The Federal Reserve admits it failed to oversee Silicon Valley

Federal Reserve Vice President for Supervision Michael S. Barr said a few weeks ago in the Senate that the failure of Silicon Valley Bank was "a case in the book of mismanagement."

The internal investigation published this Friday by the US central bank reveals that it was also a textbook case of poor supervision.

The conclusions of the report make it possible to anticipate changes that tighten the regulation and supervision of medium-sized banks.

The report published this Friday reveals several key conclusions about the causes of the bankruptcy of the bank.

The first, that the board of directors and management of Silicon Valley Bank did not know how to manage their risks.

Second, that Federal Reserve supervisors "did not fully appreciate the scope of the vulnerabilities as Silicon Valley Bank grew in size and complexity."

Worse yet, when supervisors found those weaknesses, they "did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough," according to the third finding.

The fourth conclusion is that by passing legal changes, the Federal Reserve itself tailored a regulatory approach that impeded effective supervision.

Strengthen regulation

"After the failure of Silicon Valley Bank, we must strengthen the supervision and regulation of the Federal Reserve based on what we have learned," the vice president of Supervision said in a statement.

“This review represents a first step in that process: a self-assessment that takes a hard look at the conditions that led to the bankruptcy, including the role of Federal Reserve oversight and regulation,” Barr adds.

The 118-page report, plus extensive accompanying documentation, takes a detailed look at the bank's management and the supervisory and regulatory issues surrounding its bankruptcy.

It reviews Silicon Valley Bank's recent supervisory history and includes more than two dozen documents containing sensitive bank supervisory information, such as supervisory letters, test results, and supervisory warnings.

“I welcome this comprehensive and self-critical report on Federal Reserve supervision by Vice President Barr,” Federal Reserve Chairman Jerome Powell said in the same statement.

“I agree and support his recommendations to address our supervisory standards and practices, and I am confident that they will lead to a stronger and more resilient banking system.”

The report and documents detail the bank's rapid growth, as well as the challenges Federal Reserve supervisors faced in identifying the bank's vulnerabilities and forcing it to fix them.

At the time of its failure, the bank had 31 unresolved safety and soundness supervision warnings, triple the average for banks in its group.

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