The Regulatory Post-Mortem Reports on Silicon Valley Bank and Signature Bank

The Federal Reserve released a detailed report on the supervision and regulation of the former Silicon Valley Bank (SVB).  The report, released along with a trove of confidential supervisory information pertaining to SVB, provides an in-depth look into the factors that contributed to the failure of SVB on March 10, 2023.  The report points to failures by the board of directors and management of SVB to properly manage the risks associated with its business model, which was highly concentrated on early-stage start-up companies, relied heavily on uninsured deposits, and did not sufficiently account for interest rate and liquidity risk.  Notably, the report also highlights the failure of banking supervisors to identify and address vulnerabilities that arose during SVB’s rapid growth, especially between 2019 and 2021, when the bank tripled in size.

The report places significant blame on changes to supervisory policy that took place between 2018 and 2019 with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and subsequent revisions to the Federal Reserve’s framework for supervision.  The Federal Reserve believes this “tailoring” approach resulted in lower supervisory, capital, and liquidity requirements for SVB.  

The report has four key findings:

1. SVB’s board of directors and management failed to manage their risks. 
2. Supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity.
3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough.
4. The Federal Reserve’s tailoring approach in response to EGRRCPA and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

The report also identified several broad themes: 

• Social media can instantly spread concerns about banks, and modern technology allows for near instantaneous withdrawal of funds from banks.
• Smaller banks can spread contagion in the financial system even if they are not especially connected to other financial institutions or engaged in critical financial services. 
• Greater continuity of supervision by the Federal Reserve and greater attention to special risk factors is necessary, especially as banks grow in size and complexity. 
• Crucial areas within the Federal Reserve’s regulatory framework will need to undergo review and revision, including interest rate risk, liquidity risk (especially for uninsured deposits), capital requirements, stress testing, and minimum standards for incentive compensation programs.

The Federal Reserve’s report was released on the same day the FDIC and the New York State Department of Financial Services (NYDFS) published reports on the former Signature Bank, which failed on March 12, 2023.  The FDIC’s report identified “poor management” as the “root cause” of Signature Bank’s failure.  Signature Bank’s management was described as being “slow to respond to FDIC’s supervisory concerns” and “reactive, rather than proactive, in addressing bank risks and supervisory concerns.”  The NYDFS’s report criticized Signature Bank for failing to remediate outstanding liquidity management issues.