The Federal Reserve released a report Friday that splits the blame for the failure of Silicon Valley Bank among bank leaders who failed to adequately manage risks, Fed supervisors who didn’t act aggressively enough, and a set of federal bank regulations that were loosened at the end of last decade.
The Fed’s Vice Chair of Supervision Michael Barr also recommended Friday that some US rules need to change, as a result of the failure. They include tougher capital and liquidity standards for mid-sized banks, tougher executive compensation standards as well as changes to how the Fed tests for a lender’s management of interest-rate risk.
The Fed “failed to take enough forceful action,” Barr said in a letter released by the Fed, and the bank’s failure “demonstrates that there are weaknesses in regulation and supervision that must be addressed,” suggesting that rules implemented in 2019 that lessened regulations on banks with $100 billion or more in assets will be revisited.
The March 10 seizure of the California institution triggered panic across the banking system that is still unfolding seven weeks later. Two other banks have gone down, including New York’s Signature Bank, and now San Francisco lender First Republic (FRC) is fighting for its survival after losing more than $100 billion in deposits during March. US officials are coordinating talks to save the regional bank, Reuters reported Friday.
The report also arrives ahead of another crucial week for the Fed with policymakers set to meet in Washington on Tuesday and Wednesday to decide on another possible interest rate increase. Fed Chair Jerome Powell will surely face questions at a Wednesday press conference about the findings in Friday’s report.
The review may prompt more bipartisan scrutiny of how the Fed handled the bank meltdown. Both Democrats and Republicans on Capitol Hill have been deeply critical of how the central bank responded to the crisis.
“By all accounts, our regulators appear to have been asleep at the wheel,” is how Senate Banking Committee Republican ranking member Tim Scott put it recently.
It’s a rare area where the South Carolina Senator can find agreement with the likes of Senator Elizabeth Warren (D-MA) who noted recently that “more and more lawmakers are troubled by the Fed’s key role in the recent bank failures.”
The bank’s demise unfolded slowly over a matter of years, then all at once. Its end came two days after disclosing it would take a $1.8 billion loss on the sale of some bonds that had fallen in value because of rising interest rates and would look to raise an additional $2.25 billion in capital to bolster its balance sheet. More than $40 billion was pulled from the bank on March 9, coinciding with the failed capital raise which ultimately doomed the bank.
One big problem was that the bank’s “core risk-management capacity failed to keep up with rapid asset growth, which led to steady deterioration of its financial condition in 2022 and into March 2023” as rates rose. Between 2019 and 2021, Silicon Valley Bank’s total assets tripled from $71 billion to $211 billion.
A second was that the bank “failed to develop sufficient contingent funding capacity.” The Fed’s report said management even masked some of the bank’s true risks.
The bank, for example, changed its own risk-management assumptions around liquidity shortfalls and exposure to rising interest rates “rather than fully addressing the underlying risks.”
The Fed admits its own supervisors made plenty of mistakes, too. They gave Silicon Valley Bank management a confidential supervisory rating of “satisfactory” from 2017 through 2021 “despite repeated observations of weakness in risk management.” Its liquidity was also rated “strong” during this period and thus subject to less stringent reviews.
There was a plan to downgrade another confidential rating of the firm’s sensitivity to market risk in November 2022, but Silicon Valley Bank failed before that downgrade could be finalized or issued.
The fact that its market sensitivity rating had been considered “satisfactory” for so many years “reduced the urgency to conduct a deep dive” of the bank’s exposure to interest rate risk.
“The Federal Reserve 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 situation “likely warranted a stronger supervisory message in 2022,” the report said.
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Source: https://finance.yahoo.com/news/fed-failed-to-take-enough-forceful-action-with-svb-150558388.html