Just over a year before Silicon Valley Bank’s collapse threatened a generation of technology startups and their backers, the Federal Reserve Bank of San Francisco appointed a more senior team of examiners to assess the firm. They started calling out problem after problem.
As the upgraded crew took over, it fired off a series of formal warnings to the bank’s leaders, pressing them to fix serious weaknesses in operations and technology, according to people with knowledge of the matter.
Then late last year they flagged a critical problem: The bank needed to improve how it tracked interest-rate risks, one of the people said, an issue at the heart of its abrupt downfall this month.
The Federal Reserve has promised to investigate how it supervised SVB Financial Group’s Silicon Valley Bank, now the second-biggest failure of a US lender in history. The relatively late discovery of so many flaws raises questions about whether the Fed was diligent in stepping up oversight as the firm was ballooning in size. On Friday, Santa Clara, California-based SVB Financial filed for Chapter 11 bankruptcy protection.
In a twist, the San Francisco Fed’s deputy point person in charge of monitoring the bank until late 2021 received a new assignment afterward, becoming the regulator’s point person on Silvergate Capital Corp., according to people with knowledge of the situation. Silvergate also shut this month because of similar flaws in its deposit base and the positioning of its balance sheet.
A representative for the Fed declined to comment.
SVB was a fraction of its recent size when the Trump administration and congressional Republicans rolled back banking regulations in 2018, ending automatic annual stress testing for banks smaller than $250 billion in assets. The lender’s chief executive officer, Greg Becker, had lobbied for the bill, and as the measure took effect his company’s growth took off. By early last year, it held $220 billion in assets, up from $51 billion at the end of 2017.
That trajectory made SVB the fastest-growing major bank in the nation over the past five years. By this year, it was the country’s 16th largest by assets.
Its collapse late last week left legions of startups facing the prospect that they wouldn’t be able to pay employees or keep the lights on, prompting the Fed and Federal Deposit Insurance Corp. to take extraordinary steps, including rescuing uninsured depositors and offering the industry a borrowing facility to avoid similar strains.
The central bank vowed to publish the results of its internal review by May 1. “The events surrounding Silicon Valley Bank demand a thorough, transparent and swift review by the Federal Reserve,” Fed Chair Jerome Powell said in a statement this week.
Already, the bank’s lack of a chief risk officer for much of last year has emerged as a focal point, Bloomberg News reported Tuesday.
The San Francisco Fed has a program for overseeing community and regional institutions, as well as a group trained to monitor big banks. As that one prepared to formally watch Silicon Valley Bank at the start of last year, examiners began sending the firm two types of warnings: matters requiring attention, or MRAs, and matters requiring immediate attention, or MRIAs.
While not disclosed to the public, MRAs and MRIAs are supposed to seize executives’ attention, requiring they fix problems to avoid more severe sanctions, known as consent orders. Those more stringent directives, once public, can send stocks tumbling by forcing banks to make costly improvements, pull back from certain activities or, in the extreme, stop growing.
The Biden administration found out about the full extent of SVB’s stack of MRAs and MRIAs on March 10, the day the firm was seized by regulators, according to people familiar with the matter.
SVB and Silvergate succumbed to the same basic pressures. Silicon Valley Bank’s clientele of tech startups drew down their balances as the industry struggled to raise fresh funding, while Silvergate’s crypto-friendly customers withdrew to weather last year’s plunge in digital-asset prices.
Banks are supposed to structure their balance sheets conservatively to handle unexpected economic shocks and deposit flight. But Silicon Valley Bank and Silvergate both invested heavily in bonds with low interest rates, which slumped in value as the Fed raised rates over the past year. When withdrawals forced the lenders to sell those assets, they incurred severe losses.
The Justice Department and the Securities and Exchange Commission are investigating SVB’s downfall. Those probes, which are in early stages, include whether stock sales by executives violated trading rules.