Bank’s board, EGRRCPA, supervision lapses played key roles in failure of SVB, Fed report finds

The board of directors of the failed Silicon Valley Bank (SVB) and supervision by the Federal Reserve were jointly to blame for the demise of the Santa Clara, Calif., bank, according to a report issued Friday by the Fed’s top supervisor.

The 118-page report also lays some blame for the failure on legislation enacted in 2018 (the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)), which eased some financial regulations imposed by the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) after the financial crisis of 2007–2008.

The report asserts that, while SVB was growing rapidly in size and complexity, the Fed shifted its regulatory and supervisory policies in response to the legislation.

The report, a review by Federal Reserve Board Vice Chair for Supervision Michael Barr, was one of three reports issued the same day about bank failures. A report on the second bank to fail last month, Signature Bank of New York, N.Y., was issued by the Federal Deposit Insurance Corp. (FDIC). Meanwhile, the congressional watchdog Government Accountability Office (GAO) issued an account of regulator actions surrounding the failures.

The Fed report offered “four key takeaways” on the causes of Silicon Bank’s failures. Those are:

  • SVB’s board of directors and management failed to manage their risks;
  • Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity;
  • When Fed supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough; and
  • The Fed’s tailoring approach in response to EGRRCPA and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

Regarding the bank’s board, the report asserts that SVB’s full board of directors did not receive adequate information from management about risks at the bank and did not hold management accountable for effectively managing the firm’s risks.

“The bank failed its own internal liquidity stress tests and did not have workable plans to access liquidity in times of stress,” the report states. “Silicon Valley Bank managed interest rate risks with a focus on short-run profits and protection from potential rate decreases, and removed interest rate hedges, rather than managing long-run risks and the risk of rising rates. In both cases, the bank changed its own risk-management assumptions to reduce how these risks were measured rather than fully addressing the underlying risks.

About the agency’s response to EGRRCPA, and the impact on its supervision of SVB, the report states that in 2019, following the passage of the bill, the Fed revised its framework for supervision and regulation, maintaining the enhanced prudential standards (EPS) applicable to the eight global systemically important banks, known as G-SIBs, but tailoring requirements for other large banks.

“For Silicon Valley Bank, this resulted in lower supervisory and regulatory requirements, including lower capital and liquidity requirements,” the report states. “While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank.”

In a statement, Barr said his agency must strengthen its supervision and regulation based on what it learned in the SVB failure. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation,” he said.

The Fed said the review details the management of the bank and the supervisory and regulatory issues surrounding the failure of the bank. It details the recent supervisory history of SVB, the Fed said, and includes more than two dozen documents containing the bank’s confidential supervisory information such as supervisory letters, examination results, and supervisory warnings.

The agency also said that the report and documents it contains detail the bank’s rapid growth, as well as the challenges Federal Reserve supervisors faced in identifying the bank’s vulnerabilities and forcing the bank to fix them. The Fed said that, at the time of its failure, the bank had 31 unaddressed safe and soundness supervisory warnings—triple the average number of peer banks.

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