Top Fed official blasts SVB collapse as ‘textbook case of mismanagement’

The Federal Reserve’s top official on banking supervision has blamed the collapse of Silicon Valley Bank on a “textbook case of mismanagement”, saying the board of the US central bank had been briefed on the troubles at the California lender in mid-February.

In congressional hearing testimony released ahead of an expected grilling on SVB’s failure by US lawmakers on Tuesday, Michael Barr, the Fed’s vice-chair for supervision, criticised the bank’s “concentrated business model”.

He also proposed a possible tightening of banking rules to avoid similar incidents in the future, and said US regulators were ready to intervene again if necessary.

“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound,” Barr said.

The Fed has launched a review of SVB’s collapse, which is due to be released by May 1, but Barr suggested the bank had made a number of critical errors as it grew in recent years.

“During the early phase of the [coronavirus] pandemic, and with the tech sector booming, SVB saw significant deposit growth. The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits. However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models and metrics

“At the same time, the bank failed to manage the risks of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the tech sector, which were highly concentrated and could be volatile.”

The Fed has already faced criticism that it was not quick enough to spot the vulnerabilities at SVB. Barr said supervisors had found “deficiencies” at the lender dating back to late 2021, and had met with the bank’s management in November 2022 “to express concern with the bank’s interest rate risk profile”. However, Fed staff had only briefed the central bank’s board of governors in mid-February of this year.

“Staff discussed the issues broadly, and highlighted SVB’s interest rate and liquidity risk in particular,” Barr said. “Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9.”

Barr said “the failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system”.

He said it was “critical that we propose and implement the Basel III endgame reforms”, referring to rules that would require banks to maintain certain leverage ratios and keep certain amounts of capital on hand.

He said such reforms would “better reflect trading and operational risks in our measure of banks’ capital needs”.

Barr said the Fed planned to propose “a long-term debt requirement for large banks that are not [globally systemic] so that they have a cushion of loss-absorbing resources to support their stabilisation”.

He said the Fed would have to “enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events”.

In separate testimony released on Monday, Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, called for “special attention” to be paid to the regulation of banks with more than $100bn in assets, as well as a focus on “the methods for planning and carrying out” resolutions of such banks.

He also said the FDIC would by May 1 propose policy options for changing the $250,000 limit for insured deposits — a focal point of debate in recent weeks. While Gruenberg said there had been a “moderation” in deposit outflows since the start of the banking turmoil early this month, he noted banks were still reporting that corporate depositors were shifting money to “diversify their exposure and increase their insured deposit coverage”.

He also warned that the US financial system continued to face “significant downside risks from the effects of inflation, rising market interest rates, and continuing geopolitical uncertainties”.

“Credit quality and profitability may weaken due to these risks, potentially resulting in tighter loan underwriting, slower loan growth, higher provision expenses and liquidity constraints.”