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

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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.

Follow @johnsfoley on Twitter

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.)

Editing by Lauren Silva Laughlin and Sharon Lam

 

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Netflix’s subscriber growth slows as gains from password-sharing crackdown subside

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Netflix on Thursday reported that its subscriber growth slowed dramatically during the summer, a sign the huge gains from the video-streaming service’s crackdown on freeloading viewers is tapering off.

The 5.1 million subscribers that Netflix added during the July-September period represented a 42% decline from the total gained during the same time last year. Even so, the company’s revenue and profit rose at a faster pace than analysts had projected, according to FactSet Research.

Netflix ended September with 282.7 million worldwide subscribers — far more than any other streaming service.

The Los Gatos, California, company earned $2.36 billion, or $5.40 per share, a 41% increase from the same time last year. Revenue climbed 15% from a year ago to $9.82 billion. Netflix management predicted the company’s revenue will rise at the same 15% year-over-year pace during the October-December period, slightly than better than analysts have been expecting.

The strong financial performance in the past quarter coupled with the upbeat forecast eclipsed any worries about slowing subscriber growth. Netflix’s stock price surged nearly 4% in extended trading after the numbers came out, building upon a more than 40% increase in the company’s shares so far this year.

The past quarter’s subscriber gains were the lowest posted in any three-month period since the beginning of last year. That drop-off indicates Netflix is shifting to a new phase after reaping the benefits from a ban on the once-rampant practice of sharing account passwords that enabled an estimated 100 million people watch its popular service without paying for it.

The crackdown, triggered by a rare loss of subscribers coming out of the pandemic in 2022, helped Netflix add 57 million subscribers from June 2022 through this June — an average of more than 7 million per quarter, while many of its industry rivals have been struggling as households curbed their discretionary spending.

Netflix’s gains also were propelled by a low-priced version of its service that included commercials for the first time in its history. The company still is only getting a small fraction of its revenue from the 2-year-old advertising push, but Netflix is intensifying its focus on that segment of its business to help boost its profits.

In a letter to shareholder, Netflix reiterated previous cautionary notes about its expansion into advertising, though the low-priced option including commercials has become its fastest growing segment.

“We have much more work to do improving our offering for advertisers, which will be a priority over the next few years,” Netflix management wrote in the letter.

As part of its evolution, Netflix has been increasingly supplementing its lineup of scripted TV series and movies with live programming, such as a Labor Day spectacle featuring renowned glutton Joey Chestnut setting a world record for gorging on hot dogs in a showdown with his longtime nemesis Takeru Kobayashi.

Netflix will be trying to attract more viewer during the current quarter with a Nov. 15 fight pitting former heavyweight champion Mike Tyson against Jake Paul, a YouTube sensation turned boxer, and two National Football League games on Christmas Day.

The Canadian Press. All rights reserved.

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All Magic Spells (TM) : Top Converting Magic Spell eCommerce Store

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