The Federal Reserve has admitted that it should have taken more action before the Silicon Valley bank collapsed on March 10.
The Federal Reserve said on Friday that it was partly responsible for the collapse of the Silicon Valley bank, citing that it failed to “take strong enough action” and lacked urgency.
Silicon Valley bank closed by Federal Deposit Insurance Corp. on March 10th.
The Fed also said that Silicon Valley management and board are also responsible for not managing their own risks.
do not miss:FDIC: Signature bank failed due to mismanagement
The review, which was overseen by Michael Barr, the Fed’s vice chair of oversight, cited four reasons for the SVB’s collapse and said more oversight should have been done on the bank, showing that there are “weaknesses in regulation and supervision that need to be addressed.”
“SVB’s regulatory standards were too low, SVB’s oversight was not acted with sufficient force and urgency, and contagion from corporate failure caused systemic consequences that the Fed’s framework had not contemplated,” Barr wrote in the report.
Bank deposits with SVB rose very quickly
The review of the SVB failure was hundreds of pages long and showed how the bank’s deposits, similar to Signature Bank in New York, grew very quickly.
The FDIC said Friday that the signature bank failed due to mismanagement and “unconstrained growth without adequate risk management practices; growth funded by over-reliance on uninsured deposits.”
The Silicon Valley bank failure led its parent company, SVB Financial, to file for bankruptcy protection on March 17. The bank’s assets are not included in the deposit. The Chapter 11 filing is the largest bankruptcy for a bank since Washington Mutual filed in 2008.
The FDIC and the Federal Reserve (Fed) said on March 12 that they will ensure that all depositors will get their money back, even those with balances over $250,000 insured by the FDIC.
First Citizens BancShares, a bank in North Carolina, acquired SVB on March 26 in a deal that included $72 billion in loans at a discount of $16.5 billion and bank deposits of $56 billion.
SVB was the second largest banking failure in US history and it rattled many investors. It was the result of a bank run due to the company’s announcement that it had failed to raise additional capital to increase liquidity. The bank has made investments in long-term government securities, including Treasury bills. When depositors demanded their money, the bank sold the securities, losing $1.8 billion.
The Fed supervisors should have intervened faster
The Fed said in its report that the SVB did not have enough involvement from Fed supervisors who took too long to deal with problems they were aware of and missed other problems that should have been easily identified.
“When the supervisors identified the vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough,” the Fed said.
The Fed said the fourth reason for the collapse of the SVB was due to “the approach of designing the Board of Directors in response to the Economic Growth, Regulatory Relaxation, and Consumer Protection Act and the shift in the supervisory policy stance hampered effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.”
Barr said that Fed oversight should increase in the wake of the SVB collapse.
“After the failure of the Silicon Valley bank, we must strengthen the supervision and regulation of the Fed based on what we have learned,” he said. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the circumstances that led to the bank’s failure, including the Fed’s supervisory and regulatory role.”
The report discusses other issues such as the management of the bank, the supervisory and regulatory issues surrounding bank failures, and the recent supervisory history of the SVB.
The Fed said the report includes more than two dozen documents containing the bank’s confidential supervisory information such as supervision letters, examination results and supervisory warnings.
“I welcome this comprehensive and self-critical report on Fed oversight from Vice Chair Barr,” said Jerome Powell, Chairman of the Federal Reserve. “I agree with and support his recommendations for dealing with our supervisory rules and practices, which I am confident will lead to a stronger and more resilient banking system.”
The central bank said the report chronicled deposit growth with the SVB and also discussed the challenges Fed supervisors faced in “identifying the bank’s weaknesses and forcing the bank to fix them.”
Lots of warnings have been issued by regulators at the Federal Reserve, sounding alarms of many red flags.
“At the time of the bank failure, the bank had 31 unaddressed security and safety supervisory warnings — three times the average number of peer banks.”
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