The collapse of Silicon Valley Bank (SVB) has been described as a “textbook case of mismanagement” by Federal Reserve Vice Chair of Supervision Michael Barr.[0] He cited the bank’s “concentrated business model” in technology and venture capital, its rapid growth from 2019 and 2022, and its failure to “effectively manage the interest rate risk” of its securities.[1] Barr is leading a review of the way the Federal Reserve supervised both SVB and Signature Bank, which will be released on May 1.[2] The collapse of both banks has highlighted the need for stronger regulations in the banking industry.
Barr’s testimony indicated that the Fed’s review will examine how the 2018 rollback of Dodd-Frank may have contributed to SVB’s failure.[3] During the administration of former President Donald Trump, a rollback was implemented which exempted SVB from adhering to more stringent stress testing and regulations governing liquidity, funding, leverage and capital.[4] According to Gruenberg from the FDIC, the failures of SVB and Signature Bank highlight the potential impact that financial institutions with assets exceeding $100 billion can have on overall financial stability. Therefore, it is crucial to give significant consideration to the prudent regulation of these banks, particularly in terms of capital, liquidity, and interest rate risk.[5]
The collapse of SVB has sent shockwaves across the global banking system, prompting many depositors to pull their cash out of regional and smaller banks over concerns they could lose their money.[6] Making customers whole is expected to cost the deposit insurance fund $20 billion for SVB and $2.5 billion for Signature Bank.[7] While estimates could still be adjusted, the agency estimates that the cost to the Deposit Insurance Fund of resolving SVB to be $20 billion, while the cost of resolving Signature Bank should fall around $2.5 billion.[7] President Biden has urged Congress to pass legislation to increase the penalties on bank executives when mismanagement leads to bank failures.[8]
Following the failures, the FDIC initiated an investigation to determine who should be responsible.[9] Lawmakers were informed by Gruenberg that the deposit insurance system will undergo review by the FDIC and its report will coincide with the Fed’s report release on May 1.[9]
0. “Fed’s Michael Barr, regulators to testify on Silicon Valley Bank” The Washington Post, 28 Mar. 2023, https://www.washingtonpost.com/business/2023/03/28/svb-congress-hearing-fed-fdic/
1. “Senate holds its first hearing into SVB and Signature Bank failures” NBC News, 28 Mar. 2023, https://www.nbcnews.com/politics/congress/senate-holds-first-hearing-svb-signature-bank-failures-rcna76834
2. “5 takeaways from the Senate hearing on Silicon Valley Bank’s failure” NPR, 28 Mar. 2023, https://www.npr.org/2023/03/28/1166507714/senate-hearing-silicon-valley-bank-signature-bank-failure-collapse
3. “‘Justified anger’: Key takeaways from Senate hearing on SVB’s collapse” POLITICO, 28 Mar. 2023, https://www.politico.com/news/2023/03/28/senate-silicon-valley-bank-hearing-00089166
4. “This is why SVB imploded, says top Fed official” CNN, 27 Mar. 2023, https://www.cnn.com/2023/03/27/economy/michael-barr-testimony-svb-failure/index.html
5. “Top Fed official: Silicon Valley Bank mismanagement led to failure” Axios, 27 Mar. 2023, https://www.axios.com/2023/03/27/silicon-valley-bank-federal-reserve
6. “Fed Vice Chair Calls Silicon Valley Bank a ‘Textbook Case of Mismanagement’” The New York Times, 28 Mar. 2023, https://www.nytimes.com/2023/03/27/business/economy/fed-silicon-valley-bank-mismanagement.html
7. “FDIC’s Gruenberg floats tougher resolution rules for midsize banks” American Banker, 27 Mar. 2023, https://www.americanbanker.com/news/fdics-gruenberg-floats-tougher-resolution-rules-for-mid-sized-banks
8. “Republicans request Fed and FDIC oversight records for failed Silicon Valley Bank and Signature Bank” CNBC, 20 Mar. 2023, https://www.cnbc.com/2023/03/20/republicans-request-fed-and-fdic-oversight-records-for-failed-silicon-valley-bank-and-signature-bank.html
9. “Fed calls SVB’s failure a “textbook case of bank mismanagement”” CBS News, 28 Mar. 2023, https://www.cbsnews.com/news/svb-collapse-cost-fdic-fund-20-billion/