Silicon Valley Bank imploded due to mismanagement and a sudden panic among depositors, a top Federal Reserve official plans to tell lawmakers at a hearing on Tuesday.
In prepared testimony released on Monday, Michael Barr, the Fed’s vice chair for supervision, details how SVB leadership failed to effectively manage interest rate and liquidity risk.
“SVB’s failure is a textbook case of mismanagement,” Barr says in testimony to be delivered before the Senate Banking Committee.
The Fed official points out that SVB’s belated effort to fix its balance sheet only made matters worse.
“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,” said Barr, adding that there was “inadequate” risk management and internal controls.
Depositors yanked $42 billion from SVB on March 9 alone in a bank run, a panic that appeared to be fueled in part by venture capitalists urging tech startups to pull their funds.
“Social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee,” said Barr.
The Fed official echoed comments from other top regulators in assuring the public about the safety of banks.
“Our banking system is sound and resilient, with strong capital and liquidity,” Barr said. “We are committed to ensuring that all deposits are safe. 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.”
Facing questions over how regulators — including at the Fed itself — missed red flags at SVB, the Fed has launched a review of oversight of the bank. Barr, who is leading that review, promised to take an “unflinching look” at the supervision and regulation of SVB. He said the review will be thorough and transparent and officials welcome and expert external reviews as well.
In his testimony, Barr discloses that near the end of 2021, bank supervisors found “deficiencies” in the bank’s liquidity risk management. That resulted in six supervisory findings linked to SVB’s liquidity stress testing, contingency funding and liquidity risk management.
Then, in May 2022, supervisors issued three findings related to “ineffective” board oversight, risk management weaknesses and internal audit function lapses, Barr said. Bank supervisors took further steps last year that show regulators were aware of problems at SVB.
Barr’s testimony indicates the Fed’s review will examine how the 2018 rollback of Dodd-Frank may have contributed to SVB’s failure. That rollback, under then-President Donald Trump, allowed SVB to avoid tougher stress testing and rules on liquidity, funding, leverage and capital.
Barr said the Fed will weigh whether the applying those tougher rules to SVB would have helped the bank manage the risks that led to its failure.
Looking ahead, Barr said the recent events have underscored how regulators must enhance rules applying to banks and study banking has been changed by social media, customer behavior, rapid growth and other developments.