Updated Mar 27, 2023 - Economy

Top Fed official: Silicon Valley Bank mismanagement led to failure

Federal Reserve vice chair for supervision Michael Barr appears before Congress last year. Photo: Ting Shen/Bloomberg via Getty Images

Silicon Valley Bank was a "textbook case of mismanagement," the Federal Reserve's top banking regulator will tell lawmakers this week — one key reason for the bank's failure.

Why it matters: The Fed official is among the regulators set to appear before Congress for the first hearing related to the collapse of Silicon Valley Bank, which sparked panic about the financial system's health.

  • The officials, including from the Federal Deposit Insurance Corporation and the Treasury Department, are set to appear as questions swirl about whether tougher rules and oversight could have prevented the collapse.

Details: "The picture that has emerged thus far shows SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank," Michael Barr, the Fed's vice chair for supervision, will tell the Senate tomorrow, according to the prepared text.

  • Barr is leading a review by the Fed of possible supervisory and regulatory missteps that failed to prevent the bank's failure. The results will be released by May 1.
  • The FDIC plans to also release a report on the deposit insurance next month that will include "policy options for consideration" around insurance coverage levels, FDIC chair Martin Gruenberg will tell Congress this week, according to the text of prepared remarks.
  • As part of an emergency measure, FDIC extended deposit insurance to all depositors at Silicon Valley Bank, as well as those at failed Signature Bank — including those that exceeded the $250,000 deposit cap.

The big picture: Democratic lawmakers, including Sen. Elizabeth Warren (D-Mass.), have pointed to relaxed regulations as one reason why Silicon Valley Bank's troubles flew under the radar.

  • "We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure," Barr plans to say.
  • "We are also assessing whether SVB would have had higher levels of capital and liquidity under those standards, and whether such higher levels of capital and liquidity would have forestalled the bank's failure or provided further resilience to the bank."

The intrigue: Barr also will lay out repeated warnings by Fed supervisors that were ignored by the bank, including a meeting with bank officials late last year where supervisors expressed "concern with the bank's interest rate risk profile."

  • Silicon Valley Bank's bond investments had lost significant value as interest rates rose, leaving the bank with a huge hole in its balance sheet as deposits began to flee.

What they're saying: "It is not the job of supervisors to fix the issues identified; it is the job of the bank's senior management and board of directors to fix its problems," Barr plans to say.

Worth noting: Gruenberg will also tell Congress about similar circumstances that led to the string of collapses of Silicon Valley Bank, Signature Bank and crypto-bank Silvergate in recent weeks.

  • For instance, both Silicon Valley Bank and Signature Bank had large volumes of uninsured deposits, which "creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels," according to Gruenberg's prepared remarks.
  • Gruenberg will also say that banks with assets of $100 billion or more have big implications for financial stability: "The prudential regulation of these institutions merits additional attention, particularly with respect to capital, liquidity, and interest rate risk."

Editor's note: This story has been updated with additional details throughout.

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