Fed's Barr to Congress: SVB's failure is 'textbook case of mismanagement'
Less than three weeks after Silicon Valley Bank failed, Federal Reserve Vice Chair of Supervision Michael Barr will tell lawmakers Tuesday the collapse was a textbook case of mismanagement after what was the country's 16th-largest lender fell into receivership in a matter of days.
"SVB's failure is a textbook case of mismanagement," Barr's testimony reads. "The bank had a concentrated business model, serving the technology and venture capital sector."
Barr's testimony will come just a day after First Citizens announced a deal to take over Silicon Valley Bank's loans and deposits from the FDIC, which had been leading the bank since March 10.
Barr notes the company grew "exceedingly quickly" during the pandemic, with deposits rising rapidly and these proceeds largely ending up funneled into longer-term securities like Treasury bonds and mortgage-backed securities.
"The bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics," Barr will say.
"At the same time, the bank failed to manage the risks of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the tech sector, which were highly concentrated and could be volatile."
"SVB's failure demands a thorough review of what happened, including the Federal Reserve's oversight of the bank," Barr will tell lawmakers. "I am committed to ensuring that the Federal Reserve fully accounts for any supervisory or regulatory failings, and that we fully address what went wrong."
Barr's key message that SVB's failure sits with company management echoes what Fed Chair Jerome Powell said last week in a press conference, telling the media: "[At] a basic level, Silicon Valley Bank management failed badly, they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, [and] didn't hedge that risk."
FDIC Chair Martin Gruenberg, who is set to testify alongside Barr and Treasury undersecretary Nellie Liang on Tuesday, also said in testimony released Tuesday the failure of SVB and New York's Signature Bank, which the FDIC seized on March 12, contain several common threads, including a high proportion of uninsured deposits, heavy losses on securities portfolios, and the risks banks with more than $100 billion in assets post to the financial system.
Gruenberg said the FDIC will release a report on the agency's oversight of Signature Bank, and a separate review of the deposit insurance program, by May 1.
A social media run
This is the first time investors and lawmakers will hear from Barr — who is scheduled to testify Tuesday before the Senate Banking Committee followed by the House Financial Services Committee on Wednesday — on why Silicon Valley Bank failed and regulators' response.
The Fed was responsible for supervision of SVB.
SVB was taken into receivership by the FDIC on March 10, just two days after the bank disclosed it would take a $1.8 billion loss on the sale of some securities and would look to raise an additional $2.25 billion in capital to bolster its balance sheet.
More than $40 billion was pulled from the bank on March 9, coinciding with the failed capital raise which ultimately doomed the bank. Barr also notes the role social media played in spurring what ended up being a fatal run on the bank.
"Uninsured depositors interpreted [SVB's losses and capital raise] as a signal that the bank was in distress," Barr will tell lawmakers.
"They turned their focus to the bank's balance sheet, and they did not like what they saw. In response, social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee."
What regulators knew
Barr's appearance before lawmakers on Tuesday will also bring to the fore questions about what the Federal Reserve and other regulators knew, when they knew it, and what mistakes were made.
According to Barr's testimony, near the end of 2021, supervisors found deficiencies in the bank's liquidity risk management, resulting in six supervisory findings related to the bank's liquidity stress testing, contingency funding, and liquidity risk management.
In May 2022, supervisors issued three findings related to ineffective board oversight, risk management weaknesses, and the bank's internal audit function.
"The bank waited too long to address its problems, and ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank's failure," Barr's testimony reads.
"The picture that has emerged thus far shows SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank."
In October 2022, supervisors met with the bank's senior management to express concern with the bank's interest rate risk profile. The following month supervisors delivered a supervisory finding on interest rate risk management to the bank.
In mid-February 2023, Fed staff highlighted SVB's interest rate and liquidity risk, and said they were actively engaged with SVB. As it turned out, the full extent of the bank's vulnerability was not apparent until the unexpected bank run on March 9.
"We need to ask why the bank was unable to fix and address the issues we identified in sufficient time," Barr will say. "It is not the job of supervisors to fix the issues identified; it is the job of the bank's senior management and board of directors to fix its problems."
A spokesperson for Ranking Member of the Senate Banking Committee, Tim Scott (R-SC), told Yahoo Finance Scott's questions Tuesday "will focus on the Federal Reserve’s failure to take appropriate supervisory actions to mitigate and prevent the collapse of SVB."
'Our banking system is sound'
Barr says the Fed is focusing on whether its supervision was appropriate for the rapid growth and vulnerabilities of the bank, with the Fed also assessing whether higher levels of capital and liquidity would have forestalled SVB’s failure or provided further resilience to the bank.
On Sunday, March 12, Treasury Secretary Janet Yellen, with unanimous recommendation from the Fed and the FDIC, approved systemic risk exceptions for the failures of SVB and Signature, enabling the FDIC to guarantee all of the deposits of both banks.
In addition, the Fed, with Treasury's approval, created a temporary lending facility to offer banks additional liquidity to meet any unexpected depositor demand.
"It appeared that contagion from SVB's failure could be far-reaching and cause damage to the broader banking system," Barr's testimony says. "The prospect of uninsured depositors not being able to access their funds could prompt depositors to question the overall safety and soundness of U.S. commercial banks."
Barr will say these actions demonstrate that regulators are committed to ensuring that all deposits are safe.
"Our banking system is sound and resilient, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound."
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