Fed’s SVB review finds there’s no “I” in “blame”

NEW YORK, April 28 (Reuters Breakingviews) – The death of Silicon Valley Bank is a whodunnit with many perpetrators, according to a review conducted by the Federal Reserve and released on April 28. So many, in fact, that the report makes it hard to point the blame anywhere in particular.

The 114-page post-mortem of SVB, compiled in just over six weeks at the behest of supervisory chief Michael Barr, points out some obvious but undeniable truths. Chief among them: SVB was horribly mismanaged, amassing large deposits from a concentrated base of technology firms, and reinvesting them such that rising interest rates tore its balance sheet to shreds, provoking a bank run.

But this ailing dog of a bank also had a too-long leash, thanks to timid, consensus-seeking supervisors. Staff at the San Francisco Fed, the regional central bank branch that oversaw SVB, were so focused on detail and analysis that they failed to see the big picture, Barr’s report claims. They worried more about what had already gone wrong than what could, and were too slow in acting on their concerns – for example, hoping that strong growth would offset the risks, and focusing on improvements rather than SVB’s continued absolute failings.

The Fed, headed by Jerome Powell, failed institutionally too. As SVB’s assets passed $100 billion it was handed off from one regulatory team to another, resulting in a “cliff effect” as supervisors scrambled to reassess the bank’s risks and controls. For example, it would not have had its first official big-bank stress test until 2024. It didn’t help that Congress had given the Fed discretion to apply lighter regulation to SVB-sized banks. Using pre-rollback rules, SVB would have fallen visibly short of its required liquidity levels by the end of 2022.

If one individual gets subtly thrown under the bus, it’s Barr’s predecessor, Republican appointee Randal Quarles. Supervisors felt pressure to ease the “burden” on firms during his tenure, making them less willing to take tough action. Barr, by contrast, shows no such tendencies. He is already reviewing whether banks require more capital, and mulling tougher rules for large regional banks. There are other sensible ideas, like treating rapid growth as a risk in itself, and more emphasis on “reverse stress tests,” where supervisors think through what it would take to push a firm to the brink.

Spared from the criticism so far is the Fed’s actual leadership. Barr himself only took over in summer of 2022. But the report skirts over the extent to which the Fed’s top staff were aware of risks at SVB. A presentation to the board of governors in February that discussed SVB’s vulnerabilities directly is dismissed as “informational.” And there’s no mention of Powell, who endorsed 2019’s rule rollback and presided over the Fed as Quarles pushed his light-touch supervisory agenda. Culture in an institution goes right to the top. Accountability, in this case, does not.

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CONTEXT NEWS

The Federal Reserve on April 28 released its review of the failure of Silicon Valley Bank, highlighting regulatory and management lapses that contributed to the lender’s collapse in early March.

Vice Chair Michael Barr, who heads supervision of banks at the Fed, said that while SVB was a “textbook case” of mismanagement, supervisors also failed to take forceful enough action.

The 114-page report, compiled in just over six weeks, discusses the “cliff effect” as SVB’s rapid growth saw it pass from one supervisory regime to another, leaving supervisors scrambling to reassess the bank’s risks and controls.

Supervisors at the San Francisco Fed noted issues with SVB’s liquidity, interest-rate risk and governance, but failed to “fully appreciate” risks like SVB’s reliance on a concentrated base of depositors from the technology and venture capital sectors, it concludes.

Staff reported that they faced pressure to reduce the regulatory burden on firms, and felt a “shift in culture and expectations” under Barr’s predecessor Randal Quarles, according to the report.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

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