“A combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs” the Federal Reserve said late Friday in a damning post-mortem of Silicon Valley Bank (SVB)’s collapse, pointing to failures both by regulators and bank in the report which says “[we need to] develop a culture that empowers supervisors to act in the face of uncertainty.”
The bank saw $40 billion in withdrawals on March 9 and expected $100 billion on March 10 alone, the report notes, pointing to the "concentrated network of VC investors and technology firms who, fueled by social media, withdrew uninsured deposits in a coordinated manner at an unprecedented rate" as fears mounted.
Federal Reserve post-mortem into Silicon Valley Bank collapse
The Federal Reserve report on Silicon Valley Bank’s collapse describes a “textbook case of mismanagement.”
It says of the tech startup-favourite’s bank that among myriad other failures “its senior leadership failed to manage basic interest rate and liquidity risk” – adding that SVB’s financial risk management group “acted more in collaboration than as an effective challenge to the business… Internal audit had findings related to incorrect data inputs, inadequate governance of IRR [interest rate risk] models, and inaccurate NII [net interest income] position dating back to December 2020 but did not have the internal stature to drive remediation.”
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The Fed’s Michael S. Barr, Vice Chair for Supervision, added: “We… need to be attentive to the particular risks that firms with rapid growth, concentrated business models, or other special factors might pose regardless of asset size…the Federal Reserve has begun to build a dedicated novel activity supervisory group to focus on the risks of novel activities (such as fintech or crypto activities) as a complement to existing supervisory teams.
“As we do so, we will identify whether there are other risk factors—such as high growth or concentration—that warrant additional supervisory attention. Once issues are identified, they should be addressed more quickly, both by the bank and by supervisors” he said, suggested that the Fed is going to review how it regulates both interest rate risk and liquidity risk; for the latter, starting with the risks of uninsured deposits.
Supervisors were "too accepting"
The Federal Reserve post-mortem into Silicon Valley Bank’s collapse suggests that the incident has been a wake-up call for regulators, with the Fed’s Barr adding: “We need to guard against complacency.
“More than a decade of banking system stabilityl may have led… supervisors to be too accepting.
“Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences.”
Among other failings, Silicon Valley Bank “did not conduct back-testing [testing the accuracy of the models used by banks to measure their market risks], had limited sensitivity testing, and did not have an adequate second line function to provide review and challenge to decisions and model assumptions… [it] only used the most basic IRR measurement” and even started removing hedges in March 2022, which were designed to protect NII in rising rate scenarios as focussed instead on near-term profitability" the report says.
