Fed Faults Its Supervision of Silicon Valley Bank

The Federal Reserve said on Friday that its bank supervisors missed vulnerabilities that led to the failure of Silicon Valley Bank and failed to take sufficient steps to address the vulnerabilities they did detect.

“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management. These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged,” the central bank said in a report led by Michael Barr, the Fed’s vice chair for supervision.

Silicon Valley Bank was taken over by regulators on March 10 after customers withdrew tens of billions of dollars of deposits. The government extended a guarantee of its deposits above the $250,000 deposit insurance limit in an effort to stem the chaotic run. In addition, the Fed created a new borrowing facility for banks, allowing them to borrow against the face value of securities that have lost market value.

The highly anticipated report points to flaws in the Fed’s regulatory approach and urges a re-examination for how banks the size of Silicon Valley Bank—which had about $200 billion of assets before it collapsed—are supervised.

“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Barr said in a statement released with the report. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation.”