The independent review of Silicon Valley Bank (SVB) in 2023 shows that Federal Reserve regulatory staff were aware of or should have been aware of key weaknesses in the bank, but failed to act in a timely and decisive manner.
Details of the Federal Reserve Review
The preliminary findings of this review were presented by Michelle Bowman, the Federal Reserve's Vice President for Supervision, at a luncheon at the London Mayor's residence. The review, conducted by the Starling Advisory Group, assessed whether regulators had previously identified the weaknesses of SVB, why action was delayed, and whether the lack of regulatory action contributed to the bank's failure.
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Silicon Valley Bank collapsed in March 2023 due to a rapid withdrawal of deposits, which revealed existing weaknesses in its balance sheet. The bank had heavily invested in long-term securities whose market value declined with rising interest rates, while 94% of its deposits were uninsured and concentrated in technology companies backed by venture capital.
Reasons for the Bank's Failure
On March 8, 2023, Silicon Valley Bank reported a $1.8 billion after-tax loss from the sale of securities and was seeking to raise capital. The next day, more than $40 billion in deposits were withdrawn, and the bank expected further outflows exceeding $100 billion, leading to its closure on March 10.
The new review also found that the failure of SVB was due to a combination of unrealized accounting losses in its securities portfolio, a vulnerable deposit base, and inadequate operational readiness to borrow from the Federal Reserve's discount window. It also noted that regulatory delays were not due to the regulatory framework introduced in 2018 or directives from the former Vice President for Supervision.
One significant factor in the lack of regulatory action was a long-standing culture of risk aversion. Staff were concerned that if they were not confident in the correctness of their actions, they would not act, while ambiguity in decision-making authority complicated the process.
The review also found no evidence that social media had incited or accelerated the deposit withdrawals. 96% of social media discussions about deposit withdrawals occurred after SVB's failure had become inevitable.
In response, the Federal Reserve has introduced measures to strengthen regulatory oversight, including monthly reporting of unresolved regulatory concerns to senior officials and increased flexibility for examiners in response to material weaknesses.
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