Weak Fed oversight contributed to SVB’s collapse: probe

Sloppy oversight by Federal Reserve regulators contributed to a rapid failure of Silicon Valley Bank that shook the global banking sector earlier this year, according to the findings of the Fed’s hotly anticipated probe of the lender’s downfall released Friday.

Fed supervisors “did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” according to the report compiled by the Fed’s vice chair for supervision, Michael Barr.

The supervisory issues were one of “four key takeaways” Barr cited from his review of the crisis. He also called out poor risk management from SVB’s top brass and board of directors, a lack of decisive action from supervisors to address the bank’s vulnerabilities, and shifts in policy that “impeded effective supervision.”

“SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed,” the Fed’s report concluded.

“Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” the report added.

The feds ordered a probe in the immediate aftermath of SVB’s collapse into federal receivership on March 10. Once the preferred lender to tech startups and venture capital funds, SVB fell apart after disclosing a $1.8 billion loss on bond sales as it scrambled to fix a liquidity crunch — prompting worried depositors to pull their money en masse.

SVB ranked as the 16th-largest bank in the US at the time of its collapse. Its failure was the second-largest in US history, and the largest since the downfall of Washington Mutual during the Great Recession.

Barr was particularly harsh toward SVB’s leadership — slamming it for what he called a “textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk.”

The report also included an ominous warning about the role social media networks played in recent banking sector chaos, noting the “combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs.

“Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding,” the report said.

Fed Chair Jerome Powell said he welcomed the “thorough and self-critical report on Federal Reserve supervision from Vice Chair Barr.”

“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,” Powell added.

The feds took control of SVB and guaranteed all deposits at the bank, insured or not, as fears mounted about a potential run on regional banks.

Another lender that cratered to tech firms and cryptocurrency, Signature Bank of New York, also crumbled during the turmoil.

The bank chaos still hasn’t fully resolved. Regional lender First Republic is said to be on the verge of falling into federal receivership due to a prolonged stock slide and massive outflow of deposits.

First Republic could fail despite an earlier rescue effort in which the nation’s largest banks poured $30 billion into the institution.

Despite the lingering troubles, Powell and other federal officials have repeatedly said the US banking system is sound.