Wednesday, February 21, 2024

US Fed list out reasons for the collapse of Silicon Valley Bank

Share

According to a report titled ‘Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank’ by the US Federal Reserve, its supervisors did not take sufficient action to address the problems of Silicon Valley Bank, as they had not fully grasped the extent of the bank’s challenges.

As per the report by the US Federal Reserve titled ‘Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank’, Silicon Valley Bank’s failure was due to mismanagement by its senior leadership and board of directors. Specifically, the bank’s leadership did not effectively manage interest rate and liquidity risks, and the board did not provide adequate oversight and accountability. Furthermore, the report suggests that the Federal Reserve’s supervisors did not take strong enough action to address these issues.

According to the report by the US Federal Reserve on ‘Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank’, the US banking system is robust, with sufficient capital and liquidity to maintain its resilience. However, Silicon Valley Bank was an exception due to its highly concentrated business model, interest rate risk, and heavy dependence on uninsured deposits. The report highlights that these factors made SVB a unique case, rather than indicative of the broader state of the US banking system.

The report highlights that the regulatory standards for SVB were insufficient, and the supervision of the bank lacked adequate force and urgency. Additionally, the report states that the potential contagion from SVB’s failure had systemic consequences that were not fully considered under the Federal Reserve’s tailoring framework. Overall, the report indicates that improvements in regulation and supervision may be necessary to ensure the stability and resilience of the US banking system.

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.

To summarize, the key takeaways from the US Federal Reserve’s report on Silicon Valley Bank are that the bank’s board and management failed to manage risks, supervisors did not fully comprehend the extent of vulnerabilities as the bank grew, they did not take enough action to rectify issues once identified, and changes in supervisory policy and tailoring approach in response to the EGRRCPA reduced standards and impeded effective supervision.

Customers were now aware of the deep financial problems at SVB, and started withdrawing money in mass. Unlike a retail bank that serves for business and households, SVB’s clients tended to have much larger accounts. This meant the bank run was hasty. Just two days after it announced it would raise capital, the US$200bn company collapsed, witnessing the largest bank failure in the US since the global financial crisis.

Read more

Recommended For You