse. The Fed is conducting a review of SVB’s collapse, with results to be released on May 1.
FDIC Chair Martin Gruenberg also stressed the importance of analyzing both SVB and Signature Bank’s failures and their implications for regulations and oversight. He further cautioned about the risks of inflation, rising market interest rates, and geopolitical uncertainties, noting the potential impact on unrealized losses that caused the recent banking stress.
Regulatory standards under scrutiny after SVB failure
Federal Reserve Governor Michael Barr announced that the review into the collapse of Silicon Valley Bank (SVB) will not only investigate the bank’s failure, but also evaluate whether the Fed’s testing of risk was sufficient. Barr highlighted that issues with SVB’s liquidity risk management had been identified by supervisors as far back as late 2021, and regulators had lowered the bank’s management rating to “fair” the following year.
Despite this, Barr stated that the review will assess whether standards should have been more stringent. The failure of SVB was caused by a run on deposits that revealed a mismatch in the bank’s bond portfolio, with the bank holding long-dated securities that lost value as yields increased.
Barr confirmed that the Fed will consider changing rules for long-term debt at non-systemically important institutions and assess whether more stringent standards would have prevented SVB’s collapse. While Barr stated that the banking system is generally sound and resilient, he emphasized the need for strong capital and liquidity.