Federal Reserve admits fault, blames Silicon Valley Bank executives for collapse, calls for stricter rules

The Federal Reserve failed to “take forceful enough action” before the collapse of the Silicon Valley Bank last month, said the United States central bank, on Friday (April 28). However, it also criticised leadership at Silicon Valley Bank (SVB) for “a textbook case of mismanagement,” in its latest report. 

The report also noted the extremely poor bank management, weakened regulations and lax government supervision for the failure of the collapse of the US lender. The collapse had also triggered an ongoing banking crisis for mid-sized US banks as the panic it set off also reportedly led to the failure of another major lender, Signature Bank, two days later. 

Furthermore, the report also includes the release of internal reports and Fed communications which is rare and typically confidential but the Fed chose to release these reports to show how the bank was managed up to its failure.

Where did the Fed go wrong?

In its report, the Fed issued a detailed and scathing assessment of what led to the collapse of SVB, the US’ 16th largest bank. The report was authored by Vice Chair for Supervision Michael Barr and staff said, “Federal Reserve supervisors failed to take forceful enough action.” 

It added, “SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed.” The report also highlighted the underlying cultural issues at the Fed, where supervisors were unwilling to take strict action on bank management when they saw growing problems.

“Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” said Barr. He added, “When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.” 

The Fed also concluded, on the note, that these cultural issues stemmed from legislation passed in 2018, which lessened regulations for banks with less than $250 billion in assets. A year later, the Fed also weakened its own rules and exempted banks below that threshold from stress tests and other regulations. 

The report also noted that the Fed “did not appreciate the seriousness of critical deficiencies” in SVB’s governance, liquidity, and interest rate risk management, adding, this meant that while the conditions deteriorated and significant risk to the firm’s safety and soundness emerged the bank remained “well-rated”. 

Meanwhile, Fed also criticised the bank for how they managed executive compensation, as the report indicates that the executive compensation at the bank was geared toward short-term profits and the stock price with no incentives tied to risk management.

It is also worth noting that the Silicon Valley Bank did not have a chief risk officer at the firm for roughly a year and it was also the time when the firm was rapidly growing. In 2022, SVB did not test its capacity to borrow at the discount window or have appropriate collateral and operational arrangements in place to obtain contingency funding.

What does the Fed plan to do now?

The central bank now plans to reexamine how it regulates larger regional banks like SVB, which had $200 billion in assets when it collapsed. “While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” the report noted. 

Meanwhile, banking policy analysts said that this report, along with the two separate ones released by Federal Deposit Insurance Corp and the Government Accountability Office might lead to tighter regulations. Although the Fed acknowledged it could take years for proposals to be implemented. 

(With inputs from agencies)

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