The Fed's report on Silicon Valley Bank is out, and it blames everyone
The Federal Reserve's internal review of the collapse of Silicon Valley Bank points the blame at nearly everyone involved in the second largest bank failure in US history.
In its internal review, the Federal Reserve blames nearly everyone who was involved in the second-largest bank failure in US History.
Michael Barr, the Fed's vice-chair for supervision, in his report (pdf), concludes that SVB's management took on too much of a risk and did not inform the board about it. The board also failed to hold the management accountable and tied the executive pay to the incorrect incentives. Fed supervisors were unable to understand the severity and complex nature of SVB’s weaknesses and they didn't act quickly enough when they realized what was happening.
The Fed's internal review concluded that "there was no evidence of unethical conduct" by Fed supervisors. It does, however, suggest that supervisors change their approach to bank regulation based on the lessons learned after SVB's collapse.
It suggests that banks with a focused business model (like SVB's focus on tech startups and lending) or those that grow quickly should be scrutinized more closely, no matter how big the bank may be. The report also suggests that when a bank is found to have poor risk management practices as SVB did, it should be subject to stricter capital requirements.
The Fed will review rules for banks that have assets of $100 billion and above. It will change the way it regulates interest rate risks, as well their concentration of risk from uninsured depositors--SVB was too high on both.
The Fed will also raise the regulatory threshold for banks in relation to unrealized losses from the securities that they hold. Treasury bonds are a good example. They're considered safe investments in general, but their value drops as interest rates rise, and this is one of the reasons SVB failed.
The Fed concluded that the board of SVB did not provide any incentives to senior management to manage risk properly. The Fed report states that compensation packages for senior management up to 2022 were linked to short-term equity returns and earnings, but did not include metrics related risk. As a result, managers were financially motivated to prioritize short-term profits over risk management.
Ironically, SVB was in the midst of changing its incentive program under a newly appointed head of human resource when the bank collapsed.
In its report, the Fed stated that "we should consider setting stricter minimum standards for incentives compensation programs and ensure that banks comply with existing standards."