Federal Reserve Vice Chairman Michael Barr appeared before Congress last year. Photo: Ting Shen/Bloomberg via Getty Images
The Silicon Valley bank was a “textbook case of mismanagement,” the Federal Reserve’s top banking regulator will tell lawmakers this week — a key reason for the bank’s failure.
Why it matters: The Fed official is among regulators set to appear before Congress for the first hearing related to the Silicon Valley bank collapse that sparked panic over the health of the financial system.
- Officials, including the Federal Deposit Insurance Corporation and Treasury Department, will appear amid questions about whether stricter rules and oversight could have prevented the collapse.
details: “The picture that has emerged so far shows that SVB had inadequate risk management and internal controls that could not keep pace with the bank’s growth,” Michael Barr, the Fed’s vice chairman of the supervisory board, will tell the Senate tomorrow about the prepared texts.
- Barr is leading a Fed review of possible prudential and regulatory missteps that failed to prevent the bank from collapsing. The results will be published by May 1st.
- The FDIC also plans to release a report on deposit insurance next month that will include “considering policy options” regarding the level of insurance coverage, FDIC Chairman Martin Gruenberg will tell Congress this week, according to the text of the prepared comments communicate.
- As part of an emergency response, the FDIC extended deposit insurance to all depositors at Silicon Valley Bank as well as the failed Signature Bank — including those who exceeded the $250,000 deposit limit.
The big picture: Democratic lawmakers, including Senator Elizabeth Warren (D-Mass.), have pointed to relaxed regulations as one reason Silicon Valley Bank’s troubles flew under the radar.
- “We are examining whether applying stricter standards would have caused the bank to better manage the risks that led to its failure,” Barr plans to say.
- “We are also examining whether SVB would have had higher levels of capital and liquidity under those standards and whether such higher levels of capital and liquidity would have prevented the bank from collapsing or provided the bank with further resilience.”
The intrigue: Barr will also issue repeated warnings from Fed regulators that have been ignored by the bank, including a meeting with bank officials late last year where regulators expressed “concern about the bank’s interest rate risk profile.”
- Silicon Valley Bank’s bond investments had depreciated significantly in value as interest rates rose, leaving the bank with a huge hole in its balance sheet as deposits began to flee.
What you say: “It is not the job of regulators to fix the identified issues; it’s the job of the bank’s senior management and board to fix their problems,” Barr plans to say.
Worthless: Grünberg will also brief Congress on similar circumstances that have led to the string of collapses of Silicon Valley Bank, Signature Bank and cryptobank Silvergate over the past few weeks.
- For example, both Silicon Valley Bank and Signature Bank had large volumes of uninsured deposits, which “creates liquidity risks that are extremely difficult to manage, especially in today’s environment where funds are being rushed at incredible speed in response to news driven by social… Networks are strengthened, media channels can flow out of institutions,” says Grünberg’s prepared statement.
- Grünberg will also say that banks with assets of $100 billion or more have major implications for financial stability: “The prudential regulation of these institutions deserves additional attention, particularly in relation to capital, liquidity and interest rate risk.”
Editor’s Note: This story has been updated throughout with additional details.