Federal Reserve examiners should have stepped up their oversight of Silicon Valley Bank prior to its March failure, according to the central bank’s post-mortem of the California bank’s collapse. The “supervisory approach for SVB did not evolve with SVB’s growth and increased complexity,” the Fed’s Office of the Inspector General said in its report. Examiner resources were “insufficient … and examiners lacked the requisite expertise for supervising a large, complex institution.” The report also noted that examiners failed to closely scrutinize the risks that rising interest rates posed to the $200 billion-asset bank's investments. The bank’s failure cost the Deposit Insurance Fund roughly $16.1 billion. The report also flagged SVB and its management, noting its concentration in science and tech and its “high share of uninsured deposits and large, irregular cash flows.” The bank’s executives and board “failed to manage the risks of its rapid, unchecked growth and concentrations,” the report added. Ineffective communication, and fallout from the news of Silvergate Bank's liquidation, led to a $40 billion deposit run and an additional $100 billion of withdrawal requests that the bank couldn’t meet. The report also noted that SVB Financial CEO Greg Becker served on the San Francisco Fed board, an appointment that may have "created an appearance of a conflict of interest." The OIG suggested that the Fed lean more heavily into appointing retired bankers to serve as class A directors. The report provided several other recommendations to improve the supervisory process, including:
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Assess the supervision framework and determine if adjustments should be made based on a bank’s size and complexity, such as unique or concentrated business models or rapid growth. implement measures to tailor supervisory plans “to better promote a timely focus on salient risks.”
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Develop an approach for moving bank supervision as they cross $100 billion of assets and determine how best to involve large and foreign banking organization (LFBO) supervision earlier. That could include joint reviews. Finalize and issue formal guidance on such a transition.
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Assess the supervisory planning process for banks with more than $100 billion of assets and implement measures to tailor supervisory plans to better promote a timely focus on salient risks.
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Develop guidance for LFBO staff to outline the importance of a balanced approach to supervising institutions while requiring a focus on assessing forward-looking risks and relevant financial indicators.