Federal banking regulators are preparing to release a post-mortem on the collapse of Silicon Valley Bank, whose implosion last month set off a panic among depositors and investors that, even six weeks later, has left the finance industry reeling.
The Federal Reserve, which is responsible for supervising banks in the United States, plans to release its report at 11 a.m. ET, laying out its internal investigation of its own oversight. Another federal regulator, the Federal Deposit Insurance Corporation, will release a similar report on Signature Bank, which fell two days after SVB, in the afternoon.
[North Carolina-based First Citizens Bank bought the bank through an FDIC auction days later.]
Here’s what to expect from the regulators’ reports.
Raleigh-based First Citizens to acquire Silicon Valley Bank; shares soar 52%
No smoking gun
Fed officials and the media have already revealed some of the fatal mistakes Silicon Valley Bank’s leadership made in the run-up to its collapse on March 10.
Michael Barr, the Fed’s vice chair for supervision who led the investigation, told lawmakers last month that SVB’s failure was “a textbook case of mismanagement.”
Notably, the bank sat on a mountain of unrealized losses. SVB took about 55% of its customer deposits and invested them in fixed-income securities such as government bonds. Those assets began steadily losing value when the central bank raised interest rates at a rapid pace last year.
SVB appears to have had zero hedges in place on its bond portfolio.
“Frankly, managing your interest rate risk exposure — that’s one of the first things that I teach an undergraduate banking class,” John Sedunov, professor of finance at Villanova University, told CNN last month. “It’s textbook stuff.”
SVB also grew at a breakneck pace during the pandemic, as its tech and venture capital-focused clientele thrived. The bank nearly quadrupled in size between 2018 and 2021, and by the time it collapsed it was the nation’s 16th largest bank, with $209 billion in assets. That should have been a red flag in itself, experts say, because the management’s capacity and the bank’s compliance systems seldom grow at pace with the rest of the business.
SVB was ultimately felled by a panic that drove its clients to yank their deposits all at once, creating a run on the bank. As the bank stumbled, it became clear that virtually all — 97%, according to data from Wedbush Securities — of SVB’s deposits were uninsured. Its overreliance on uninsured money made it especially vulnerable, because depositors whose larger balances are not fully covered by the FDIC will be quick to draw down their funds at the first sign of trouble.
The blame game
The Fed, which plays both a regulatory and supervisory role, is investigating itself on a tight deadline, fueling critics’ concerns that the central bank is trying to deflect blame.
“The Fed’s so-called self-investigations are incomplete and biased, predictably leading to unwarranted self-exoneration,” said Dennis Kelleher, CEO of nonprofit advocacy group Better Markets. “No genuinely thorough, comprehensive, and unbiased review of such a major event would have been put on such a short deadline, which clearly suggests other motives.”
Barr told lawmakers that staff working on the report will be doing a “self-assessment” to uncover whether any Fed supervisors or regulators are at fault.
There are indications the Fed, SVB’s primary regulator, warned the bank as early as 2019 about its insufficient risk-management systems, according to reporting from the Wall Street Journal and the New York Times. It’s not yet clear whether the Fed took action on that warning.
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