Silicon Valley Bank failure review finds Fed staff ‘should have known’ about risks

A new review of the Silicon Valley Bank collapse found Federal Reserve supervisory staff “knew or should have known” about the institution’s vulnerabilities, Michelle Bowman, the Fed’s vice chair for supervision, said Friday.

The initial findings from an outside consulting firm’s independent review suggested the biggest bank failure since the 2008 financial crisis resulted from poor management and a lack of “decisive action” by Fed supervisory staff.

It also determined that a 2018 law rolling back portions of the Dodd-Frank Act did not contribute to the central bank’s delayed response, breaking with a prior assessment from Bowman’s predecessor.

“Their report marks a pivotal moment not just in our understanding of what went wrong at SVB, but in our understanding of what went wrong within the Federal Reserve’s supervisory process,” Bowman said in prepared remarks from London.

“This review is not about assigning blame,” she added. “Instead, it is about learning lessons from the past to avoid repeating them in the future.”

Bowman asked the Starling Advisory Group to conduct a new investigation into the bank’s failure after she took over as vice chair for supervision last June.

The group found that Silicon Valley Bank’s collapse in early 2023, which was quickly followed by the failures of both First Republic Bank and Signature Bank, was the result of a “confluence of vulnerabilities.”

The bank faced unrealized losses as the Fed hiked interest rates in 2022 and 2023, according to the review. Its reliance on uninsured deposits from venture capital-backed tech firms compounded the problem and left it at risk of a run.

Fed supervisory staff “knew, or should have known, about these vulnerabilities as early as March 2022” and failed to take “prompt and decisive action to encourage or require” the bank to reduce its risks, the review noted.

It added that delays in supervisory action were not the result of “the regulatory tailoring mandate” in a 2018 law that loosened key portions of the Dodd-Frank Act, which was passed in the wake of the 2008 financial crisis.

The review pointed to a “long-standing culture of risk aversion” among staff, who “believed it was personally safer to take no action unless they were certain the action was exactly right,” as well as confusion over who could decide on the right course of action.

Bowman’s predecessor, Michael Barr, issued an initial report on Silicon Valley Bank’s collapse in April 2023.

Barr, who still serves on the Fed board, similarly found that bank leaders failed to manage risks — while Fed supervisors did not “fully appreciate the extent” of the bank’s vulnerabilities or take sufficient steps to address these issues once they were identified.

However, his report also suggested that the 2018 rollback of portions of Dodd-Frank “impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.”