The sudden collapse of Silicon Valley Bank last month was due to a combination of extremely poor bank management, weakened regulations and lax government supervision, according to a highly anticipated autopsy of the bank’s failure from the Federal Reserve released Friday.
The report takes a critical look at what the Fed missed as Silicon Valley Bank grew quickly in size in the years leading up to its collapse. The report also points out underlying cultural issues at the Fed, where supervisors were unwilling to be hard on bank management when they saw growing problems.
The report, authored by Federal Reserve staff and Michael Barr, the Fed’s vice chair for supervision, comes amid ongoing concerns about the strength of regional banks. Earlier this week, First Republic Bank’s stock tumbled after investors were spooked by the bank’s disclosure on Monday that depositors withdrew more than $100 billion during last month’s crisis, raising concerns about First Republic’s stability.
Silicon Valley Bank was seized by regulators on March 10 after customers withdrew billions of deposits within a matter of hours in a classic bank run, which was hastened by the swiftness of mobile banking. The new report from the Fed singled out the central bank for criticism, saying the institution “did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management.”
“These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged,” the report said.
In a statement, Fed Chair Jerome Powell said he welcomed the report, which he called “thorough and self-critical.”
A digital bank run
Silicon Valley Bank was 40-year-old financial institution that catered to the tech industry and was the 16th largest U.S. bank before its sudden collapse, which set off a crisis of confidence for the banking industry.
Two days after Silicon Valley Bank’s failure, regulators seized Signature Bank of New York. Although regulators guaranteed all the banks’ deposits, customers at other midsize regional banks rushed to pull out their money — often with a few taps on a mobile device — and move it to the perceived safety of big money center banks such as JPMorgan Chase.
The report also looks at the role social media and technology played in the bank’s last days. While SVB’s management was poor and ultimately that was the reason the bank failed, the report also notes that social media caused a bank run that happened in just hours, compared to days for earlier bank runs like those seen in 2008.
First Republic’s woes
Although the withdrawals have abated at many banks, First Republic Bank in San Francisco appears to be in peril, even after receiving a $30 billion infusion of deposits from 11 major banks in March. The bank’s shares have plunged 57% this week after it revealed the extent to which customers pulled their deposits in the days after Silicon Valley Bank failed.
The nation’s banks are regulated by a troika of regulators: the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. All have been criticized for potentially missing signs that Silicon Valley Bank and Signature Bank might be in trouble.
Barr appeared at two hearings in Congress last month and acknowledged that Federal Reserve bank supervisors had warned Silicon Valley management as early as the fall of 2021 of risks stemming from its business model, but the bank’s managers failed to take the steps necessary to fix the problems.
Republicans at both hearings had criticized federal regulators for failing to act with the proper sense of urgency.
