The Federal Reserve’s chief banking regulator said Monday that Silicon Valley Bank’s failure was largely due to mismanagement, though he noted that regulation and oversight also need to be stepped up.
Fed Governor Michael Barr, the central bank’s vice chairman for supervision, urged in prepared remarks to two congressional panels that regulators had noticed problems with SVB’s risk management but that the bank was too slow to respond.
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“To begin with, the failure of the SVB is a textbook example of mismanagement,” he said. “The bank waited too long to address its problems, and ironically, the overdue actions it eventually took to strengthen its balance sheet led to the run of uninsured depositors that led to the bank’s bankruptcy.”
Barr will address the Senate Banking Committee on Tuesday, followed by an appearance before the House Financial Services Committee on Wednesday.
The Fed is conducting an assessment of the collapse of the SVB with findings to be released on May 1.
“I am committed to ensuring that the Federal Reserve takes full account of any oversight or regulatory shortcomings, and that we fully address what went wrong,” Barr said.
In addition to investigating what specifically happened to the bank, Barr also noted that the investigation will examine whether the Fed’s risk tests were adequate.
He points out that the supervisors already identified problems with the SVB’s liquidity risk management at the end of 2021. The following year, regulators continued to point out problems and downgraded the bank’s management rating to “fair”.
In addition, Fed officials received a presentation in mid-February about the risk that rising interest rates introduced by central banks pose to banking operations. Still, Barr said the review will examine whether the standards should have been stricter.
“In particular, we are evaluating whether the application of stricter standards would have prompted the bank to better manage the risks that led to the bankruptcy,” he said. “We are also assessing whether SVB would have had a higher level of capital and liquidity under those standards, and whether such a higher level of capital and liquidity would have prevented the bank from failing or made the bank more resilient.”
SVB went bankrupt after a run on deposits revealed a maturity mismatch in the bank’s bond portfolio. In particular, the bank held long-dated securities that depreciated in value as revenues increased. When it had to sell some of those assets at a loss to cover deposit-taking demands, it sparked another run and eventual failure.
Barr said the Fed will look at changing long-term debt rules at institutions not considered systemically dangerous. The investigation will also include whether stricter standards would have prompted SVB to manage liquidity risk better.
Aside from that, Barr said he considers the overall health of the banking system to be “sound and resilient, with strong capital and liquidity.”
