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US Federal Reserve chair says SVB management ‘failed badly’

Reuters/Leah Millis
Federal Reserve chair Jerome Powell holds a news conference in Washington on March 22, 2023, after raising interest rates by a quarter of a percentage point

The management of Silicon Valley Bank “failed badly,” Federal Reserve chair Jerome Powell said on Wednesday, but its collapse also underscores the need for better controls despite what had been escalating oversight by the Fed’s own examiners.

“These are not weaknesses that are running broadly through the banking system,” Powell told a press conference after the Fed’s latest policy meeting, adding that depositors’ money is safe.

Fed supervisors saw the bank’s exposure to liquidity and interest-rate risks and moved to intervene, he said, but the speed of the bank run outpaced anything seen in the past.

“It does kind of suggest there’s a need for regulatory and supervisory changes, just because supervision and regulation need to keep up with what’s happening,” Powell said.

He refrained from offering any specifics, saying those will come out of a review underway by the Fed’s vice chair for supervision Michael Barr and due by May 1.

“My only interest is that we identify what went wrong here, make an assessment of what are the right policies to put in place so that doesn’t happen again and then implement those policies,” Powell said.

Red flags

Federal Reserve bank examiners had called out problems at SVB as early as 2019.

But it was only in late 2021 after its rapid growth had catapulted it from oversight by the Fed’s community bank examiners to those charged with supervising banks with assets between $100 billion and $250 billion that the red flags started piling up.

In all the bank received six citations, Powell said, including both matters “requiring attention” and the more serious matters “requiring immediate attention”.

The citations focused on duration and liquidity risk, showing regulators were concerned about the bank’s ability to meet short-term obligations such as depositor withdrawals.

A key part of the bank examiner’s toolkit, MRAs and MRIAs are often included in reports following regular examinations of a bank’s health, or in a separate supervisory letter.

They typically do not specify a deadline for a fix, or spell out exactly how the fix should be made. Such citations are not made public but are disclosed to senior management.

Bank executives are expected to respond with plans for remediation that include those details, which then may be adjusted based on further discussion with bank examiners, according to a person familiar with the process who declined to speak publicly because the supervisory process is confidential.

Citations such as those SVB received can be a precursor to more stringent steps, including a formal downgrade of its confidential regulatory rating, or a public enforcement action such as a cease and desist order or a fine.

In early 2023 the Fed launched a “horizontal” review of SVB and a number of its peers to assess potentially correlated liquidity risks in light of the rise in interest rates.

The steps failed to head off a downfall triggered by exactly the deficiencies that supervisors had demanded be fixed.