Board of Governors of the Federal Reserve System

Executive Summary

On March 10, 2023, Silicon Valley Bank (SVB), a subsidiary of Silicon Valley Bank Financial Group (SVBFG), was closed by the California Department of Financial Protection and Innovation (CDFPI). Regulation and supervision are designed to lower the probability of distress at banks and their holding companies, but SVB, a bank subject to heightened standards because of its size, failed nonetheless.²

This report examines the multiple factors that contributed to the failure of SVBFG and reviews the role of the Federal Reserve, which was the primary federal supervisor for the holding company and the bank. The report covers the Federal Reserve's supervisory and regulatory responsibilities with respect to the Federal Reserve's safety-and-soundness objectives.

The report finds that four key factors contributed to the failure of SVBFG. This executive summary provides more details on each, which include:

1. Silicon Valley Bank's board of directors and management failed to manage their risks;
2. Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity;
3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough; and
4. The Board's tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

At the core of the Federal Reserve's oversight framework is the expectation that boards of directors of supervised firms provide effective oversight, and that management is responsible for daily and operational decisions.³ Supervisors assess the effectiveness of those individuals and the bank's risk-management processes but do not manage or run the banks. The objectives of boards and management are not perfectly aligned with those of the public, which is why prudential oversight through supervision and regulation is essential.

The report shows that SVBFG was a highly vulnerable firm in ways that both SVBFG's board of directors and senior management and Federal Reserve supervisors did not fully appreciate. These vulnerabilities—foundational and widespread managerial weaknesses, a highly concentrated business model, and a reliance on uninsured deposits—left SVBFG acutely exposed to the specific combination of rising interest rates and slowing activity in the technology sector that materialized in 2022 and early 2023.

Federal Reserve supervisors did not fully appreciate these vulnerabilities as the firm grew in size and complexity. After risks were identified, supervisors did not take sufficient steps to ensure that SVBFG fixed them in a timely fashion. This reflects a complex combination of many factors within the Federal Reserve, including delays in applying more stringent standards as SVBFG grew rapidly, the resources devoted to SVBFG supervision, an approach that emphasized consensus and the continued accumulation of evidence even as SVBFG deteriorated, and a shift in the stance of supervision policy that was amplified by the COVID-19 pandemic.

A consolidated timeline of key events is available at the end of this section (figure 1).

Silicon Valley Bank Financial Group

Key Takeaway 1:

Silicon Valley Bank's board of directors and management failed to manage their risks.

SVBFG's failure can be tied directly to the failure of the board of directors and senior management. The board and management failed to effectively oversee the risks inherent in SVBFG's business model and balance sheet strategies. SVBFG did not take sufficient steps in a timely fashion to build a governance and risk-management framework that kept up with its rapid growth and business model risks. An SVBFG director, for example, told supervisors in 2022 that controls always lag growth. See the "Evolution of Silicon Valley Bank" section for more information.

Growth of SVBFG

SVBFG was a large bank holding company with approximately $212 billion in total assets when it failed in March 2023. SVBFG provided financial services predominantly to companies in the technology and life sciences sectors. Between 2019 and 2021, SVBFG tripled in size as it benefited from rapid deposit inflows during rapid venture capital (VC) and technology sector growth in a period of exceptionally low interest rates. These deposits were largely uninsured, and SVBFG invested them primarily in securities with longer-term maturities. In 2022, as interest rates began to rise, SVBFG saw deposit outflows and a rapid increase in unrealized losses on those securities.

SVBFG's rapid failure can be linked directly to its governance, liquidity, and interest rate risk-management deficiencies. The full board of directors did not receive adequate information from management about risks at SVBFG and did not hold management accountable. For example, information updates that management sent the board did not appropriately highlight SVBFG's liquidity issues until November 2022 despite deteriorating conditions. Moreover, the board put short-run profits above effective risk management and often treated resolution of supervisory issues as a compliance exercise rather than a critical risk-management issue. Compensation packages of senior management through 2022 were tied to short-term earnings and equity returns and did not include risk metrics. As such, managers had a financial incentive to focus on short-term profit over sound risk management.

SVBFG showed foundational weaknesses in its liquidity risk management, including both its liquidity position and its ability to manage risk through its internal liquidity stress tests (ILST), limits, and contingency funding plans (CFP). For example, beginning in July 2022 when SVBFG first became subject to enhanced prudential standards (EPS) under Regulation YY as a consequence of exceeding the $100 billion threshold, SVBFG repeatedly failed its own ILST.⁴ Management responded by increasing funding capacity, but the funding capacity actions were not rapidly undertaken or fully executed by March 2023. Management also switched to using less conservative stress testing assumptions, which masked some of these risks. This was particularly problematic due to a highly concentrated deposit base that management assumed was more stable than it proved to be.

SVBFG failed to assess and manage the interest rate risk (IRR) in its rapidly growing securities portfolio. These risk-management challenges proved critical when the external environment for SVBFG changed as interest rates rose sharply and activity in the technology sector slowed in 2022 and 2023. Rising rates impacted SVBFG in two ways: both net interest income and the value of long-dated securities declined, resulting in pressure on earnings and potential losses.

SVBFG management was focused on the short-run impact on profits. SVBFG's internal risk appetite metrics, which were set by its board, provided limited visibility into its vulnerabilities. In fact, SVBFG had breached its long-term IRR limits on and off since 2017 because of the structural mismatch between long-duration securities and short-duration deposits. In April 2022, SVBFG made counterintuitive modeling assumptions about the duration of deposits to address the limit breach rather than managing the actual risk. Over the same period, SVBFG also removed interest rate hedges that would have protected against rising interest rates. In sum, when rising interest rates threatened profits and reduced the value of its securities, SVBFG management took steps to maintain short-term profits rather than effectively manage the underlying balance sheet risks.

Failure of SVB

As the risks to the firm's balance sheet mounted, SVBFG took steps to address the issues and announced a plan on March 8, 2023, to restructure its balance sheet. SVBFG had sold $21 billion in available-for-sale (AFS) securities, was booking a $1.8 billion after-tax loss, was planning to increase term borrowings by $15 billion to $30 billion, and was seeking to raise $2.25 billion in capital.⁵ The next day, SVB experienced a bank run as withdrawals of uninsured deposits rapidly accelerated. These deposit outflows reflected fundamental concerns about the bank and appear to have been sparked by a number of interrelated factors: heightened uncertainty and changing sentiment around the technology sector; potential negative action from credit rating agencies; and highly correlated withdrawals from SVBFG's concentrated network of VC investors and technology firms who, fueled by social media, withdrew uninsured deposits in a coordinated manner at an unprecedented rate.

On March 9, SVB lost over $40 billion in deposits, and SVBFG management expected to lose over $100 billion more on March 10. This deposit outflow was remarkable in terms of scale and scope and represented roughly 85 percent of the bank's deposit base. By comparison, estimates suggest that the failure of Wachovia in 2008 included about $10 billion in outflows over 8 days, while the failure of Washington Mutual in 2008 included $19 billion over 16 days.⁶ In response to these actual and expected deposit outflows, SVB failed on March 10, 2023, which in turn led to the later bankruptcy of SVBFG.

During the final days before its failure, SVB's operational weaknesses became apparent as it struggled to execute on its CFP. For example, SVB did not test its capacity to borrow at the discount window in 2022 and did not have appropriate collateral and operational arrangements in place to obtain liquidity. While stronger operational capacity to obtain contingency funding in March 2023 would likely not have prevented SVB's failure, it could have facilitated a more orderly resolution.

SVB's failure had two stages. First, its core risk-management capacity failed to keep up with rapid asset growth, which led to steady deterioration of its financial condition in 2022 and into March 2023. This reflected a long build-up of weakness, as SVBFG could not effectively manage through a changing economic and financial environment in 2022 and 2023. Second, SVBFG failed to develop sufficient contingent funding capacity. This contributed to a disorderly failure when SVBFG tried to manage the acute situation after its March 8, 2023, balance sheet restructuring announcement.

Federal Reserve Oversight

Federal Reserve oversight of supervised firms involves the Federal Reserve Board and the 12 Reserve Banks. The Board establishes the regulations to which banks are subject and designs the programs used to supervise firms. In general, the Reserve Banks are responsible for the assessment of firms, such as SVBFG, in each District as part of delegated authority from the Board. In this arrangement, the Board staff provide input and support in supervision and also provide oversight of the Reserve Banks. In the case of SVBFG, the Federal Reserve Bank of San Francisco (FRBSF) was the responsible Reserve Bank. By policy design, supervisory and regulatory standards generally increase with a firm's size and complexity.⁷

The Federal Reserve organizes its supervisory approach based on asset size, with the exception of the global systemically important banks (G-SIBs) that are supervised within the Large Institution Supervision Coordinating Committee (LISCC) portfolio.⁸ Banks with assets of $100 billion or more that are not G-SIBs are supervised within the Large and Foreign Banking Organization, or LFBO, portfolio. Banks with assets in the $10 billion to $100 billion range are supervised within the Regional Banking Organization, or RBO, portfolio. Banks with assets of less than $10 billion are supervised within the Community Banking Organization, or CBO, portfolio. While SVBFG was in the RBO portfolio, examination staffing generally came from pools of RBO and CBO examiners, who may have had less experience with the governance and risk-management practices required for a more sizable and complex institution like SVBFG.

Federal Reserve oversight of SVBFG proved inadequate for the well-documented and significant vulnerabilities and managerial weaknesses at SVBFG. The record shows that supervisors identified some of the material issues, but also underappreciated important ones, particularly during the period of SVBFG's rapid growth while in the RBO portfolio. SVB's foundational problems were widespread and well-known, yet core issues were not resolved, and stronger oversight was not put in place. As is often the case with complex problems, this outcome reflects a combination of many interconnected factors and not a single point of failure.

Supervisory Assessment

Key Takeaway 2:

Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.

SVBFG had 31 open supervisory findings when it failed in March 2023, about triple the number observed at peer firms.⁹ The supervisory findings at SVBFG included core areas, such as governance and risk management, liquidity, interest rate risk management, and technology.

Supervisors last assessed SVBFG according to the Large Financial Institution (LFI) rating system in August 2022.¹⁰ The ratings, while highlighting key weaknesses, did not fully reflect the vulnerabilities of SVBFG. Under this framework, supervisors assessed SVBFG on the following:

• Governance and controls: "Deficient-1," a rating that is less than satisfactory. Supervisors had told SVBFG that "governance and risk-management practices are below supervisory expectations" and that its "risk-management program is not effective" when three supervisory findings were issued in May 2022.¹¹
• Liquidity: "Conditionally Meets Expectations (CME)," a satisfactory rating. Supervisors had informed SVBFG that its "liquidity risk management practices are below supervisory expectations" and identified foundational shortcomings in key areas as part of the issuance of six supervisory findings in November 2021.¹²
• Capital: "Broadly Meets Expectations (BME)," a satisfactory rating that is the highest rating in the LFI rating system. Supervisors later informed SVBFG that "interest rate risk (IRR) simulations are not reliable and require improvements…calling into question the reliability of IRR modeling and the effectiveness of risk-management practices" when one supervisory finding was issued in November 2022.¹³

A review of the supervisory record shows that supervisory judgments were not always appropriate given the observed weaknesses of SVBFG (see the "Federal Reserve Supervision" section and the "Supervision of SVBFG by Critical Risk Areas" section). In particular, SVBFG was rated as "Satisfactory-2" in all categories when it shifted from the RBO portfolio to the LFBO portfolio in 2021. Liquidity at SVB was rated "Strong-1" in May 2021 and then "Satisfactory-2" in August 2022.

For governance, SVBFG was rated "Satisfactory-2" in terms of management for both the holding company and the bank from 2017 through 2021 despite repeated observations of weakness in risk management. For example, the 2020 review confirmed that management and board oversight remained satisfactory, but also concluded that improvements were necessary: "An independent and effective LOD [line of defense] framework is fundamental to the Board and management's ability to plan for and respond to risks arising from changing business conditions, new activities, accelerated growth, and increasing complexity."¹⁴ The evidence shows no discussion of downgrading the management rating. When SVBFG moved to the LFBO portfolio, supervisors recognized that SVBFG's risk management was not robust and proceeded to build evidence, issue MRIAs, and downgrade SVBFG. Governance and Controls were ultimately rated "Deficient-1," but not until August 2022.

In terms of liquidity, SVBFG was rated "Strong-1" and subject to limited-scope liquidity reviews as part of the guidelines for smaller firms, despite its significant asset growth and idiosyncratic business model. A more thorough evaluation prior to joining the LFBO portfolio would have been beneficial, given the lag since the last in-depth examination and the heightened standards for a firm in the LFBO portfolio. Moreover, the standard liquidity risk metrics in the RBO portfolio were likely not appropriate for a bank like SVB. For example, a commonly used metric was the ratio of core deposits, which excludes large time deposits and brokered deposits, to total assets. By this metric, SVB appeared to have a comparatively stable source of funding despite the fact that SVB's deposits were concentrated in large, uninsured accounts that proved to be quite volatile.

For IRR, SVBFG was rated as "Satisfactory-2" despite the firm repeatedly breaching its internal risk limits for long-term risk exposure over several years. IRR was not viewed as a material risk at SVBFG until late 2022 and therefore not subject to a thorough examination.

Portfolio Transition and Heightened Standards

Key Takeaway 3:

When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.

In the case of SVBFG, despite widespread evidence of foundational governance and risk-management issues, supervisors were slow to downgrade supervisory ratings or to ensure that SVBFG's board and senior management took sufficient and immediate steps to compensate for those widespread weaknesses (see the "Federal Reserve Supervision" section and the "Supervision of SVBFG by Critical Risk Areas" section).

During the second half of 2022 and into 2023, as SVBFG's liquidity steadily weakened, unrealized losses accumulated on its securities portfolios, and its performance outlook deteriorated, supervisors continued to accumulate evidence of widespread weaknesses and delayed escalating supervisory action. For example, it took more than seven months to develop an informal enforcement action, known as a memorandum of understanding (MOU), for SVBFG and SVB to address the underlying risks related to "oversight by their respective boards of directors and senior management and the Firm's risk-management program, information technology program, liquidity risk- management program, third-party risk-management program, and internal audit program."¹⁵ SVBFG failed before the MOU was delivered.

The supervision of SVBFG was complicated by the transition of SVBFG, due to its rapid growth in assets, from the RBO portfolio to the LFBO portfolio within the Federal Reserve supervisory structure in February 2021. As a result of its rapid growth, SVBFG shifted to the LFBO portfolio in 2021 and was subject to a higher set of supervisory and regulatory standards. FRBSF established a new team to supervise SVBFG as an LFBO firm in March 2021, which included an expansion to 20 individuals, up from about 8 individuals while SVBFG was in the RBO portfolio.

By policy design, banks in the LFBO portfolio are subject to more stringent supervisory expectations and higher regulatory requirements. As SVBFG continued to grow and entered the LFBO portfolio, the regulations provided for a long transition period, or runway, for SVBFG to meet those higher standards, and supervisors did not want to appear to pull forward large bank standards by applying them to smaller banks in light of policymaker directives. This transition meant that the new supervisory team needed considerable time to make their initial assessments. In addition, Board staff provided the FRBSF team a waiver to delay the initial set of ratings under the LFI rating system by six months until August 2022.¹⁶

Once SVBFG moved to the LFBO portfolio, liquidity ratings remained satisfactory despite fundamental weaknesses in risk management and mounting evidence of a deteriorating position. The combination of ILST shortfalls, persistent and increasingly significant deposit outflows, and material balance sheet restructuring plans likely warranted a stronger supervisory message in 2022. The record suggests a desire to wait for further evidence after the planned horizontal liquidity review (HLR) in 2023, which ultimately found additional issues related to SVBFG's ILST assessment and capacity to monetize liquidity buffers. SVBFG's liquidity shortfalls from its ILST were not accurately reflected in an assessment of SVBFG's true liquidity risk. Rather, the shortfall was characterized as an "operational" one by both SVBFG and supervisors. This ILST shortfall was in fact a violation by the firm of the corresponding liquidity regulation, Regulation YY, which should have led to an MRIA that required SVBFG to take immediate action to remedy the breach.

The rating assigned in the RBO portfolio set the default view of SVBFG as a solid firm for the new supervisory team when SVBFG entered the LFBO portfolio and made downgrades more difficult in practice. For example, as part of the initial liquidity target exam in November 2021 that led to six supervisory findings, staff concluded that the proposed findings were all foundational issues, rather than ones specifically related to EPS readiness. Despite the observed weaknesses, because SVBFG had just recently been rated as satisfactory in July 2021, staff questioned whether it would be reasonable to come out with a new rating so quickly.

With regard to interest rate risk-management, supervisors identified interest rate risk deficiencies in the 2020, 2021, and 2022 CAMELS exams but did not issue supervisory findings (MRA/MRIA). The deficiencies were only communicated as written advisories or verbal observations. As a second example, in the first half of 2022, SVBFG believed that it would see higher net interest income (NII) from rising interest rates. In October 2022, however, SVBFG management informed supervisors that NII was now projected to decline in the fourth quarter of 2022. The supervisory team issued an MRA in November 2022 and planned to downgrade the Sensitivity to Market Risk rating in the CAMELS framework from "Satisfactory-2" to "Less-than-Satisfactory-3" as part of the 2022 CAMELS exam.¹⁷ The firm failed before that downgrade was finalized.

While supervisors did issue supervisory findings, the delay in a rating downgrade meant that SVBFG effectively continued to operate below supervisory expectations for more than a year despite its growing size and complexity. Federal Reserve supervisors ultimately downgraded SVB's CAMELS ratings for Management, Liquidity, and on a Composite basis in August 2022 and SVBFG's Governance and Controls were determined to be less than satisfactory.¹⁸ Despite widespread weaknesses, this 2022 action was the first downgrade of SVBFG or SVB in the period since 2017.

Overall, the supervisory approach at SVBFG was too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment. Further, the rating assigned as a smaller firm set the default view of SVBFG as a well-managed firm when a new supervisory team was assigned in 2021 after SVBFG's rapid growth. This made downgrades more difficult in practice.

The root cause of these delays around supervisory actions is difficult to ascertain. Governance issues related to the Board's approach to delegated authority may play a role. For example, the Board has delegated to the Reserve Banks supervisory authority for firms like SVBFG, including the authority to issue supervisory ratings, but in practice, Reserve Bank supervisors typically seek approval from or consensus with Board staff before making a rating change. Enforcement actions for banks with assets greater than $100 billion are not delegated to Reserve Banks but require approval by Board staff. The lack of clarity around governance processes and the need for consensus often led to a lengthy process.

A related complication is that the Board provides substantive input to the supervisory process, including the ratings for firms subject to delegated authority, and also acts in an oversight capacity over the Reserve Banks. This creates conflicting incentives for the Reserve Banks that could be an additional force that pushes toward consensus around supervisory judgments.

Policy Stance

Key Takeaway 4:

The Board's tailoring approach in response to EGRRCPA and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

Over the same period that SVBFG was growing rapidly in size and complexity, the Federal Reserve shifted its regulatory and supervisory policies because of a combination of external statutory changes and internal policy choices (see the "Federal Reserve Supervision" section, the "Supervision of SVBFG by Critical Risk Areas" section, and the "Federal Reserve Regulation" section). The Board's Vice Chair for Supervision, a position that is appointed by the President and confirmed by the Senate for a four-year term, is responsible for developing supervisory and regulatory policies for the Board to consider.

In 2018, EGRRCPA amended the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) by raising the $50 billion minimum asset threshold for general application of EPS to bank holding companies with $250 billion in total assets.¹⁹ At the same time it raised the threshold for general application of EPS, EGRRCPA provided the Board with discretion to rebut the statutory presumption and apply EPS to bank holding companies with total assets between $100 billion and $250 billion.

In October 2019, the Board established categories for determining application of the EPS to large U.S. banking organizations and foreign banking organizations through the 2019 tailoring rule, as well as EPS related to capital and liquidity requirements.²⁰ This tailoring was consistent with EGRRCPA and reflected policy choices about how Federal Reserve oversight should be designed and implemented. Specifically, the threshold for EPS was raised from $50 billion in assets to $100 billion in assets, and SVBFG was subject to a less stringent set of EPS when it reached the $100 billion threshold than would have applied before 2019 (see the "Federal Reserve Regulation" section). Critically for supervision, the Board raised the threshold for heightened supervision by the LFBO portfolio from $50 billion in assets to $100 billion in assets in July 2018 to track the new EGRRCPA thresholds, which delayed application of heightened supervisory expectations to the firm by at least three years.

In 2018, the Board confirmed its policy stance on supervisory guidance, issuing "guidance on guidance," which publicly clarified the role of supervisory expectations as compared to laws or regulations.²¹ In April 2021, the Board adopted a final rule to codify the long-standing principle that supervisory guidance does not have the force and effect of law, but rather outlines expectations and appropriate practices for a particular subject area or activity.²²

Over the same period, under the direction of the Vice Chair for Supervision, supervisory practices shifted. In the interviews for this report, staff repeatedly mentioned changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions. There was no formal or specific policy that required this, but staff felt a shift in culture and expectations from internal discussions and observed behavior that changed how supervision was executed. As a result, staff approached supervisory messages, particularly supervisory findings and enforcement actions, with a need to accumulate more evidence than in the past, which contributed to delays and in some cases led staff not to take action.

It is difficult to judge how these collective changes in policy affected the oversight of SVBFG, but a review of the historical record and staff interviews suggest that they played a role. Although the stated intention of these policy changes was to improve the effectiveness of supervision, the changes also led to slower action by supervisory staff and a reluctance to escalate issues. For example, staff informed SVBFG about a forthcoming MOU around information technology in 2021, but staff subsequently dropped the matter because they felt it would not be pursued by policy­makers at that time.

Over the same period, the intensity of supervisory coverage of SVBFG declined while SVBFG was in the RBO portfolio. For example, scheduled supervision hours for SVBFG fell over 40 percent from 2017 to 2020 (impacted, in part, by the pandemic), even as SVBFG grew rapidly. Supervisory attention increased dramatically in 2022 when SVBFG entered the LFBO portfolio. Budgetary resources may have mattered also. During this period, the overall number of supervisory resources remained flat. From 2016 to 2022, for example, banking sector assets grew 37 percent (nominal terms), while Federal Reserve System supervision headcount declined by 3 percent.

A final factor was the impact of the COVID-19 pandemic that began in March 2020. At that time, SVBFG was in the RBO portfolio. The Board issued supervisory guidance for supervisors to continue to assess institutions in accordance with existing policies and to consider whether firms have managed risks appropriately, including taking action in response to the stress from COVID-19.²³

One practical impact was a pause in some examinations for the RBO portfolio that may have made SVBFG's transition from the RBO to the LFBO portfolio more abrupt. Moreover, supervisors needed additional time to reassess supervisory views. When LFBO work on SVBFG began in the middle of 2021, the new team began with a safety-and-soundness assessment that was issued by supervisors in May 2021 based on exam work done in the fall of 2020. Over that period, SVBFG had continued its rapid growth.

Regulation

SVBFG's rapid growth led it to move across categories of the Federal Reserve's regulatory framework (see the "Federal Reserve Regulation" section). Under the current framework, the application of rules to a particular firm depends on a range of factors related to a firm's size and complexity. As seen in the visual produced by the Federal Reserve Board,²⁴ the framework is quite complicated. SVBFG and staff supervising SVBFG spent considerable effort seeking to understand the rules and when they apply, including the implications of different evaluation criteria, historical and prospective transition periods, cliff effects, and complicated definitions. SVBFG regularly engaged consultants to help prepare for the transition.

In June 2021, SVBFG crossed the $100 billion threshold in average total consolidated assets and therefore met the criteria for a Category IV firm under the 2019 tailoring rule. SVBFG became subject to capital, liquidity, and risk-management requirements applicable to Category IV firms. SVBFG also faced specific supervisory guidance regarding corporate governance, board effectiveness, and management of interest rate risk. However, at the time of its failure, an important subset of Category IV capital and liquidity requirements, including supervisory stress testing, the stress capital buffer, the liquidity coverage ratio (LCR), and the net stable funding ratio (NSFR), were not yet applied to SVBFG because of applicable transition periods in the rules. For example, SVBFG's first supervisory stress test would have occurred in 2024, more than two years after SVBFG became a Category IV firm.

In the absence of these changes, SVBFG would have been subject to enhanced liquidity risk management requirements, full standardized liquidity requirements (i.e., LCR and NSFR), enhanced capital requirements, company-run stress testing, supervisory stress testing at an earlier date, and tailored resolution planning requirements. An analysis of SVBFG's December 2022 capital and liquidity levels against the pre-2019 requirements suggests that SVBFG would have had to hold more high-quality liquid assets (HQLA) under the prior set of requirements.²⁵ For example, under the pre-2019 regime, SVBFG would have been subject to the full LCR and would have had an approximately 9 percent shortfall of HQLA in December 2022, and estimates for February 2023 show an even larger shortfall (approximately 17 percent), which would have required different actions from SVBFG. In terms of capital, under the pre-2019 regime, SVBFG would have been required to recognize unrealized gains and losses on its AFS securities portfolio in its regulatory capital; by including the unrealized losses on its AFS securities portfolio, in December 2022 SVBFG's reported regulatory capital would have been $1.9 billion lower.

Increased capital and liquidity would have bolstered the resilience of SVBFG. The requirements may also have encouraged closer scrutiny of the firm's financial position. Had SVBFG been subject to the capital and liquidity requirements that existed before EGRRCPA and related rulemakings, SVBFG may have more proactively managed its liquidity and capital positions or maintained a different balance sheet composition.

A comprehensive assessment of changes from EGRRCPA, the 2019 tailoring rule, and related rulemakings show that they combined to create a weaker regulatory framework for a firm like SVBFG. Further, the long transition periods provided by the rules that did apply further delayed the implementation of requirements, such as stress testing, that may have contributed to the resiliency of the firm.

Other Findings

Surveillance and Analytics

Staff at the Board and the Reserve Banks produce a wide range of analytical work that examines the condition of the U.S. banking system with a specific focus on emerging risks that is designed to provide context for policymakers and staff (see the "Additional Topics" section). A review of both internal and external material shows that staff identified a wide range of emerging issues, including the impact of rising interest rates on securities valuation and potential deposit impacts, both of which proved relevant for SVB. The Board received a briefing on these topics in mid-February 2023 in which SVBFG was specifically identified as an example of a large firm with "significant safety and soundness risks."²⁶ Analytical reports also highlighted that bank deposits that increased rapidly during the pandemic presented a rising risk, particularly in the FRBSF District where outflows were relatively large in the fourth quarter of 2022.

Overall, the analytical and surveillance work seemed largely fit for purpose in terms of traditional assessments of the condition of the banking industry and emerging risks for individual banks. While the surveillance work covered traditional topics, it did not expressly consider certain emerging forces such as changing depositor dynamics or the implications for contingency funding. In addition, it is not clear how this surveillance work impacted the specific supervisory approach for SVBFG.

Finally, this report focused on the perspective of risks to individual firms and did not review financial stability work related to the systemic factors that proved critical after the failure of SVBFG.

Other Topics

The report examines the Federal Reserve's assessment of several additional topics: the firm's incentive compensation program, applications to expand its operations, SVB's loan agreements that required borrowers to place deposits at SVB, and application of the Volcker rule to SVB (see the subsections under the "Additional Topics" section).

As discussed later in the report, SVBFG's incentive compensation practices may have encouraged excessive risk-taking. The other topics appear less salient to the failure of SVB.

Behavior

The report found no evidence of unethical behavior on the part of supervisors. The previous conclusions relate to substantive supervisory judgments in the development and implementation of the Federal Reserve's oversight program only.

Issues for Consideration

The final portion of this report considers lessons learned from the failure of SVBFG that could enhance the Federal Reserve's supervision and regulation (see the "Observations for Federal Reserve Oversight" section). Lessons learned are an important component of this type of review, but it is useful to describe the caveats and challenges.

One challenge is to be as clear as possible about the underlying problems to be solved. For example, in the case of SVBFG's failure, one must determine how much weight to put on the decisions of SVBFG's board and management, the design of the Federal Reserve's supervision and regulation, the execution of that supervision and regulation, and the specific combination of environmental factors that materialized in 2022 and early 2023. This type of causal decomposition is quite difficult from a single event.

Second, decisions about the stance of policy and desired level of resilience appropriately reflect policy­makers' views on many complex and interrelated topics: risk appetite; the costs of regulatory burden; the competitive landscape; how financial services are most efficiently provided to an economy; the importance of transparency, accountability, and fairness; the effectiveness of market discipline; and the source and impact of systemic spillovers. Different policymaker choices and trade-offs will have different implications for the resilience of the financial system, the desired stance of prudential oversight, and financial outcomes.

Finally, while SVBFG failed because of a particular constellation of factors, that is only one realization of many potential outcomes across supervised firms and over time. Constructive change to the Federal Reserve's supervision and regulation needs to be robust and reflect not only the factors that proved pivotal for SVBFG but also a broader range of potential scenarios that may have not yet materialized and could be equally consequential. This is particularly true in an environment like this one with rapid financial and technological innovation, competition from new financial entrants, macroeconomic uncertainty, more rapid financial flows, and faster communication through social media, all of which bring an uncertain combination of risks and opportunities for the banking system.

A successful review of the Federal Reserve's regulatory and supervisory program will depend critically on difficult judgments about these issues. To begin that discussion, the final section of this report identifies four broad thematic areas of potential changes: enhance risk identification; promote resilience; change supervisor behavior; and strengthen processes.

Supervisors expect banks to manage all material risks, so these issues are not limited to the specific factors that drove the failure of SVBFG. Rather, the themes are meant to identify broad and foundational issues that could better promote safety and soundness generally. Looking beyond current events, many of these issues are not new and echo similar issues raised in earlier reviews of Federal Reserve supervision. This suggests both the importance of this type of review and the challenges ahead.

 

References

 

 2. Throughout this report, Silicon Valley Bank Financial Group, the holding company, is referred to as "SVBFG." Silicon Valley Bank, the state member bank, is referred to as "SVB." SVBFG filed for bankruptcy on March 17, following the failure of SVB. Where context requires, the term SVBFG refers to both the holding company and the consolidated organization, inclusive of SVB. Return to text

 3. See Board of Governors of the Federal Reserve System, "Supervisory Guidance on Board of Directors' Effectiveness," SR letter 21-3/CA letter 21-1 (February 26, 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm. Return to text

 4. As described in greater detail in this report, Regulation YY implements certain of the enhanced prudential standards (EPS) mandated by the Dodd-Frank Act for large bank holding companies. See 12 C.F.R. pt. 252. Return to text

 5. SVBFG, "Message to Shareholders Regarding Recent Strategic Actions Taken by SVB," 1, March 8, 2023, https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/r/Q1-2023-Investor-Letter.FINAL-030823.pdf; SVBFG, "SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock," March 8, 2023, https://ir.svb.com/news-and-research/news/news-details/2023/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock/default.aspx. Return to text

 6. Jonathan D. Rose, "Old-Fashioned Deposit Runs," Finance and Economics Discussion Series 2015-111, table 1 (Washington: Board of Governors of the Federal Reserve System, November 2015), https://www.federalreserve.gov/econresdata/feds/2015/files/2015111pap.pdf. Return to text

 7. See Board of Governors of the Federal Reserve System, "Federal Reserve Board Finalizes Rules that Tailor Its Regulations for Domestic and Foreign Banks to More Closely Match Their Risk Profiles," October 10, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm. Return to text

 8. Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, November 2022), https://www.federalreserve.gov/publications/files/202211-supervision-and-regulation-report.pdf. Return to text

 9. Supervisory findings include matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs). As described in greater detail in this report, MRAs and MRIAs are one of the primary tools to formally convey supervisory findings. The 31 supervisory findings refer to safety-and-soundness findings. SVBFG also had four open consumer compliance findings. Return to text

 10. SVBFG and SVB 2021 Supervisory Ratings letter, August 17, 2022. See table 4 of this report. See also Board of Governors of the Federal Reserve System, "Large Financial Institution (LFI) Rating System," SR letter 19-3/CA letter 19-2 (February 26, 2019), https://www.federalreserve.gov/supervisionreg/srletters/sr1903.pdf. Return to text

 11. SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022. Return to text

 12. SVBFG Liquidity Planning Target Supervisory letter, November 2, 2021. Return to text

 13. SVB 2022 CAMELS Examination Supervisory letter, November 15, 2022. Return to text

 14. SVB 2020 CAMELS Examination Report, May 3, 2021. Return to text

 15. Memorandum of Understanding (Draft), March 10, 2023. Return to text

 16. The LFI rating system applies to holding companies; see SR letter 19-3. Return to text

 17. SVB 2022 CAMELS Examination Supervisory letter, November 15, 2022. Return to text

 18. SVBFG and SVB 2021 Supervisory Ratings letter, August 17, 2022. Return to text

 19. Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, 132 Stat. 1296, 1356, § 401(a) (2018) (codified at 12 U.S.C. § 5365). Return to text

 20. Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations, 84 Fed. Reg. 59,032 (November 1, 2019), https://www.federalregister.gov/documents/2019/11/01/2019-23662/prudential-standards-for-large-bank-holding-companies-savings-and-loan-holding-companies-and-foreign. Return to text

 21. Board of Governors of the Federal Reserve System, "Interagency Statement Clarifying the Role of Supervisory Guidance," SR letter 18-5/CA letter 18-7 (September 11, 2018). Because the SR letter was codified in the 2021 final rule on guidance, the SR letter was made inactive. Return to text

 22. Role of Supervisory Guidance, 86 Fed. Reg. 18,173 (April 8, 2021), https://www.federalregister.gov/documents/2021/04/08/2021-07146/role-of-supervisory-guidance. Return to text

 23. Board of Governors of the Federal Reserve System, "Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions," SR letter 20-15 (June 23, 2020), https://www.federalreserve.gov/supervisionreg/srletters/sr2015.htm. Return to text

 24. Board of Governors of the Federal Reserve System, "Requirements for Domestic and Foreign Banking Organizations," Tailoring Rule Visual (October 10, 2019), https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf. Return to text

 25. It should be noted that had these heightened requirements come into effect based on the pre-EGRRCPA criteria (e.g., at least $250 billion in total consolidated assets or at least $10 billion of total consolidated on-balance sheet foreign exposure), SVBFG may have proactively managed its asset size and on-balance sheet foreign exposure to avoid becoming subject to these additional requirements. Return to text

 26. Board of Governors of the Federal Reserve System, "Impact of Rising Rates on Certain Banks and Supervisory Approach," S&R Quarterly Presentation, February 14, 2023. Return to text