WASHINGTON—Silicon Valley Bank has failed due to a combination of poor management, weakened regulations and poor government oversight, the Federal Reserve revealed Friday in a eagerly anticipated report on how the institution failed to properly supervise the bank before its collapse. at the beginning of last month.
The report, authored by Fed staff and its vice president for supervision, Michael Barr, offers a critical look at what the central bank overlooked as Silicon Valley grew rapidly in the years before its crash. The report highlights underlying problems in the culture of the Fed, whose supervisors were reluctant to deal harshly with bank managers when they saw growing problems.
“The Federal Reserve failed to adequately assess the severity of critical deficiencies in the firm’s governance, liquidity, and risky interest rate management. These assessments meant that Silicon Valley Bank maintained good ratings as conditions deteriorated and considerable threats to the firm’s safety and soundness emerged,” the report read.
The Fed added that, based on its own report, it will reexamine how it regulates banks the size of Silicon Valley, which had $200 billion worth of assets when they failed. One of the criticisms stemming from the Silicon Valley bankruptcy is that the Fed and other regulators loosened their supervision of midsize banks after the passage of a banking law in 2018 that eased some of the toughest restrictions on the sector after the financial crisis of 2008.
“While stricter supervisory and regulatory requirements might not have prevented the firm from going bankrupt, it is likely that they would have strengthened the resilience of Silicon Valley Bank,” the report says.
The Fed also criticized how the bank managed executive compensation. The document indicates that the remuneration of managers depended on short-term profits and the price of shares. There were no incentives linked to risk management. He notes that Silicon Valley did not have a risk manager for about a year, right at a time of rapid growth.
American banks are regulated by a trio of agencies: the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC). All have been criticized for missing signs that Silicon Valley and Signature banks could be in trouble.
The Fed report, which includes the release of internal reports and Fed communications, is a rare look at how the central bank oversees individual banks as one of the country’s regulators. These processes are usually confidential and rarely come to light, but the Fed decided to publish these reports to show how the bank was managed until its failure.
