The Federal Reserve performed a post-mortem on last month’s spectacular, sudden failure of Silicon Valley Bank, and blamed terrible decisions by bank management, but also themselves and the FDIC for lax regulation.
When the go-to lender for startups Silicon Valley Bank suddenly collapsed over the course of one weekend in March, it was the second largest bank failure in U.S. history. The bank had held $211 billion in assets, a meteoric growth from having had just $71 billion in assets in 2019. But the bank was put into receivership with the US Federal Deposit Insurance Corporation (FDIC) on March 10 after a run on the bank where panicked depositors took tens of millions of dollars out in one day.
Lawmakers on both sides of the aisle have been quick to blame regulators at the FDIC and Federal Reserve for not being on top of the bank’s deteriorating financial condition as tech stocks tanked in 2022. "By all accounts, our regulators appear to have been asleep at the wheel," said Senate Banking Committee Republican ranking member Tim Scott (R-SC) according to Yahoo Finance. Meanwhile, liberal senator Elizabeth Warren is also quoted by Yahoo Finance as saying, “more and more lawmakers are troubled by the Fed's key role in the recent bank failures.”
That Yahoo Finance report covers the Federal Reserve’s own autopsy on why Silicon Valley Bank failed, and they do blame themselves for not regulating proactively enough, but also allowing looser regulations on mid-size regional banks. The federal analysis also blames the bank’s leadership and management for a series of disastrously short-sighted decisions.
"The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management. These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged," the report said, according to the Associated Press.
In the self-blame department, the Federal Reserve admits it "failed to take enough forceful action" as the bank’s condition worsened. But they also point out that a series of 2018 Trump era regulatory rollbacks, whose aftermath "demonstrates that there are weaknesses in regulation and supervision that must be addressed."
The Fed's report suggests that the FDIC continued to give Silicon Valley Bank a "satisfactory" supervisory rating every year from 2017 through 2021, "despite repeated observations of weakness in risk management."
But the Fed also blamed leadership at the bank itself, saying their “core risk-management capacity failed to keep up with rapid asset growth, which led to steady deterioration of its financial condition in 2022 and into March 2023.”
According to Axios, the Fed is considering stricter banking regulations in the wake of Silicon Valley Bank’s collapse, and the situation with a few other regional banks.
The reports also addressed New York-based Signature Bank, whose federal seizure happened two days after Silicon Valley Bank was seized, and the Fed admitted that while "poor management" was the "root cause" of that bank’s failure, they added that the FDIC "could have escalated supervisory actions sooner."
Closer to home, Yahoo Finance also reports that beleaguered SF-based First Republic Bank, which received a $30 billion infusion yet continues to melt down, could be headed for a federal takeover as well if another private bailout cannot be arranged.
Image: SANTA CLARA, CALIFORNIA - MARCH 13: A security guard at Silicon Valley Bank monitors a line of people outside the office on March 13, 2023 in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers are lining up to try and retrieve their funds from the failed bank. The Silicon Valley Bank failure is the second largest in U.S. history. (Photo by Justin Sullivan/Getty Images)