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Fed Admits to Failure in SVB Collapse

Michael Barr, the Federal Reserve’s Vice Chair for Supervision, commenced a 118-page report of the Fed’s “Supervision and Regulation of Silicon Valley Bank” released today by admitting, “Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank.” Proceeding forward, Barr admits that the Fed’s “senior leadership failed to manage basic interest rate and liquidity risk,” the board of directors “failed to oversee” such leadership and “hold them accountable,” and that the Fed itself “failed to take forceful enough action” to mitigate or downright prevent the failure of SVB, once the nation’s 16th largest bank, just last month. The New York Times’ Jeanna Smialek, meanwhile, summarizes Barr’s findings as painting “a picture of a bank that grew rapidly in size and risk with limited intervention from supervisors who missed obvious problems and moved slowly to address the ones they did recognize.”

On the one hand, the bipartisan “Economic Growth, Regulatory Relief, and Consumer Protection Act” passed in 2018 saw a rollback in the Dodd-Frank Act-introduced regulation of small to medium size banks that included SVB. Previously, banks with average total assets less than $50 billion would be considered “small to medium sized,” and not be subject to the scrutinous oversight of the Fed’s Large and Foreign Banking Organization (LFBO) Supervisory Program. After the 2018 rollback, however, the cutoff for when a bank would be supervised by the LFBO was pushed up to when, also in the words of Smialek, “it consistently averaged more than $100 billion in assets.” As a result, SVB did not come under the supervision of the LFBO until late 2021, a year when the bank’s total assets doubled to about $200 billion. In the process, the faults in SVB’s balance sheet and risk management became extremely apparent, with a seeming over-reliance on a handful of volatile factors, such as the long-term appreciation of Treasury securities and mortgage-backed securities, the continued growth of the tech startup industry in the midst of tightening interest rates that it was sensitive to, and a large share of deposits over the FDIC’s $250,000 insurance limit.

While the Fed scaled back its supervision of SVB over the last few years, remaining vestiges of the bank’s oversight failed to muster any action. In 2021, a review from the Federal Reserve Bank of San Francisco, charged with the oversight of SVB and other regional banks, found six separate “matters requiring attention” with regards to the growing bank, most of all the concern that it did not hold enough liquidity to cater to depositor worries and an unusual increase in withdrawals. Obviously enough, SVB’s fate was sealed when $42 billion in deposits was withdrawn after the bank notified investors that it was in heavy need of emergency liquidity, just last month.

As always, the world of macroeconomics may not yield as clear-cut findings on who’s to blame as one would expect from a story book narrative. While the Fed admits to failing to better regulate SVB as it engaged in increasingly risky behavior of the last few years, the SVB may have, in turn, been encouraged by a low-interest rate environment and the Fed’s promises that transitory inflation would not compel the interest rate increases that proved to be the dagger in SVB’s balance sheet. Perhaps another takeaway that can be derived from the Fed’s report today is that in the world of economics, not even hindsight is always 20/20.


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