By Ann Saphir
SAN FRANCISCO (Reuters) – A team of 20 bank examiners at the San Francisco Federal Reserve took over day-to-day supervision of Silicon Valley Bank in the second half of 2021, after the bank’s growth pushed its assets above the $100 billion mark that triggers more intense oversight.
Soon after, supervisors began calling out problems at the bank, but only internally. None were made public until after the bank’s failure on March 10, 2023, and much is still unknown.
Fed Vice Chair of Supervision Michael Barr has promised full disclosure as part of his supervisory review due out May 1.
Here’s what regulators saw — but the public did not — in the lead-up to the collapse. The details come from testimony given by regulators to Congress this week.
Examiners issue six citations — “matters requiring attention” (MRA) and “matters requiring immediate attention” (MRIA) — related to the bank’s liquidity stress testing, contingency funding, and liquidity risk management.
The citations come just as the Fed has begun to telegraph that it will soon start raising interest rates to fight inflation.
Banks of SVB’s size must conduct quarterly liquidity stress tests to assess the bank’s resilience to both rising and falling interest rates.
SVB’s tests, supervisors find, are not “stressful enough; they were not realistic… it conducted those tests and the guidance back from the supervisors was that the tests were inadequate,” Barr told Congress.
SVB’s chief risk officer Laura Izurieta steps down. The post remains vacant until December 2022, when Kim Olson takes the job.
Supervisors issue three findings related to ineffective board oversight, risk management weaknesses, and the bank’s internal audit function, according to Barr’s testimony.
SVB gets its first supervisory ratings as a large bank: a downgrade to a “3” on its overall rating and a “3” on its management rating.
The scores mean the bank is “not well-managed,” Barr said this week.
“The supervisors told the board of directors and the bank that the board oversight with respect to risk management was deficient,” Barr said this week.
SVB’s liquidity rating is a “2” — satisfactory.
“We are trying to understand how that is consistent” with the other, lower ratings, Barr said.
A “3” rating triggers what industry experts call the “penalty box” where the bank is barred from growth by acquisition.
They are not low enough to merit inclusion on the FDIC’s confidential “problem bank” list.
“We are looking at whether those standards were sufficiently stringent, whether the firm should have been downgraded further, and whether further supervisory steps should have been taken,” Barr said.
The supervisors meet with the CFO “to convey the seriousness of the findings directly,” Barr said.
Supervisors deliver an additional MRA “based on the inaccuracy of their interest-rate risk modeling” which was “not at all aligned with reality,” Barr said.
“The models suggested they earn more money when they were losing more money,” he said.
By now the Fed’s fight against inflation has lifted short-term rates by 4.5 percentage points since March 2022. Fed supervisors begin a “horizontal review” of several banks, including SVB, for interest-rate risk.
Fed staff give a presentation to Barr and other Board members about interest rate risk generally and at Silicon Valley Bank in particular. This is the first time Barr learns of the interest-rate risk at SVB.
“Staff indicated that they were completing their review of the bank and of the broader horizontal review at that time and I was waiting for the results of that review,” Barr said this week.
Silicon Valley Bank announces it sold “substantially all” of its securities that were available for sale and sought to raise more capital in what CEO Greg Becker told shareholders was a strategic action to “better support earnings in a higher-for-longer rate environment.”
The move was a “belated” attempt to improve the bank’s liquidity position, Barr said this week, “and they did it in a way that spooked investors and spooked depositors and spooked the market.”
“The bank was reporting to supervisors Thursday morning that deposits were stable,” Barr said. “Thursday afternoon, late afternoon, I became aware of deposit flows, and Thursday evening that there was essentially a bank run.”
AFTERNOON MARCH 9 – MORNING MARCH 10
Fed staff and the bank work together through the night to move as much SVB collateral as they can to the Fed so that SVB can get emergency loans through the Fed’s “discount window” to meet demands for withdrawals. Over 24 hours, 85% of the bank’s deposits are withdrawn or attempted to be withdrawn. The bank cannot meet those demands. Regulators shut it down.