In its recently released review of the supervision and regulation of Silicon Valley Bank, the Federal Reserve Board identified the key reasons why the bank failed this past March.
The review, done by the Fed’s Vice Chair for Supervision Michael Barr, said a major reason for the collapse was that Silicon Valley Bank’s board of directors and management failed to manage their risks. Further, Barr said Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity. And when they did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.
In addition, the report said the board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act, along with a shift in the supervisory policy, impeded effective supervision. It did this, said Barr, by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Barr said. “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.”
The report also discusses the recent supervisory history of Silicon Valley Bank and includes more than two dozen documents containing the bank’s confidential supervisory information, such as supervisory letters, examination results, and supervisory warnings.
“I welcome this thorough and self-critical report on Federal Reserve supervision from Vice Chair Barr,” Federal Reserve Chair Jerome Powell said. “I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.”
The report added that at the time of its failure, the bank had 31 unaddressed safe and soundness supervisory warnings—triple the average number of peer banks.