Fed’s top banking regulator sees SVB’s demise ‘textbook case of mismanagement’

ISTANBUL

The US Federal Reserve’s top regulator on banking, Michael Barr, sees the sudden demise of Silicon Valley Bank (SVB) as a “textbook case of mismanagement,” according to his statement released Monday.

“SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours,” he wrote in his prepared remarks at his testimony before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday.

Barr, the Fed’s vice chair for supervision, wrote SVB’s failure demands a thorough review, including the Fed’s oversight of the bank, adding he is committed to ensuring that the central bank fully addresses what went wrong.

He said the first step would be to have a “thorough and transparent” examination of the supervision and regulation of SVB before its failure, which will become available to the public by May 1.

The vice chair noted that SVB’s business, focused on the venture capital sector in technology, grew quickly by tripling in assets between 2019 and 2022, while it saw high deposit growth during the early period of the coronavirus pandemic when the tech sector was booming.

“The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits. However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics,” he wrote.

Barr stated that SVB also failed to manage the risks of its liabilities, which were largely composed of deposits from venture capital firms and the tech sector that could be volatile.

“Because these companies generally do not have operating revenue, they keep large balances in banks in the form of cash deposits, to make payroll and pay operating expenses. These depositors were connected by a network of venture capital firms and other ties, and when stress began, they essentially acted together to generate a bank run,” he explained.

SVB announced earlier this month it sold its $21 billion bond portfolio at a $1.8 billion loss. After the bank was quickly closed by US regulators, First Citizens Bank agreed to buy SVB’s deposits and loans, approximately $72 billion of its assets at a discount of $16.5 billion.

• Michael Barr
• Silicon Valley Bank (SVB)
• US Federal Reserve