Less than three weeks after the Silicon Valley bank collapsed, Federal Reserve Vice Chairman Michael Barr will tell lawmakers Tuesday that the collapse was a textbook case of mismanagement after the country’s 16th largest lender filed for bankruptcy in a matter of days had gone.
“The SVB’s failure is a textbook case of mismanagement,” Barr said in his statement. “The bank had a concentrated business model and served the technology and venture capital sectors.”
Barr’s testimony comes just a day after First Citizens announced it would acquire Silicon Valley Bank’s loans and deposits from the FDIC, which has owned the bank since March 10.
Barr notes that the company has grown “extraordinarily rapidly” during the pandemic, with deposits rising rapidly and most of that proceeds going into longer-dated securities like government bonds and mortgage-backed securities.
“The bank has not effectively managed the interest rate risk of these securities or developed effective tools, models and metrics to measure interest rate risk,” Barr will say.
“At the same time, the bank failed to manage the risks of its liabilities. These liabilities consisted largely of deposits from venture capital firms and the technology sector, which were highly concentrated and could be volatile.”
“The failure of the SVB requires a thorough review of what happened, including the Federal Reserve’s oversight of the bank,” Barr will tell lawmakers. “I am committed to ensuring that the Federal Reserve holds full accountability for any oversight or regulatory failure and that we fully address what went wrong.”
Barr’s key message that SVB’s failure lies with management echoes what Fed Chair Jerome Powell said in a news conference last week when he told the media: “[At] at a fundamental level, the management of Silicon Valley Bank has failed badly, they have allowed the bank to grow very quickly, they have exposed the bank to significant liquidity and interest rate risk, [and] I didn’t hedge that risk.”
The story goes on
A social media run
This is the first time investors and lawmakers are hearing from Barr – who is scheduled to testify before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday – about why Silicon Valley Bank failed and how regulators have responded.
The Fed was responsible for oversight of the SVB.
SVB was placed under receivership by the FDIC on March 10, just two days after the bank announced it had made a $1.8 billion loss on the sale of some securities.
More than $40 billion was withdrawn from the bank on March 9, coinciding with the failed capital raising that ultimately brought the bank down. Barr also points to the role social media played in what eventually became a fatal bank run.
“Uninsured depositors interpreted [SVB’s losses and capital raise] as a signal that the bank was in distress,” Barr will tell lawmakers.
“They focused on the bank’s balance sheet and they didn’t like what they saw. In response, there was increased talk of a run on social media and uninsured depositors acted quickly to flee.”
What regulators knew
Barr’s appearance before lawmakers Tuesday will also raise questions about what the Federal Reserve and other regulators knew, when they knew, and what mistakes were made.
According to Barr, towards the end of 2021, regulators identified deficiencies in the bank’s liquidity risk management, resulting in six supervisory findings related to the bank’s liquidity stress testing, emergency funding and liquidity risk management.
Michael Barr is sworn in as Vice Chairman of the Federal Reserve for Supervision by Federal Reserve Board Chairman Jerome Powell in the press conference room of the William McChesney Martin Federal Reserve Board Building in Washington, United States, July 19, 2022. U.S. Federal Reserve Board/Handout via Portal
In May 2022, regulators released three findings related to ineffective board oversight, weaknesses in risk management and the bank’s internal audit function.
“The bank waited too long to address its problems and, ironically, the overdue action it finally took to strengthen its balance sheet sparked the rush of uninsured depositors that led to the bank’s collapse,” Barrs said Expression.
“The picture that has emerged so far is that SVB had inadequate risk management and internal controls that were struggling to keep pace with the bank’s growth.”
In October 2022, regulators met with the bank’s senior management to express concerns about the bank’s interest rate risk profile. The following month, regulators provided the bank with a supervisory finding on interest rate risk management.
In mid-February 2023, Fed officials highlighted the SVB’s interest rate and liquidity risk and said they were actively looking into the SVB. As it turned out, the full extent of the bank’s vulnerability was only revealed in the unexpected bank run on March 9th.
“We have to ask ourselves why the bank wasn’t able to timely fix and address the issues we identified,” Barr will say. “It is not the job of regulators to fix the issues identified; it is the job of senior management and the board of the bank to fix their problems.”
“Our banking system is healthy”
According to Barr, the Fed is focusing on whether its oversight was appropriate for the bank’s rapid growth and vulnerabilities, while also considering whether higher levels of capital and liquidity would have prevented the SVB from collapsing or given the bank further resilience.
On Sunday, March 12, Treasury Secretary Janet Yellen, with unanimous recommendation from the Fed and FDIC, approved systemic risk exemptions for the failure of SVB and Signature, enabling the FDIC to guarantee all deposits from both banks.
In addition, the Fed, with the approval of the Treasury Department, created a temporary lending facility to provide banks with additional liquidity to meet unexpected demand from depositors.
U.S. Treasury Secretary Janet Yellen testifies prior to a hearing of the Senate Financial Services-General Appropriations Subcommittee on President Biden’s proposed Treasury Department budget request for fiscal year 2024 on Capitol Hill in Washington, U.S. March 22, 2023. Portal/Evelyn Hockstein
“It appeared that the contagion from the SVB’s failure could be far-reaching and damaging to the broader banking system,” Barr’s testimony read. “The prospect of uninsured depositors not being able to access their funds could cause depositors to question the overall safety and soundness of US commercial banks.”
Barr will say these actions show regulators are committed to ensuring all deposits are safe.
“Our banking system is solid and resilient, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and stand ready to use any of our tools for institutions of any size, if necessary, to keep the system safe and sound.”
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