An independent review, commissioned by Federal Reserve Vice Chair for Supervision Michelle Bowman and conducted by Starling Advisory Group, concluded that Federal Reserve supervisory staff knew or should have known about Silicon Valley Bank's vulnerabilities as early as March 2022. Despite this awareness, supervisors did not take timely and decisive action to compel SVB to address its significant interest rate risk or the concentration of its largely uninsured deposits.
SVB's failure in March 2023, the largest in the U.S. since the 2007-09 financial crisis, stemmed from a combination of factors including substantial unrealized accounting losses on its securities portfolio that exceeded its capital, a highly concentrated deposit base (94% uninsured) heavily reliant on venture capital-backed tech companies, and a lack of operational readiness for emergency borrowing. The bank's collapse triggered contagion, leading to the failures of Signature Bank and First Republic Bank and necessitating extraordinary government intervention.
The review identified a long-standing culture of risk aversion within the supervisory staff as a significant factor contributing to inaction, where staff felt it was safer to do nothing than to risk making an incorrect decision. This inaction was not attributed to regulatory tailoring mandates or directives from previous Vice Chairs. Interestingly, the report also debunked claims that social media fueled the bank run, with an analysis by Charles River Associates finding that 96% of social media discussions about the run occurred after SVB's failure was already inevitable.
In response to these findings, the Federal Reserve is implementing changes, including a new Statement of Supervisory Operating Principles that emphasizes early identification of threats and prompt, decisive action. They are also addressing the cultural issue by requiring examination teams to submit monthly reports directly to leadership, detailing any uncertainties regarding supervisory actions, aiming to empower examiners and provide real-time oversight. The review comes amidst political scrutiny, with some questioning its timing and potential motives, particularly regarding former Vice Chair Michael Barr.
