Federal Reserve Board announces the results from the review of the supervision and regulation of Silicon Valley Bank, led by Vice Chair for Supervision Barr

On April 28, 2023, the Board of Governors of the Federal Reserve System (FED) issued a press statement to inform that Michael Barr, Vice Chairman for Supervision of the FED, has concluded its review of the causes of the recent failure of the Silicon Valley Bank (SVB).
In a corresponding report published same day, Mr. Barr outlines the root causes of the failure and also recommends regulatory and supervisory measures that need to be addressed in the future to strengthen the resilience of U.S. financial institutions and to prevent such failure from happening again – or at least its likelyhood.
According to the Vice Chairman, Silicon Valley Bank primarily
- failed to adequately manage its risks at senior level. Due to its highly concentrated business model on the technology sector and a heavy reliance on uninsured deposits to fund its business, SVB faced acute trouble when economic activities in the sector declined in 2022 and early 2023 and interest rates rose to levels beyond those experienced in the last decade. Additionally, the company also failed to conduct adequate stress tests to simulate such situation and to keep up interest rate hedges to protect from rising rates.
- failed to adjust its risk management practices over the years to accommodate for business growth and risks. Likewise, the FED as the supervising regulator failed to identify and / or seriously address SVB’s deficiencies in risk management, even though it was aware of liquidity issues faced by the bank, particularly in the years 2020, 2021, and 2022.
- failed to promptly address risk management deficiencies identified by the FED. Here, too, many of the subsequent issues could have been prevented had the FED adequately pushed the SVB to resolve the deficiencies. Instead, so Mr. Barr, were supervisors much too keen to operate in a „consensus-driven environment“. In this context, Mr. Barr also notes that the supervisory team of the FED overseeing the Silicon Valley Bank changed in 2021 due to the bank becoming too large for the existing team. This change meant additional time to review the Bank’s financial position, before any action was finally taken on the part of the regulator.
Finally, the Vice Chairman points out that – in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) – the FED has increased the prudential standards of large, systemically important banks (G-SIBs), but has „tailored“ the requirements of institutions not qualifying as G-SIBs. In fact this means that SVB has faced less stringent regulatory and prudential requirements than it would have without the implementation of the EGRRCPA. Although Mr. Barr notes that more stringent obligations as regards the financial resilience of SVB might have not prevented this failure entirely from happening, it certainly would have ensured a closer supervision and a prompter identification of the issues leading to the failure.