March 4, 2024

The Federal Reserve concluded in a much-anticipated report on Friday that the Silicon Valley bank’s fiasco in early March was the product of mismanagement and regulatory failures, combined with a social media frenzy.

Michael S. Barr, the Fed’s vice chair for supervision appointed by President Joe Biden, said in an exhaustive investigation into SVB’s March 10 collapse that a myriad of factors contributed to the failure of the 17th largest U.S. bank.

These include bank executives committing “textbook” failures in managing interest rate risk, Fed regulators who failed to understand the depth of SVB’s problems and were slow to respond, and a social media frenzy that threatened to hasten the institution’s demise.

Barr called for broad changes in the way regulators deal with the nation’s complex and intertwined financial system.

“After the failure of Silicon Valley Bank, we must strengthen the Fed’s oversight based on the lessons we have learned,” Barr said.

“As risks in the financial system continue to evolve, we need to continually assess our regulatory framework and be humble about our ability to assess and identify emerging risks,” he added.

Increased capital and liquidity could help SVB survive, a senior Fed official said. Central bank officials are likely to turn their attention to cultural change, noting that SVB’s risks have not been thoroughly examined. Future changes could introduce standardized liquidity requirements for a wider range of banks and stricter regulation of bank managers’ pay.

Bank stocks traded higher after the report, with SPDR S&P Bank The ETF gained about 1.3%.

The regulator shut down SVB following a run on deposits sparked by liquidity problems, a stunning move that continues to reverberate across the banking system and financial markets. To meet capital requirements, the bank was forced to sell long-term Treasury bills at a loss as rising interest rates eroded the value of the principal.

Barr noted that the deposit run at SVB was exacerbated by fears of the bank’s troubles circulating on social media, combined with the ease of withdrawing deposits in the digital age. Regulators need to pay attention to this phenomenon in the future, Barr said.

“The combination of (T)social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the pace of bank runs,” he said in the report. “Social media has enabled depositors to immediately spread fears of bank runs , and technology can withdraw funds instantly.”

He used broad strokes in discussing the Fed’s failures, without mentioning Mary Daly, president of the San Francisco Fed, under whose jurisdiction the SVB falls. The senior Fed official, speaking on condition of anonymity, said regional governors are generally not responsible for directly supervising banks in their regions.

Fed Chairman Jerome Powell said he welcomed Barr’s investigation and his internal criticism of the Fed’s actions during the crisis.

“I agree with and support his recommendations for our rules and supervisory practices, which I believe will lead to a stronger and more resilient banking system,” Powell said.

SVB is the darling of the tech industry and the go-to for ambitious companies in need of growth financing. In turn, the bank used billions in uninsured deposits as the basis for lending.

The crash, which occurred in just a few days, raised concerns that depositors would lose money because many accounts were over the $250,000 threshold for FDIC insurance. Signature Bank, which uses a similar business model, also failed.

As the crisis unfolded, the Federal Reserve rolled out emergency lending measures while reassuring savers that they would not lose their money. While the moves have largely quelled panic, they have prompted comparisons to the 2008 financial crisis and calls for a reversal of some of the deregulatory measures introduced in recent years.

Senior Fed officials said the Dodd-Frank changes helped spark the crisis, but they also acknowledged that the SVB case was also a regulatory failure. A change approved in 2018 reduced the stringency of stress tests for banks with assets below $250 billion, a category in which SVB falls.

“We need to foster a culture that empowers executives to act in the face of uncertainty,” Barr wrote. “In the case of SVB, the regulator delayed action to gather more evidence, even when weaknesses were clear and growing. This means that the regulator did not compel SVB to address its problems, even though those problems had festered.”

Possible areas for the Fed to focus include the types of uninsured deposits that have raised concerns during the SVB drama, as well as general concerns about capital requirements and the risk of unrealized losses on banks’ balance sheets.

Barr noted that changes in oversight and regulation could take years to take effect.

The Office of the Accountant-General also released a report on the bank failures on Friday, noting that “risky business strategies and weak liquidity and risk management” contributed to the failures of SVB and Signature.