A review by the Federal Reserve, led by Vice Chair for Supervision Michael S. Barr, found that the central bank's oversight of Silicon Valley Bank (SVB) was inadequate and its regulatory standards were too low. The report, released on April 28, 2023, concluded that the Fed did not take "forceful enough action" to address the escalating risks at SVB before its failure on March 10, 2023. This collapse, which created turmoil in the global banking industry, highlighted significant weaknesses in the Fed's regulatory and supervisory framework.
The review detailed that SVB grew rapidly, from $71 billion in assets to over $211 billion between 2019 and 2021, without being subjected to heightened supervisory or regulatory standards. The Federal Reserve's staff failed to recognize the seriousness of critical deficiencies in the bank's governance, liquidity, and interest rate risk management. Consequently, SVB maintained a positive rating even as its financial condition deteriorated, and significant risks to its safety and soundness emerged.
Michelle Bowman, another Fed Governor, echoed these sentiments, stating that Fed bank-supervision staff could have anticipated and prevented SVB's failure as early as March 2022. She noted that supervisory staff knew or should have known about vulnerabilities such as real but unrealized accounting losses on its securities portfolio, a highly uninsured and concentrated deposit base, and a lack of operational readiness to borrow from the discount window. Despite this knowledge, prompt and decisive action was not taken to compel SVB to mitigate its interest rate risk or concentration vulnerabilities.
The delays in supervisory action were attributed partly to a culture of risk aversion among staff, who believed it was safer to avoid action unless they were completely certain. The report also clarified that regulatory tailoring mandates or directives from previous Vice Chairs for Supervision were not responsible for the inaction. The review aims to redefine supervisory objectives, prioritize significant threats to financial stability, and expand supervisory options to provide examiners with more flexibility in addressing vulnerabilities.
SVB's failure was triggered by a rapid bank run on March 9, 2023, following an announcement on March 8 of a balance sheet restructuring that included selling $21 billion in securities and an expected $1.8 billion after-tax loss. Depositors, particularly uninsured ones, interpreted this as a sign of distress, leading to over $40 billion in deposit outflows on March 9. Management anticipated an additional $100 billion in outflows the next day. The California Department of Financial Protection and Innovation closed SVB on March 10, appointing the FDIC as receiver.
