Federal Reserve Should Have Scrutinized SVB’s Interest Rate Risk

Federal Reserve supervisors did not adequately supervise Silicon Valley Bank (SVB) in the lead up to its collapse, the Inspector General has concluded.

The Inspector General of the Federal Reserve’s review of the bank’s collapse found examiners should have closely scrutinized the risk of rising interest rates on SVB’s investment securities portfolio.

It identified several factors that led to the bank’s collapse, including the management team’s failure to introduce adequate controls to manage the risks associated with the significant growth of its balance sheet and concentrations of risk.

The review also identified that the Regional Banking Organization (RBO) did not evolve its supervisory approach as SVB grew.

It also said the RBO and Federal Reserve Bank of San Francisco (FRB San Francisco) did not effectively transition SVB from the RBO portfolio (banks with $10 billion to $100 billion total assets) to the Large and Foreign Banking Organization (LFBO) portfolio (banks with over $100 billion).

SVB had over $100 billion in assets in December 2020, and was forecasting continued growth. It was also planning the acquisition of a private banking and wealth management business.

An LFBO has a dedicated supervisory team (DST) fully dedicated to its year-round supervision, but the report highlighted that LFBO Supervision was not timely in staffing its DST, waiting until SVB formally exceeded the total asset threshold in accordance with expectations in June 2021.

The FRB San Francisco and the Board of Governors of the Federal Reserve System conducted several assessments of SVB examining liquidity and capital targets and identified various issues.

However, the organizations did not conduct an IRR review despite warnings about the risks of rising interest rates and did not identify or appreciate the significance of SVB’s financial deterioration.

The review recommends that the Federal Reserve should assess the LFBO’s supervisory planning process, as well as introduce reforms to the process that focus on timely reactions to risk.

The review also recommends it develop guidance for LFBO supervision staff to highlight the importance of a balanced approach to supervising institutions.

The Board of Governors of the Federal Reserve System concurs with the Inspector General’s recommendations and has outlined actions to address them, with the Inspector General set to follow up to ensure they are fully addressed.