The US Fed, in the report titled ‘Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank’ claims that its own supervisors failed to act aggressively enough to ensure Silicon Valley Bank’s problems were rectified after supervisors failed to recognise the full degree of the bank’s difficulties.

Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. Further, Federal Reserve supervisors failed to take forceful enough action, is what the report concludes.

The report calls out that the US banking system is sound and resilient, with strong capital and liquidity. And in some respects, SVB was an outlier because of the extent of its highly concentrated business model, interest rate risk, and high level of reliance on uninsured deposits.

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However, SVB’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed, is what the report hinted at.

According to the Fed’s report on SVB bank, regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework.

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The four key takeaways of the Fed’s report on SVB bank are:

  1. Silicon Valley Bank’s board of directors and management failed to manage their risks.
  2. Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.
  3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.
  4. The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.