Why the Bank Failed
To begin, SVB's failure is a textbook case of mismanagement. The bank had a concentrated business model, serving the technology and venture capital sector. It also grew exceedingly quickly, tripling in asset size between 2019 and 2022. During the early phase of the pandemic, and with the tech sector booming, SVB saw significant deposit growth. The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits.3 However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics.
At the same time, the bank failed to manage the risks of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the tech sector, which were highly concentrated and could be volatile. Because these companies generally do not have operating revenue, they keep large balances in banks in the form of cash deposits, to make payroll and pay operating expenses. These depositors were connected by a network of venture capital firms and other ties, and when stress began, they essentially acted together to generate a bank run.
The Bank's Failure
The bank waited too long to address its problems, and ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank's failure. Specifically, on Wednesday, March 8, SVB announced that it realized a $1.8 billion loss in a sale of securities to raise liquidity and planned to raise capital during the following week. Uninsured depositors interpreted these actions as a signal that the bank was in distress. They turned their focus to the bank's balance sheet, and they did not like what they saw.
In response, social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee. Depositors withdrew funds at an extraordinary rate, pulling more than $40 billion in deposits from the bank on Thursday, March 9. On Thursday evening and Friday morning, the bank communicated that they expected even greater outflows that day. The bank did not have enough cash or collateral to meet those extraordinary and rapid outflows, and on Friday, March 10, SVB failed.
Panic prevailed among SVB's remaining depositors, who saw their savings at risk and their businesses in danger of missing payroll because of the bank's failure.
Contagion and the Government's Response
It appeared that contagion from SVB's failure could be far-reaching and cause damage to the broader banking system. The prospect of uninsured depositors not being able to access their funds could prompt depositors to question the overall safety and soundness of U.S. commercial banks. There were signs of distress at other banking organizations, and Signature Bank, an FDIC-supervised institution, experienced a deposit run that resulted in the bank's failure. On Sunday, March 12, the Secretary of the Treasury, upon the unanimous recommendation of the boards of the Federal Reserve and the FDIC, approved systemic risk exceptions for the failures of SVB and Signature. This enabled the FDIC to guarantee all of the deposits of both banks. Equity and other liability holders of the two failed banks were not protected and lost their investments. Senior management was immediately removed.
In addition, the Federal Reserve (Board), with the Treasury Department's approval, created a temporary lending facility, the Bank Term Funding Program, to allow banks to receive additional liquidity to meet any unexpected depositor demand. The facility allows banks to borrow against safe Treasury and agency securities at par for up to one year. Together with banks' internal liquidity and stable deposits, other external sources, and discount window lending, the new facility provides ample liquidity for the banking system as a whole.
Our Review of the Bank's Failure
Immediately following SVB's failure, Chair Powell and I agreed that I should oversee a review of the circumstances leading up to SVB's failure. SVB was a state member bank with a bank holding company, and so the Federal Reserve was fully responsible for the federal supervision and regulation of the bank. The California Department of Financial Protection and Innovation—the state supervisor—has announced its own review of its oversight and regulation of SVB.
In the Federal Reserve's review, we are looking at SVB's growth and management, our supervisory engagement with the bank, and the regulatory requirements that applied to the bank. As this process is ongoing, I will be limited in my ability to provide firm conclusions, but I will focus on what we know and where we are focusing the review.
The picture that has emerged thus far shows SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank. In 2021, as the bank grew rapidly in size, the bank moved into the large and foreign banking organization, or LFBO, portfolio to reflect its larger risk profile and was assigned a new team of supervisors. LFBO firms between $100 billion and $250 billion are subject to some enhanced prudential standards but not at the level of larger banks or global systemically important banks (G-SIBs).
Near the end of 2021, supervisors found deficiencies in the bank's liquidity risk management, resulting in six supervisory findings related to the bank's liquidity stress testing, contingency funding, and liquidity risk management.4 In May 2022, supervisors issued three findings related to ineffective board oversight, risk management weaknesses, and the bank's internal audit function. In the summer of 2022, supervisors lowered the bank's management rating to "fair" and rated the bank's enterprise-wide governance and controls as "deficient-1." These ratings mean that the bank was not "well managed" and was subject to growth restrictions under section 4(m) of the Bank Holding Company Act.5 In October 2022, supervisors met with the bank's senior management to express concern with the bank's interest rate risk profile and in November 2022, supervisors delivered a supervisory finding on interest rate risk management to the bank.
In mid-February 2023, staff presented to the Federal Reserve's Board of Governors on the impact of rising interest rates on some banks' financial condition and staff's approach to address issues at banks. Staff discussed the issues broadly, and highlighted SVB's interest rate and liquidity risk in particular. Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank's vulnerability was not apparent until the unexpected bank run on March 9.