WASHINGTON–The Federal Reserve has released a report on the reasons behind the failure of the $211-billion Silicon Valley Bank, while the FDIC has separately released a report on the failure of Signature Bank.
The Fed report and review were led by Fed Vice Chair for Supervision Michael S. Barr. Silicon Valley Bank’s failure was the second-largest in U.S. history.
According to the report, the four key takeaways are:
- Silicon Valley Bank's board of directors and management failed to manage their risks
- Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity
- When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough
- The Federal Reserve’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
Regulation Must be ‘Strengthened’
"Following Silicon Valley Bank's failure, we must strengthen the Federal Reserve's supervision and regulation based on what we have learned," said Barr in a statement accompanying release of the report. "This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank's failure, including the role of Federal Reserve supervision and regulation."
The Fed said report discusses in detail the management of the bank and the supervisory and regulatory issues surrounding the failure of the bank. It also goes through the recent supervisory history of Silicon Valley Bank and includes more than two dozen documents containing the bank's confidential supervisory information such as supervisory letters, examination results, and supervisory warnings.
31 Flavors of Unaddressed Issues
In addition, 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 the bank to fix them.
“At the time of its failure, the bank had 31 unaddressed safety and soundness supervisory warnings—triple the average number of peer banks,” the Fed stated.
Special Assessment
As a result of the failure of Silicon Valley Bank, along with Signature Bank and others, the FDIC announced it will be assessing a special premium on banks to replenish the deposit insurance fund.
The full report can be found here.
FDIC Report on Failed Signature Bank
Separately, the FDIC and its chief risk officer, Marshall Gentry, have released FDIC’s Supervision of Signature Bank, an internal review evaluating the agency’s supervision of Signature Bank, New York, N.Y., from 2017 until its failure in March 2023.
The internal review report identifies the causes of Signature Bank’s failure and assesses the FDIC’s supervision of the bank.
According to the FDIC, the detailed analysis identifies clearly that “the root cause of [Signature Bank’s] failure was poor management. [Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity and risk profile of the institution. [Signature Bank’s] management did not prioritize good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations (SRs). [Signature Bank] funded its rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls.”
What About FDIC Supervision?
Meanwhile, when it comes to the FDIC’s supervision of Signature Bank, the report finds the agency “conducted a number of targeted reviews and ongoing monitoring, issued Supervisory Letters and annual roll–up reports of examination (ROEs), and made a number of SRs to address supervisory concerns.
“In retrospect, FDIC could have escalated supervisory actions sooner, consistent with the Division of Risk Management Supervision’s (RMS) forward–looking supervision concept. Additionally, examination work products could have been timelier and communication with [Signature Bank’s] board and management could have been more effective.”
The report also finds the “FDIC experienced resource challenges with examination staff that affected the timeliness and quality of [Signature Bank] examinations.”
Could Have Benn More ‘Forward
“Maintaining safety and soundness requires effective challenge from the regulators and receptivity and responsiveness from the banks,” according to the report. “In the case of [Signature Bank], the bank could have been more measured in its growth, implemented appropriate risk management practices, and been more responsive to the FDIC’s supervisory concerns, and the FDIC could have been more forward–looking and forceful in its supervision.”
The internal review report recommends a number of matters for consideration or further study by the FDIC related to examination guidance, processes, and resources.
The full report can be found here: FDIC’s Supervision of Signature Bank