Ajit Karn
Washington: According to prepared remarks from a senior Federal Reserve official, the failure of Silicon Valley Bank (SVB) was a “textbook case of mismanagement” necessitating stricter banking regulation.
“SVB failed because the bank’s management failed to effectively manage its interest rate and liquidity risk,” Michael Barr, vice chair for supervision at the Federal Reserve, said in prepared remarks for a Tuesday Senate hearing.
He added that its failure “requires a comprehensive examination of what transpired, including Federal Reserve oversight of the bank.”
Silicon Valley imploded on March 10 after taking on excessive interest-rate risk, leaving it vulnerable when the Federal Reserve began raising interest rates to combat rising inflation.
Barr added in remarks released Monday that the company’s “concentrated” business model, which relied heavily on a network of closely interconnected venture capitalists, made it vulnerable to a bank run by concerned depositors.
“The bank waited too long to address its problems, and ironically, the tardy actions it finally took to strengthen its balance sheet sparked the uninsured depositor flight that ultimately led to the bank’s failure,” he said.
The oversight was inadequate
Barr stated that the passage of the 2019 Economic Growth, Regulatory Relief, and Consumer Protection Act resulted in the Fed reducing its oversight of lesser institutions, including SVB.
SVB was subject to “less frequent stress testing” and “less rigorous capital planning and liquidity risk management standards” as a result of the Fed’s “less stringent” standards enacted after the passage of a bill sponsored by Republicans.
Barr stated that SVB’s failure “demonstrates the need to advance our efforts to strengthen the resilience of the banking system.”
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He added that the Fed will propose a number of reforms to increase capital and long-term debt requirements for banks like SVB.
“We will need to enhance our stress testing with multiple scenarios so that it captures a broader range of risk and uncovers channels for contagion,” he said, adding that changes to liquidity rules may also be necessary “to improve the resilience of the financial system.”
