SVB’s failure is a “textbook case” of mismanagement”
Less than three weeks after Silicon Valley Bank failed, Federal Reserve Deputy Chairman for Supervision Michael Barr will tell lawmakers on Tuesday that the collapse was a textbook case of mismanagement after what was the nation’s 16th largest lender collapsed within days .
“SVB’s failure is a textbook case of bad management,” says Barr’s testimony. “The bank had a concentrated business model that served the technology and venture capital sectors.”
Barr’s testimony will come just one day after First Citizens announced a deal to take over Silicon Valley Bank̵[ads1]7;s loans and deposits from the FDIC, which had been in charge of the bank since March 10.
Barr notes that the company grew “extremely quickly” during the pandemic, with deposits increasing rapidly and those earnings largely ending up in long-term securities such as government bonds and mortgage-backed securities.
“The bank did not effectively manage the interest rate risk of these securities or develop effective interest rate risk measurement tools, models and calculations,” Barr will say.
“At the same time, the bank was unable to manage the risk of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the technology sector, which were highly concentrated and could be volatile.”
“SVB’s failure requires a thorough review of what happened, including the Federal Reserve’s oversight of the bank,” Barr will tell lawmakers. “I am committed to ensuring that the Federal Reserve fully accounts for any supervisory or regulatory failures and that we fully address what went wrong.”
Barr’s key message that SVB’s failure lies with corporate management echoes what Fed Chair Jerome Powell said last week at a news conference, telling the media: “[At] a fundamental level, Silicon Valley Bank management failed miserably, they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, [and] did not hedge that risk.”
A social media race
This is the first time investors and lawmakers will hear from Barr — who is scheduled to testify Tuesday before the Senate Banking Committee followed by the House Financial Services Committee on Wednesday — about why Silicon Valley Bank failed and regulators’ response.
The Fed was responsible for supervising SVB.
SVB was taken over by the FDIC on March 10, just two days after the bank disclosed it would take a $1.8 billion loss on the sale of some securities and would look to raise an additional $2.25 billion in capital to bolster the balance.
More than $40 billion was withdrawn from the bank on March 9, coinciding with the failed capital raising that ultimately doomed the bank. Barr also notes the role social media played in spurring what ended up being a fatal run on the bank.
“Uninsured Depositors Interpreted [SVB’s losses and capital raise] as a signal that the bank was in distress,” Barr will tell lawmakers.
“They turned their focus to the bank’s balance sheet, and they didn’t like what they saw. In response, social media saw an increase in talk of a run, and uninsured depositors acted quickly to flee.”
What regulators knew
Barr’s appearance before lawmakers on Tuesday will also bring questions about what the Federal Reserve and other regulators knew, when they knew it, and what mistakes were made.
According to Barr’s testimony, near the end of 2021, regulators found deficiencies in the bank’s liquidity risk management, resulting in six supervisory findings related to the bank’s liquidity stress testing, contingency funding and liquidity risk management.
In May 2022, the supervisory authorities issued three findings relating to ineffective board supervision, weaknesses in risk management and the bank’s internal audit function.
“The bank waited too long to address its problems, and ironically, the overdue actions it eventually took to shore up its balance sheet triggered the uninsured depositor run that led to the bank’s failure,” Barr’s testimony said.
– The picture that has emerged so far shows that SVB had inadequate risk management and internal control that struggled to keep up with the growth in the bank.
In October 2022, the supervisory authorities met with the bank’s senior management to express concern about the bank’s interest rate risk profile. The following month, the supervisory authorities delivered a supervisory finding on interest rate risk management to the bank.
In mid-February 2023, Fed staff highlighted SVB’s interest rate and liquidity risks, saying they were actively engaged with SVB. It turned out that the full extent of the bank’s vulnerability was not visible until the unexpected bank run on 9 March.
“We need to ask why the bank was not able to fix and resolve the issues we identified in sufficient time,” Barr will say. “It is not the task of the supervisory authorities to fix the problems that have been identified; it is the job of the bank’s senior management and board to fix the problems.”
“Our banking system is healthy”
Barr says the Fed is focusing on whether its oversight was appropriate for the rapid growth and vulnerabilities of the bank, with the Fed also considering whether higher levels of capital and liquidity would have prevented SVB’s failure or given the bank additional resilience.
On Sunday, March 12, Treasury Secretary Janet Yellen, with the unanimous recommendation of the Fed and the FDIC, approved systemic risk exemptions for the failure of SVB and Signature, allowing the FDIC to guarantee all deposits of both banks.
In addition, the Fed, with the Treasury Department’s approval, established a temporary lending facility to offer banks additional liquidity to meet any unexpected depositor needs.
“It appeared that contagion from SVB’s failure could be far-reaching and cause damage to the broader banking system,” Barr’s testimony said. “The prospect of uninsured depositors being unable to access their funds may cause depositors to question the overall safety and soundness of US commercial banks.”
Barr will say that these actions show that regulators are committed to ensuring that all deposits are safe.
“Our banking system is solid and robust, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound. .”
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