Silicon Valley Bank failed last month due to mismanagement, weakened regulations and inadequate oversight, according to a 144-page report released Friday by the Federal Reserve.
“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” Michael Barr, the Federal Reserve Board’s vice chair for supervision and leader of the investigation into Silicon Valley Bank’s demise, said Friday in a letter that accompanied the report.
“Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework.”
Silicon Valley Bank failed in March, prompting weeks of financial turmoil and spurring investigations by the Justice Department and the Securities and Exchange Commission. Congress is also expected to launch a probe into the failure.
Barr said Friday that SVB “failed because of a textbook case of mismanagement by the bank,” pointing to senior leaders who failed to manage SVB’s basic interest rate and liquidity risk and a board of directors that didn’t oversee leadership and hold them accountable.
“And Federal Reserve supervisors failed to take forceful enough action,” Barr said. Later, he added, “Supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough.”
The bank grew rapidly, fueled by the growth of the venture capital and technology sectors, but regulators were slow to require them to adhere to higher standards, Barr said. Issues were identified, but supervisors did not act swiftly enough to address them.
“In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing,” Barr said. “This meant that supervisors did not force SVB to fix its problems, even as those problems worsened.”
The report noted that social media accelerated the bank’s downfall and “may have fundamentally changed the speed of bank runs,” Barr said. The bank run fueled by SVB’s mismanagement happened over the course of a few hours while similar instances in 2008 took days, The Associated Press reported.
“Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding,” Barr said.
The report issued Friday is likely to draw criticism from the banking industry and some Republicans, The Washington Post reported. Rep. Patrick McHenry, R-N.C., the chair of the House Financial Services Committee, said in a statement obtained by the newspaper that a “bulk of the report appears to be a justification of Democrats’ long-held priorities.”
Congress eased bank regulations in a bipartisan vote in 2018 with the Fed loosening regulations further in 2019, according to the Post. President Joe Biden has urged regulators to reinstate some of those rules.
