The failure of Silicon Valley Bank demonstrates a "textbook case of mismanagement," the Federal Reserve’s top banking regulator is expected to tell Senate lawmakers on Tuesday, while acknowledging there may have been shortcomings in the central bank’s oversight.
"SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors," said Michael Barr, the Fed’s vice chairman for supervision, in written testimony released by the central bank.
Mr. Barr is leading a review of the Fed’s supervision of the firm, which is due by May. He said in the prepared remarks that the central bank is committed to ensuring it "fully accounts for any supervisory or regulatory failings, and that we fully address what went wrong."
He described the broader banking system as "sound and resilient, with strong capital and liquidity."
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Mr. Barr is scheduled to appear Tuesday before the Senate Banking Committee along with Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Nellie Liang, a top Treasury official. The trio are expected to appear again on Wednesday in the House.
The FDIC announced early Monday that First Citizens Bancshares Inc., one of the nation’s largest regional banks, is acquiring large pieces of SVB more than two weeks after the lender’s collapse sent tremors through the banking system.
Regulators took control of Santa Clara, Calif.-based SVB on March 10. The collapse sparked a panic that led to the weekend failure of Signature Bank in New York and an intervention by financial regulators aimed at easing fears that depositors would flee smaller lenders.
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Worries about American banks have centered on other regional lenders that are perceived to be at risk of deposit flight. Both SVB and Signature had large amounts of uninsured deposits, or accounts with more than the standard insurance cap of $250,000 per depositor.
Mr. Barr said in the prepared remarks that the Fed is considering whether its bank supervisors have the tools to mitigate threats they see to a firm’s safety and soundness. He said it is also looking at whether "the culture, policies, and practices of the board and Reserve Banks support supervisors in effectively using these tools."
He also said the Fed is weighing whether a Trump-era rollback of financial rules allowed SVB to escape more stringent stress tests and other standards.
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"We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure," he said.
The Fed is also assessing whether SVB would have faced higher levels of capital and liquidity that would have prevented its failure or made it more resilient, Mr. Barr said. He said his review would be thorough and that his report would include supervisory assessments and exam material.
