US FED blames SVB's failure on management

Last Friday, a highly-anticipated report was released regarding the collapse of Silicon Valley Bank (SVB). The report, published by the US Federal Reserve, acknowledged its own shortcomings and urged for increased banking oversight.

In a statement accompanying the report, Michael Barr, the Federal Reserve vice chair for supervision, stated that the collapse of Silicon Valley Bank highlights the need to enhance the supervision and regulation of the Federal Reserve. Barr acknowledged that SVB's management had not effectively managed risk leading to the bank's sudden downfall and that Federal Reserve supervisors had not taken sufficient action even after identifying issues at the California-based high-tech lender.

The collapse of Silicon Valley Bank on March 10, which was caused by taking on too much interest-rate risk, had a ripple effect throughout the banking industry. It resulted in the failure of another regional US bank and put pressure on Swiss investment banking giant Credit Suisse to merge.

Fortunately, regulators on both sides of the Atlantic worked together in the days that followed to mitigate the banking turmoil and stabilize financial markets.

The report revealed that the Federal Reserve had not fully comprehended the severity of critical shortcomings in SVB's governance, liquidity, and interest rate risk management. This is particularly concerning as the bank's assets more than doubled in size between 2019-2021 during the high-tech boom.

In light of this, Barr stated that the Federal Reserve will be taking steps to strengthen banking supervision to ensure that risks and vulnerabilities are identified more quickly.

In addition to enhancing banking supervision, the Federal Reserve is planning to strengthen the regulatory framework for banks by revisiting the rules around interest-rate risk, liquidity, and capital requirements, as well as stress-testing.

The review will be comprehensive and extend beyond SVB's collapse, as it will examine the Federal Reserve's liquidity and capital rules more broadly, according to a senior Fed official who spoke to reporters prior to the report's release.

Jerome Powell, the Fed chair, expressed his support for Barr's "self-critical" report on SVB's collapse. Powell agrees with and endorses the recommendations to address rules and supervisory practices, and believes that they will lead to a more robust and resilient banking system.