Silicon Valley Bank (SVB) failed to address vulnerabilities that were identified as early as November 2021, according to Michael Barr, a leading official from the United States Federal Reserve. Barr, who oversees banking supervision for the Federal Reserve, appeared before the Senate Banking Committee on Tuesday to discuss the conditions that prompted Silicon Valley Bank’s collapse earlier this month. He described the bank’s failure as a “textbook case of bank mismanagement”.
The crisis began around March 8, when Silicon Valley Bank announced it had been forced to sell its government bonds at a significant loss. It had hoped to raise money for shortfalls sustained as interest rates rose. Those sales triggered a bank run, with clients — many from the technology and venture capital sectors — racing to withdraw their money. The bank run coincided with the fall of several other regional banking institutions, including Silvergate Bank and Signature Bank, and the federal government had to step in to ensure deposits at institutions like Silicon Valley Bank.
“Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risk and clear liquidity risk. That interest rate risk and liquidity risk was cited, was highlighted, by the supervisors of the firm beginning in November of 2021,” Barr told the committee on Tuesday. “That exposure led the firm to be highly vulnerable to a shock and that shock came on the evening of Wednesday, March 8.”
Barr noted that federal supervisors had rated Silicon Valley Bank a three on the CAMELS scale, a rating system federal regulators use to assess a bank’s overall health, with one being the highest score. Any rating higher than three is considered concerning. Barr explained that the bank’s three score meant it was “not well managed”. “At the holding company level, it was rated deficient,” he added, pointing out that these ratings are normally kept confidential.
Barr, however, maintained that federal supervisors had made Silicon Valley Bank aware of the issues it faced in the years leading up to the crash. He also criticised the bank for lacking a chief risk management officer (CRO) for several months before the crisis: “I think it’s terrible risk management, obviously, not to have a CRO at the firm.”
In the wake of this month’s banking crisis, several senators — including the odd-couple pairing of progressive Democrat Elizabeth Warren and conservative Republican Rick Scott — have pushed for greater government oversight of banking regulators. In response to what they consider the “Federal Reserve’s gross mismanagement and lack of oversight to prevent” the banking crisis, Warren and Scott unveiled last week a joint proposal to have the president appoint an inspector general to the reserve’s board.
Warren explained that the crisis “underscored the urgent need for a truly independent inspector general to hold Fed officials accountable for any lapses or wrongdoing”. The Massachusetts Democrat also criticised a 2018 banking deregulation bill passed under former Republican President Donald Trump for contributing to March’s bank failures. That law allowed medium-sized banks — like Silicon Valley Bank — with assets under $250bn to avoid stricter regulatory scrutiny.
In Tuesday’s committee hearing, Barr said the Federal Reserve would look into strengthening capital and liquidity standards for banks with more than $100bn. In the hours following the hearing, President Joe Biden warned that the US economy may still see aftershocks from the March banking crisis. The initial bank failures sent stocks spiralling and fuelled fears of a larger financial meltdown. “Oh no, It’s not over yet,” Biden told reporters. “We’re watching very closely.”