The Federal Reserve's bank supervisors informed Silicon Valley Bank's management as early as the fall of 2021 of risks stemming from its unusual business model, a top Fed official said on Tuesday, but the bank's managers failed to take the steps necessary to fix its problems.
The Fed official, Michael Barr, the nation's top banking regulator, said during a Senate Banking Committee hearing that the Fed is considering whether stronger bank rules are needed to prevent a similar bank failure in the future. “Supervisors had rated the bank at a very low rating," Barr said. “At the holding company level it was rated deficient, which is also clearly not well-managed.”
The timeline that Barr laid out for when the Fed had alerted Silicon Valley Bank's management to the risks it faced is earlier than the central bank has previously said the bank was on its radar screen. Silicon Valley's deposits grew rapidly and were heavily concentrated in the high-tech sector, which made it particularly vulnerable to a downturn in a single industry. It had bought long-term Treasurys and other bonds with those funds.
The value of those bonds fell as interest rates rose. When the bank was forced to sell those bonds to repay depositors as they withdrew funds, Silicon Valley absorbed heavy losses and couldn't repay all its customers. Barr said that as a result, the Fed's review of what happened with Silicon Valley will consider whether stricter regulations are needed, including whether supervisors have the tools they need to prevent banks from failing.
The Fed will also consider whether tougher rules are needed on liquidity — the ability of the bank to access cash — and capital requirements, the level of funds held by the bank. “A review will consider whether the supervisory warnings were sufficient and whether supervisors had sufficient tools to escalate,” Barr said. “I anticipate the need to strengthen capital and liquidity standards for firms over USD 100 billion,” which would have included SVB.
