Top Fed officer blasts SVB collapse as “textbook case of bad management”

The Federal Reserve’s top official on banking supervision has blamed the collapse of Silicon Valley Bank on a “textbook case of mismanagement”, saying the US central bank’s board had been briefed on the problems at the California lender in mid-February.

In congressional hearing testimony released ahead of an expected grilling of SVB’s failure by US lawmakers on Tuesday, Michael Barr, the Fed’s deputy chairman for supervision, criticized the bank’s “concentrated business model”.

He also suggested a possible tightening of banking rules to avoid similar incidents in the future, saying US regulators were ready to intervene again if necessary.

“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for institutions of all sizes, as needed, to keep the system safe and sound,”[ads1]; Barr said.

The Fed has launched a review of SVB’s collapse, to be released by May 1, but Barr suggested the bank had made a number of critical mistakes as it grew in recent years.

“In the early phase of [coronavirus] pandemic, and with the booming technology sector, SVB saw significant deposit growth. The bank invested the income from these deposits in long-term securities to increase returns and increase profits. However, the bank did not manage the interest rate risk of these securities effectively or develop effective tools, models and calculations for measuring interest rate risk.

“At the same time, the bank was unable to manage the risk of its obligations. These liabilities were largely composed of deposits from venture capital firms and the technology sector, which were highly concentrated and could be volatile.”

The Fed has already faced criticism that it was not quick enough to discover the vulnerabilities at SVB. Barr said regulators had found “deficiencies” at the lender dating back to the end of 2021, and had met with the bank’s management in November 2022 “to express concerns about the bank’s interest rate risk profile”. However, Fed staff had only briefed the central bank’s board in mid-February this year.

“Staff discussed the issues broadly, highlighting in particular SVB’s interest rate and liquidity risks,” Barr said. “The employees said that they were actively engaged in SVB, but it turned out that the full extent of the bank’s vulnerability was not visible until the unexpected bank run on March 9.”

Barr said “the failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system”.

He said it was “critical that we propose and implement the Basel III endgame reforms,” ​​referring to rules that would require banks to maintain certain leverage ratios and keep certain amounts of capital on hand.

He said such reforms would “better reflect trading and operational risk in our measure of banks’ capital needs”.

Barr said the Fed planned to propose “a long-term debt requirement for large banks that are not [globally systemic] so that they have a cushion of loss-absorbing resources to support their stabilization”.

He said the Fed needs to “enhance our multi-scenario stress testing so that it captures a wider range of risks and uncovers channels of contagion, such as those we saw in the recent series of events”.