Fed’s Barr calls Silicon Valley Bank failure a ‘textbook case of mismanagement’

Fed’s Barr calls Silicon Valley Bank failure a ‘textbook case of mismanagement’

The Federal Reserve’s top banking regulator said Monday that Silicon Valley Bank’s failure was largely due to mismanagement, although it noted that regulation and oversight also needed to be strengthened.

Fed Governor Michael Barr, the central bank’s deputy supervisor, insisted in prepared remarks before two congressional panels that regulators had identified problems with SVB’s risk management but the bank had been too slow to respond.

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“First of all, the failure of the SVB is a textbook case of mismanagement,” he said. “The bank waited too long to address its problems and, ironically, the overdue actions it eventually took to strengthen its balance sheet triggered the rush of uninsured depositors that led to the bank’s collapse.”

Barr will address the Senate Banking Committee on Tuesday, followed by an appearance before the House Financial Services Committee on Wednesday.

The Fed is conducting a SVB collapse review, the results of which are due to be released on May 1st.

“I am committed to ensuring that the Federal Reserve holds full accountability for any oversight or regulatory failure and that we fully address what went wrong,” Barr said.

FDIC Chairman Martin Grünberg also released his comments Monday. He, too, noted the importance of examining closely how both SVB and Signature Bank failed and the implications for regulation and oversight.

“The two bank failures also show the impact that banks with assets in excess of $100 billion can have on financial stability,” Grünberg said. “The prudential regulation of these institutions deserves serious attention, particularly in relation to capital, liquidity and interest rate risk.”

He also noted that the financial system faces “significant downside risks from the impact of inflation, rising market interest rates and ongoing geopolitical uncertainties.” He warned that further Fed rate hikes could amplify the types of unrealized losses that have fueled the recent bank stress.

A look at regulatory standards

Along with investigating what happened specifically with the SVB, Barr also noted that the investigation will examine whether the Fed’s risk tests were appropriate.

He pointed out that the supervisor had already identified problems with the liquidity risk management of the SVB at the end of 2021. The following year, regulators continued to flag issues and downgraded the bank’s management rating to fair.

In parallel, Fed officials received a presentation in mid-February on the risk that rising interest rates introduced by central banks posed to banking operations. Still, Barr said the review will consider whether the standards should have been stricter.

“In particular, we are examining whether the application of stricter standards would have prompted the bank to better manage the risks that led to its failure,” he said. “We are also examining whether SVB would have had higher levels of capital and liquidity under those standards and whether such higher levels of capital and liquidity would have prevented the bank from collapsing or provided the bank with further resilience.”

SVB failed after a deposit rush exposed a duration mismatch in the bank’s bond portfolio. In particular, the bank held securities with long maturities, which fell in value as yields rose. When it had to sell some of those assets at a loss to cover demands to pay out deposits, it sparked another run and eventual collapse.

Barr said the Fed will consider changing long-term debt rules at institutions not considered systemic. Part of the review will also examine whether stricter standards would have prompted SVBs to better manage their liquidity risk.

Additionally, Barr said he viewed the health of the banking system in general as “solid and resilient, with strong capital and liquidity.”

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2023-03-27 17:29:54