Fed Review Blames Supervisory Delays for SVB Collapse

An independent review of Silicon Valley Bank's 2023 collapse has concluded that Federal Reserve supervisory staff were aware of, or should have identified, critical weaknesses at the lender as early as March 2022, yet did not move quickly or firmly enough to address them.

The preliminary findings were presented by Federal Reserve Vice Chair for Supervision Michelle Bowman at the Lord Mayor of London's luncheon at Mansion House on Friday. The review, conducted by Starling Advisory Group, examined whether supervisors had spotted SVB's vulnerabilities in advance, why corrective action was delayed, and whether supervisory inaction played a part in the bank's downfall.

SVB failed in March 2023 after a swift deposit run laid bare deep flaws in its balance sheet. The bank had poured money into longer-term securities whose value eroded as interest rates climbed. At the same time, 94 per cent of its deposits were uninsured and heavily concentrated among venture capital-backed technology firms.

On March 8, 2023, SVB disclosed a USD 1.8 billion after-tax loss from securities sales and launched a bid to raise capital. The next day, depositors pulled out more than USD 40 billion, with the bank bracing for further outflows exceeding USD 100 billion. Regulators closed the institution on March 10.

The review attributed the failure to a mix of unrealised accounting losses on SVB's securities portfolio that surpassed its capital, a deposit base prone to runs, and insufficient operational readiness to tap the Federal Reserve's discount window. It also determined that the supervisory delays could not be traced to the 2018 regulatory tailoring framework or to directives from the former Vice Chair for Supervision.

A long-standing culture of risk aversion emerged as a major driver of supervisory inaction. Staff hesitated to act unless certain their decisions were correct, while unclear decision-making authority added further friction.

The review found no evidence that social media sparked or sped up the bank run, noting that 96 per cent of online discussion about the run surfaced only after SVB's failure had become unavoidable.

In response, the Federal Reserve has rolled out measures to tighten supervisory oversight, including monthly reporting of unresolved supervisory concerns to senior officials and more leeway for examiners to address material vulnerabilities.