Just a year before the collapse of a Silicon Valley bank threatened a generation of technology startups and their backers, the Federal Reserve Bank of San Francisco appointed another senior team of examiners to assess the firm. They started calling problem after problem.
According to people with knowledge of the matter, as soon as the upgraded crew took over, it set off a series of formal warnings to bank leaders under pressure to address serious weaknesses in operations and technology.
Then late last year he flagged a key problem: The bank needs to reform the way it tracks interest rate risks, said one of the people, an issue at the heart of the sudden slide this month.
The Federal Reserve has pledged to investigate the way SVB Financial Group supervised the Silicon Valley bank, which is now the second biggest US lender failure in history. The relatively late discovery of so many defects raises questions about whether the feds were diligent in pursuing oversight as the firm ballooned 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 overseeing the bank later got a new assignment until the end of 2021, according to people with knowledge of the situation, becoming the regulator’s point person at Silvergate Capital Corp. Silvergate also closed this month due to similar flaws in its deposit base and the state of its balance sheet.
A representative for the Fed declined to comment. The people describing the regulator’s monitoring asked not to be identified because the process is confidential.
The SVB was a fraction of its recent size when the Trump administration and congressional Republicans led a bipartisan effort to roll back banking rules in 2018, eliminating automatic annual stress tests for banks with less than $250 billion in assets. Done. The lender’s CEO, Greg Baker, lobbied for the bill, and his company grew as soon as the measure went into effect. At the beginning of last year, it had $220 billion in assets, up from $51 billion at the end of 2017.
That trajectory made SVB the fastest-growing major bank in the country over the past five years — outpacing even firms such as First Citizens Bankshare Inc. and Truist Financial Corp., which completed mergers. Till this year, SVB was the 16th largest in the country by assets.
Baker also had another role: He was part of the nine-member San Francisco Fed board from 2019, until his bank failed.
Its collapse late last week left a legion of startups facing the prospect that they might not be able to pay employees or leave, prompting the Fed and the Federal Deposit Insurance Corp to take extraordinary steps to rescue uninsured depositors and Offering the industry. Borrowing facility to avoid similar stress.
The central bank has vowed to publish the results of its internal review by May 1. “The events surrounding the 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 over the past year at the bank, the lack of a chief risk officer has emerged as a focal point, Bloomberg News reported on Tuesday.
The San Francisco Fed has a program for a group trained to oversee community and regional institutions, as well as large banks. As Silicon Valley Bank prepared for a formal look early last year, examiners began sending the firm two types of warnings: Matters Requiring Attention, or MRAs, and Matters That Require Attention, or MRAs. requires immediate attention, or MRI.
While not disclosed to the public, MRAs and MRIAs are expected to attract the attention of authorities, requiring them to fix problems to avoid more severe sanctions, known as consent orders. goes. Those more stringent directives, once made public, could drag stocks down by forcing banks to make costly reforms, scale back some activities or stop rising at the peak.
According to people familiar with the matter, the Biden administration became aware of SVB’s pile of MRAs and MRIAs on March 10, the day the firm was seized by regulators.
SVB and Silvergate succumbed to the same fundamental pressures. Clients of tech startups at Silicon Valley Bank reduced their balances as the industry struggled to raise new funds, while Silvergate’s crypto-friendly clients withdrew as digital-asset prices plummeted last year.
Banks are expected to build their balance sheets conservatively to handle unexpected economic shocks and deposit flight. But both Silicon Valley Bank and Silvergate invested heavily in bonds with low interest rates, which fell in value last year as the Fed raised rates. When the withdrawals forced the lenders to sell those properties, they suffered heavy losses.
The Justice Department and the Securities and Exchange Commission are investigating SVB’s decline. Those investigations, which are in the preliminary stages, include whether the sale of stock by the authorities violated trading rules.