SVB was a 'textbook case of mismanagement' and the collapsed bank waited too long to fix its problems, Fed official says

• Silicon Valley Bank was a "textbook case of mismanagement," a top Fed official has said.
• The collapsed bank grew quickly, and failed to manage interest rate and liquidity risks, Michael Barr said.

Collapsed Silicon Valley Bank was a "textbook case of mismanagement" and the California-based lender took too long to fix its problems, according to a top Federal Reserve official.

In prepared comments for a congressional hearing Tuesday, Michael Barr sliced into SVB, which was taken over by regulators on March 10 after it suffered a bank run and a capital crisis.

Its sudden downfall marked the second-largest bank failure in US history and rattled faith in the US banking industry, igniting fears the pressures on SVB might cause similar problems at other lenders.

"SVB's failure is a textbook case of mismanagement," said Barr, the Fed's vice-chair for supervision.

He said SVB's troubles could call for a possible tightening of banking rules, to ensure such events don't repeat themselves. The Fed is carrying out a review of what led the lender to fail, with the results to be published on May 1.

"Specifically, we are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure," he said.

Barr said the lender had a "concentrated business model" in that it focused tightly on tech and VC firms. He noted it grew exceedingly quickly as the tech sector boomed, with assets tripling in size between 2019 and 2022.

With its deposits growing, SVB invested in long-term securities in search of higher profits — and that's where it stumbled. When its customers drew on the big balances they held at the bank, that put stress on its balance sheet.

"SVB failed because the bank's management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours," he added.

Barr also said the bank waited to long to address its problems. When it finally did take action to strengthen its balance sheet, that backfired. Its announcement that it had booked $1.8 billion in losses on a fire sale from its bond portfolio, and that it was looking to raise capital, was seen a sign of distress — and sparked an old-fashioned bank run.

SVB's share price plummeted 86% in the space of two days when it revealed the losses earlier this month, as its troubles set off shockwaves in US regional bank shares and other markets.

One focus of the SVB review is whether the Fed's approach to supervising the lender was the right one, according to Barr. The US central bank steps up its scrutiny depending on the size of a lender's asset portfolio, in billions of dollars — and it might make sense to treat banks with "novel activity" differently.

Overall, Barr noted that the US banking system is sound and resilient, with strong capital and liquidity, despite the failure of SVB and other institutions.