Posted on 04/28/23
| News Source: FOX Business
The Federal Reserve released its assessment Friday of what led to Silicon Valley Bank's collapse, saying the lender's failure was due to a "textbook case of mismanagement" while taking some responsibility for insufficient supervision of the institution.
The report details the bank’s rapid growth, the challenges Fed supervisors faced in identifying SVB's vulnerabilities, and their reluctance to force the bank to fix them.
The review was led by Fed Vice Chair for Supervision Michael S. Barr, who wrote in a letter summarizing the report that SVB "failed because of a textbook case of mismanagement by the bank, saying "Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable."
Barr added, "And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report."
The report said SVB's leadership did not fully appreciate the bank's vulnerabilities, pointing to foundational and widespread managerial weaknesses, its highly concentrated business model catering overwhelmingly to the venture capital community, and its reliance on uninsured deposits which left the bank "acutely exposed to rising interest rates" amid a slowdown in the tech sector.
The probe found SVB had failed its own internal liquidity stress tests with no plan for accessing liquidity, and scrapped interest rate hedges rather than managing long-run risks and the risk of rising interest rates.
The bonuses SVB executives received before the failure was a major talking point in the wake of the failure. The report addresses this issue saying, "Compensation packages of senior management through 2022 were tied to short-term earnings and equity returns and did not include risk metrics. As such, managers had a financial incentive to focus on short-term profit over sound risk management."