The collapse of Silicon Valley Bank (SVB) was a “textbook case of mismanagement” which requires tougher banking regulation, according to prepared remarks by a top Federal Reserve official.
“SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk,” the Fed’s vice chair for supervision Michael Barr said in remarks released ahead of a Senate hearing Tuesday.
He added that its failure “demands a thorough review of what happened, including the Federal Reserve’s oversight of the bank.”
Silicon Valley collapsed on March 10 after taking on excessive interest-rate risk, leaving it exposed when the Fed began hiking rates to tackle rising inflation.
Its “concentrated” business model, which relied heavily on a closely-interconnected network of venture capitalists, also left it vulnerable to a bank run by concerned depositors, Barr added in remarks released Monday.
“The bank waited too long to address its problems, and ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure,” he said.
– Oversight relaxed –
Barr said the passage of the 2019 Economic Growth, Regulatory Relief, and Consumer Protection Act, led the Fed to reduce its regulation of smaller banks, including SVB.
The “less stringent” standards put in place by the Fed after the Republican-backed bill’s passage meant SVB was subject to “less frequent stress testing” and “less rigorous capital planning and liquidity risk management standards.”
Barr said SVB’s failure “illustrates the need to move forward with our work to improve the resilience of the banking system.”
The Fed will propose a number of reforms to increase capital and long-term debt requirements for banks of SVB’s size, he added.
“We will need to enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events,” he said, adding that changes to liquidity rules may also be required “to improve the resiliency of the financial system.”