A report circulating among Silicon Valley Bank’s venture capital division shows that back in January 2019, the Federal Reserve issued a warning to SVB about risk management systems, according to The Wall Street Journal.
At the time, the Fed issued what it called a “Matter Requiring Attention,” a less serious subpoena than an enforcement action. Regulators are supposed to make sure the issue is resolved, but it’s not clear if the Fed has required SVB to meet the standards in 2019.
Over time, the Fed has issued it most more warnings, indicating that the bank’s problems have been a concern. The Federal Reserve is the bank’s primary federal regulator.
Following warnings in 2019, the Fed notified SVB in 2020 that its risk control system did not meet the level expected of a large financial institution or a bank with more than $100 billion in assets. Large banks that don’t meet the Fed’s regulatory standards should take corrective action to fix the problem or risk facing enforcement action.
An SVB spokesman did not immediately respond to a request for comment. The San Francisco Fed, which has joint jurisdiction over the bank with the Federal Reserve Board, also did not respond to requests for comment.
SVB’s collapse was the second-largest bank failure in U.S. history. Its collapse marks the biggest test yet of a post-financial crisis regulatory structure designed to force banks to reduce risk and monitor it more closely.
The risks to SVB’s financial position were evident in the months leading up to its bankruptcy. The bank’s parent company disclosed that the market value of its bonds held to maturity was $15.9 billion below its balance sheet value at the end of September 2022, a gap slightly higher than its total equity at the time of $15.8 billion. a large number of SVB’s uninsured depositors began fleeing after the bank announced it was raising capital and selling a large number of securities at a loss.
Authorities are trying to contain the impact of the collapse of SVB Bank and subsequently Signature Bank, turmoil that regulators say poses a threat to the financial system. Top U.S. banks decided last Thursday to jointly inject $30 billion into a third faltering bank, First Republic Bank.
SVB’s failure is inseparable from its management’s poor judgment. The value of SVB’s portfolio of securities holdings shrank sharply as the Federal Reserve raised interest rates. The bank was seen as an unusual case by banking regulators because of its heavy concentration of clients in venture capital and technology startups.
Notably, the Federal Reserve has imposed stricter rules on larger banks, and SVB’s rapid growth over the past few years should have subjected the bank to increasingly stringent regulation by regulators. With the influx of deposits into SVB during the new crown epidemic, the bank has grown rapidly. By the end of 2020, SVB’s assets increased to $114 billion from about $70 billion in 2019.
Despite concerns expressed by the Federal Reserve as early as 2019, SVB’s assets nearly double to about $209 billion from 2020 to the end of 2021, according to the Federal Deposit Insurance Corporation (FIDC).
Keith Noreika, executive vice president at Patomak Global Partners, who served as acting director of the Office of the Comptroller of the Currency (OCC) in 2017, said the Fed’s criticism of SVB’s risk management system raises the question “why the bank was still allowed to double in size after that.”
The Fed announced last Monday that Michael S. Barr, vice chairman for supervision, is leading a review of the supervision of Silicon Valley Bank in light of SVB’s collapse. The results of the review will be released by May 1.
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