Board of Governors of the Federal Reserve System

Federal Reserve Regulation

Regulatory Framework

Background

The Global Financial Crisis in 2008–09 had a profound impact on the U.S. banking system and the Federal Reserve's oversight framework. To address weaknesses in the banking sector that were evident in that period, the Board established a set of enhanced prudential standards (EPS) for large banking organizations. These standards implemented elements of section 165 of the Dodd-Frank Act, which directed the Board to establish EPS for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more.¹³⁷ This included liquidity, capital, stress testing, and resolution planning requirements. Regulations implementing these standards were issued in order to improve the resilience of large banking organizations as well as reduce the impact of a large banking organization's failure on U.S. financial stability.

As mentioned earlier, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amended section 165 of the Dodd-Frank Act by raising the $50 billion minimum asset threshold for general application of EPS to $250 billion. Additionally, EGRRCPA provided the Board with discretion to rebut the statutory presumption and apply EPS to bank holding companies with total assets of $100 billion or more but less than $250 billion.

In response, the Board established categories for determining application of the EPS to large U.S. banking organizations and foreign banking organizations in the 2019 tailoring rule.¹³⁸ The rule established four categories of standards (Category I through IV) based on risk-based indicators (a banking organization's total assets and levels of cross-jurisdictional activity, off-balance sheet exposure, nonbank assets, and weighted short-term wholesale funding)¹³⁹ with increasingly stringent requirements for larger and more complex firms whose failure could impact U.S. financial stability.¹⁴⁰ The banking agencies also issued updates to the capital and liquidity rules that aligned with the Board's 2019 tailoring rule.¹⁴¹

The changes due to EGRRCPA, the 2019 tailoring rule, and related rulemakings had a significant impact on the level of requirements to which SVBFG was subject in 2018 and beyond.¹⁴² Had these changes not been made to the framework, 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. Further, the enhanced requirements that did apply to SVBFG were not immediately effective because of lengthy transition periods prescribed by the relevant regulations.

The "Regulations that Applied to SVBFG" section describes the requirements that applied to SVBFG prior to its failure (see figure 24). In addition, the "Pro Forma Impact of EGRRCPA and Tailoring" section presents analysis of the requirements that would have applied to the firm in the absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings and notes whether SVBFG would have met those requirements.

Regulations that Applied to SVBFG

Liquidity

SVBFG became subject to liquidity risk management and internal liquidity stress testing (ILST) requirements that apply to Category IV firms starting in the third quarter of 2022. Key requirements included the following:

• SVBFG's board was required to approve on an annual basis and review on a semi-annual basis the level of risk that SVBFG could assume, as well as review SVBFG's liquidity risk policies and procedures.
• SVBFG's risk committee was required to approve SVBFG's CFP outlining SVBFG's strategy for dealing with liquidity needs during a stress event.
• SVBFG was also required to conduct cash flow projections, implement a CFP, and establish an independent review function tasked with assessing the effectiveness of its liquidity risk management framework.
• SVBFG was required to conduct quarterly ILSTs that included an overnight, 30-day, 90-day, and one-year timeframe and hold a buffer of highly liquid assets to meet its projected net stressed cash flow need over a 30-day period.

SVBFG was also subject to monthly liquidity reporting under the Federal Reserve Board's FR 2052a Complex Institution Liquidity Monitoring Report (FR 2052a). SVBFG began submitting these reports in January 2022.

In addition to the EPS for liquidity risk management, there are two standardized liquidity requirements for certain large banking organizations: the LCR and NSFR. The LCR seeks to strengthen firms' short-term resilience to funding shocks by requiring large firms to hold a minimum amount of high-quality liquid assets to meet total net cash outflows in a 30-day stress period. The NSFR rule seeks to mitigate the risks of firms supporting their assets with insufficient amounts of stable funding by requiring them to maintain a minimum level of stable funding to support their assets, funding commitments, and derivative exposures over a one-year time horizon. Category IV firms were not subject to the LCR or NSFR unless they had $50 billion or more in average weighted short-term wholesale funding. SVBFG crossed the $50 billion threshold in average weighted short-term wholesale funding in December 2022 and would have been required to comply with reduced LCR and NSFR requirements at a 70 percent calibration at the start of the fourth quarter of 2023.¹⁴³

Based on the liquidity data reported by SVBFG, SVBFG would have met the reduced LCR requirement at the 70 percent calibration in the months leading up to its failure (see table 11).¹⁴⁴ Internal analysis also indicates that SVBFG would have been able to meet the 70 percent reduced NSFR requirement. However, SVBFG did not maintain a sufficient liquidity buffer to meet its own ILST prior to its failure. It should be noted that for the time period displayed in table 11, SVBFG was not subject to the LCR requirement, and it is possible that SVBFG would have managed its liquidity position differently and had different ratios had it been subject to the LCR requirement, including quarterly public disclosures.

Table 11. SVBFG reduced liquidity coverage ratio (LCR)

Capital

Pursuant to the 2013 capital rule,¹⁴⁵ banking organizations, including SVBFG and SVB, are subject to several risk-based and leverage-based standards, including minimum requirements and buffers.¹⁴⁶ These requirements remained unchanged as SVBFG and SVB crossed the $100 billion threshold.

SVBFG and SVB were required to maintain minimum risk-based ratios and the tier 1 leverage capital ratio.¹⁴⁷ They were also required to hold additional capital of 2.5 percent of risk-weighted assets (capital conservation buffer) on top of the minimum risk-based regulatory capital ratios in order to avoid limitations on capital distributions (e.g., dividends and share buybacks) and discretionary bonus payments.

SVBFG and SVB exceeded the minimum and capital conservation buffer requirements for the CET1 ratio consistently from 2017 to 2022 (see figure 25).¹⁴⁸ SVBFG and SVB also exceeded the minimum plus buffer requirements for the tier 1 and total risk-based capital ratios, as well as the minimum tier 1 leverage ratio for the same period.¹⁴⁹

Stress Testing and Capital Planning

SVBFG was required to comply with the capital plan rule beginning on January 1, 2022, and to submit its first capital plan by April 5, 2022.¹⁵⁰ The capital plan must include an assessment of the expected uses and sources of capital over the subsequent nine quarters, assuming both expected and stressful conditions.

In addition to the capital plan submission, SVBFG was also subject to the supervisory stress test on a two-year cycle and to the stress capital buffer requirement, which would be provided every other year to align with the two-year supervisory stress test cycle. The stress capital buffer requirement uses the results of the supervisory stress test to resize a firm's 2.5 percent capital conservation buffer. Due to the transition period, SVBFG's first supervisory stress test would have occurred in 2024.¹⁵¹ SVBFG would have received notice of its first stress capital buffer requirement by June 30, 2024, which would have become effective on October 1, 2024.¹⁵² Finally, from 2014 to 2018, SVBFG and SVB were required to conduct an annual company-run stress test.¹⁵³ After 2018, following the enactment of EGRRCPA, they were no longer required to conduct company-run stress tests.

Resolution

Under the 2019 revisions to the resolution planning rule, SVBFG was not subject to a resolution plan requirement when it became a Category IV firm.¹⁵⁴

The FDIC requires certain IDIs to submit plans detailing how they could be resolved in an efficient manner in the event of their failure (the IDI rule).¹⁵⁵ SVB became subject to the IDI rule in 2021 when its total assets on a four-quarter average basis breached $100 billion and submitted its IDI plan on December 1, 2022, with an as-of date of December 31, 2021. EGRRCPA did not impact the IDI rule.

Pro Forma Impact of EGRRCPA and Tailoring

EGRRCPA, the 2019 tailoring rule, and related rulemakings changed the requirements applicable to certain firms. Prior to passage of EGRRCPA and the 2019 tailoring rule, a number of additional requirements, such as the full LCR requirement, recognizing unrealized gains and losses on AFS securities in capital, advanced approaches capital requirements, and a supplementary leverage ratio, applied to firms with total consolidated assets of at least $250 billion or consolidated total on-balance sheet foreign exposure of at least $10 billion.

The firm had more than $10 billion in on-balance sheet foreign exposure starting in the second quarter of 2020, so it would have been subject to these rules prior to its failure absent changes to its business model in response to the requirements.¹⁵⁶ This section outlines the requirements that would have applied under the previous regulatory framework (see table 12). It should be noted that had the prior criteria been in place for the application of heightened requirements, SVBFG may have proactively managed its asset size and on-balance sheet foreign exposure to avoid becoming subject to these additional requirements.

Table 12. Key requirements for SVBFG and SVB

Liquidity

In absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings, SVBFG would have been subject to additional liquidity risk management, ILST, and standardized liquidity requirements. The additional liquidity risk management requirements include establishing specific liquidity risk limits, weekly collateral monitoring, and requirements for monitoring intraday exposures. Rather than a quarterly ILST, SVBFG would have been subject to this requirement on a monthly basis¹⁵⁷ as well as monthly liquidity reporting to supervisors.

In addition, SVBFG would have been subject to the full LCR requirement and the full NSFR requirement.¹⁵⁸ SVBFG also would have been subject to quarterly public disclosures of its LCR and of its NSFR.

Based on SVBFG's liquidity reporting to Federal Reserve supervisors, SVBFG would not have met the full LCR requirement over the time periods shown below. For example, SVBFG's December 2022 full LCR would have been approximately 91 percent, a shortfall relative to the 100 percent requirement (see table 13). To meet the full LCR requirement, SVBFG would have had to obtain approximately $8 billion in additional high-quality liquid assets. The estimates for February 2023 show an even larger shortfall of approximately $14 billion. The shortfall numbers likely understate SVBFG's need because firms generally maintain a buffer above the minimums to account for potential volatility in the ratio and peer comparisons related to public disclosure.

Table 13. SVBFG full liquidity coverage ratio (LCR)

The LCR rule also requires a firm to have the operational capability to monetize its liquid assets and to test this capability periodically. In addition, the LCR rule places limits on the composition of assets that qualify as high-quality liquid assets. If SVBFG had been subject to the LCR, it may have adopted more proactive monitoring or managing of its liquidity position and mix of liquid assets.

Based on SVBFG's liquidity reporting to Federal Reserve supervisors, estimates for SVBFG's NSFR suggest that it would have been above the 100 percent requirement under the NSFR rule.

Capital

In the absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings, SVBFG would have been subject to the advanced approaches capital framework.¹⁵⁹ These additional capital standards include recognizing unrealized gains and losses on AFS securities in capital, using advanced approaches methodologies to calculate risk-based capital requirements, and a supplementary leverage ratio requirement.

Recognizing unrealized gains and losses on AFS securities in its CET1 capital would have reduced SVBFG's capital by $1.9 billion. This would have resulted in a drop in the CET1 capital ratio from 12.1 percent to 10.4 percent as of the end of the fourth quarter of 2022 (table 14 and table 15).¹⁶⁰

Table 14. SVBFG impact of accumulated other comprehensive income (AOCI) opt-out removal

Table 15. SVBFG impact of accumulated other comprehensive income (AOCI) opt-out removal on common equity tier 1 (CET1)

The decrease in its regulatory capital may have led SVBFG to operate differently. For example, SVBFG may have raised additional capital or may have made different business decisions.

Under the pre-2019 capital rule, SVBFG would have been required to calculate its risk-based capital ratios using both the standardized and advanced approaches where the higher requirement would apply. SVBFG was never required to calculate its advanced approaches ratios, so it is unknown whether its capital would have been impacted based on this metric.

In addition, SVBFG would have been subject to a minimum supplementary leverage ratio of 3 percent starting in 2021. SVBFG would have met this requirement based on regulatory report estimates available.¹⁶¹

Stress Testing and Capital Planning

Under the pre-2019 regulatory framework, SVBFG would have been subject to additional stress testing requirements as follows: (1) annual and semiannual company-run stress test requirements and (2) annual supervisory stress test, capital planning, and stress capital buffer requirements effective in 2020. The removal or delay of these requirements may have contributed to SVBFG having weaker capital planning and stress testing processes.

In the absence of EGRRCPA and the Board's 2019 tailoring rule, and after SVBFG crossed the $50 billion asset threshold and transition periods, SVBFG would have been subject to annual and mid-cycle company-run stress tests and would have had to explore its own idiosyncratic stress scenarios in its company-run stress test.¹⁶² This may have helped it to identify firm-specific risks. SVBFG also would have been subject to continued controls and oversight of its stress testing processes.

Prior to EGRRCPA and the Board's 2019 tailoring rule, firms with a four-quarter average of $50 billion in total consolidated assets or more were subject to annual supervisory stress tests.¹⁶³ SVBFG would therefore have been subject to its first supervisory stress test in 2020, and annually thereafter.¹⁶⁴ In addition, SVBFG would have submitted its first capital plan by April 5, 2019, and would have been subject to its first stress capital buffer requirement in 2020, and annually thereafter.

Resolution Planning

Under the 2011 rule, barring the passage of EGRRCPA and the Board's rules implementing it, SVBFG would have been required to submit a resolution plan to the agencies beginning in July 2019.¹⁶⁵ In administering the 2011 rule, however, the agencies extended plan filing deadlines to at least two years to permit sufficient time for plan review, development of meaningful feedback, and for firms to address the feedback.¹⁶⁶ The 2011 rule also permitted certain firms to file less detailed tailored plans after filing their initial plan absent the agencies' objection.¹⁶⁷ Given its bank-centric profile, SVBFG would likely have been able to file a tailored resolution plan after its initial resolution plan filing on at least a two-year cadence. As noted above, SVB became subject to the IDI rule in 2021 and submitted its IDI plan on December 1, 2022. More than 98 percent of SVBFG's assets were in SVB.

Conclusions

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. 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. These requirements may have resulted in SVBFG's having increased capital and liquidity that would have bolstered its resilience. The requirements may also have encouraged closer scrutiny of the firm's financial position, and SVBFG may have more proactively managed its liquidity and capital positions or maintained a different balance sheet composition. 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.

 

References

 

 137. Dodd-Frank Act § 165, 12 U.S.C. § 5365. Return to text

 138. See Tailoring Rule Visual, footnote 24. Return to text

 139. Short-term wholesale funding is defined in the instructions to the FR Y-15 report. Instructions for Preparation of Banking Organization Systemic Risk Report, https://www.federalreserve.gov/reportforms/forms/FR_Y-1520160930_i.pdf. Return to text

 140. Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations, 84 Fed. Reg. 59,032 (November1, 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

 141. Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements, 84 Fed. Reg. 59,230(November1, 2019), https://www.federalregister.gov/documents/2019/11/01/2019-23800/changes-to-applicability-thresholds-for-regulatory-capital-and-liquidity-requirements. Return to text

 142. On July 2, 2018, the Federal Reserve granted SVBFG an extension of time to comply with certain prudential requirements. The substantive effect of this action was superseded by the Federal Reserve's July 6, 2018, public statement on EGRRCPA, and the 2019 tailoring rule. Return to text

 143. For both the reduced LCR and reduced NSFR applicable to Category IV firms, the denominator is multiplied by 70 percent, thereby reducing the amount of high-quality liquid assets or available stable funding needed to meet the LCR and NSFR, respectively. 12 C.F.R. § 249.30(c), Table 1; 12 C.F.R. § 249.105(b), Table 1. Unlike other firms subject to the LCR or NSFR, Category IV firms' depository institution subsidiaries are not subject to either requirement. All other requirements of the LCR rule apply to such firms, including the rule's maturity mismatch requirement. Return to text

 144. Federal Reserve staff's estimates of the firm's LCR and NSFR (both full and reduced figures) are based on the data the firm reported in its 2052a filing. Return to text

 145. Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 78 Fed. Reg. 62,017 (October 11, 2013), https://www.federalregister.gov/documents/2013/10/11/2013-21653/regulatory-capital-rules-regulatory-capital-implementation-of-basel-iii-capital-adequacy-transition. Return to text

 146. Risk-based capital standards are calculated as a ratio of a firm's regulatory capital (numerator) to risk-weighted assets (denominator), which take into account the underlying risk of a firm's assets. By contrast, the tier 1 leverage ratio uses regulatory capital as the numerator and a measure of total assets (unweighted) as the denominator. Leverage-based requirements treat all assets equally and are generally meant to serve as a backstop to risk-based requirements. See 12 C.F.R. §§ 217.10–11. Return to text

 147. SVBFG and SVB were subject to the following minimum regulatory capital requirements: a common equity tier 1 capital ratio of 4.5 percent, a tier 1 capital ratio of 6 percent, a total capital ratio of 8 percent of risk-weighted assets, and a leverage ratio of 4 percent. The leverage ratio (or tier 1 leverage ratio) is calculated as tier 1 capital to total on-balance sheet assets. Return to text

 148. SVBFG would have been subject to a stress capital buffer calculated based on its supervisory stress test results; however, given the transition period in the stress test rule, the stress capital buffer would not have applied until 2024. Return to text

 149. Staff used regulatory reporting data from the FR Y-9C, Schedule HC-R, Part 1, item 47 and FFIEC 031, Schedule RC-R, Part 1, item 49. Return to text

 150. 12 C.F.R. § 225.8. Return to text

 151. Under the supervisory stress test rules, a firm that crosses the $100 billion threshold by September 30 must comply with the stress test rules beginning on January 1 of the second calendar year after the bank holding company crosses the threshold. 12 C.F.R. § 252.43(b)(1). For Category IV firms, the Board conducts a supervisory stress test and publishes the results in even-numbered years. 12 C.F.R. § 252.44(d)(1), table 1. Even though the firm was not yet subject to the supervisory stress test, SVBFG began reporting the stress test regulatory reports to the Board in 2021. See Board of Governors of the Federal Reserve System, "Instructions for the Capital Assessments and Stress Testing information collection (Reporting Form FR Y-14Q)," 5–8, modified September 2022, https://www.federalreserve.gov/apps/reportingforms/Download/DownloadAttachment?guid=c4ef7d8e-9242-4384-bd8c-fe458e753bb2. Return to text

 152. See 12 C.F.R. §§ 225.8(c)(1), (h); 12 C.F.R. § 252.43(b)(1); 12 C.F.R. § 252.44(d)(1). Return to text

 153. 12 C.F.R. §§ 252.14-17 (2019). Return to text

 154. 
The 165(d) resolution planning requirements apply when a domestic bank holding company meets the relevant asset threshold as determined based on the average of the company's four most recent FR Y-9Cs. See 12 C.F.R. § 243.2. (defining "covered company"); Resolution Plans Required, 84 Fed. Reg. 59,194 (November 1, 2019), https://www.federalregister.gov/documents/2019/11/01/2019-23967/resolution-plans-required. Return to text

 155. 12 C.F.R. § 360.10. Return to text

 156. Federal Reserve Board staff analyzed the FFIEC 009 regulatory reporting data submitted by SVB to determine the date it would have crossed the $10 billion foreign exposure threshold. Based on the data, SVB crossed the $10 billion foreign exposure threshold in the second quarter of 2020. SVBFG likely also crossed $10 billion at the same time. Return to text

 157. See 12 C.F.R. § 252.34–35 (2019). Return to text

 158. See 12 C.F.R. § 249.1(b)(1) (2019). The NSFR rule was proposed but not finalized prior to issuance of the 2019 tailoring rule and related rulemakings. The proposed scope of application of the NSFR aligned with the scope of the LCR, and for the purposes of this review this analysis assumes that in the absence of the tailoring rule and related rulemakings, the NSFR's scope would have been finalized to align with the LCR's. Return to text

 159. The firm crossed the $10 billion foreign exposure threshold in the second quarter of 2020, meaning that it would have had to comply with SLR and AOCI recognition starting in 2021. Due to transition arrangements, SVBFG would not yet have been required to calculate its risk-weighted assets using advanced approaches methodologies before its failure in March 2023. See 12 C.F.R. § 217.100(b)(1)(i)(B)(2) (2019) for advanced approaches applicability for SVBFG and 12C.F.R. § 217.100(b)(1)(ii)(B) and (C) (2019) for advanced approaches applicability for SVB prior to 2019 tailoring rule and related rulemakings. See also 12 C.F.R. § 217.121(a)(1) (2019). Return to text

 160. SVBFG's unrealized losses started in early 2022 and peaked in the third quarter of that year. The $1.9 billion impact reflects the adjustment to capital through the opt-out from recognition of AOCI, which primarily reflects unrealized gains and losses adjusted for taxes, and certain other adjustments. Return to text

 161. SVB does not report the SLR or total leverage exposure information in its regulatory reporting filings. Return to text

 162. See 12 C.F.R. § 252.55 (2019). Return to text

 163. 12 C.F.R. §§ 252.43(a)(1)(i), 252.44 (2019). Return to text

 164. Starting in 2018, SVBFG also would have been required to submit the Capital Assessments and Stress Testing reports (FR Y-14), which provides data that inform the Board's stress testing process. See Instructions for the Capital Assessments and Stress Testing information collection. See footnote 151. Return to text

 165. See Resolution Plans Required, 76 Fed. Reg. at 67,323 (November 1, 2011), https://www.federalregister.gov/documents/2011/11/01/2011-27377/resolution-plans-required. Return to text

 166. See Federal Reserve Board, Agencies Extend Next Resolution Plan Filing Deadline for Certain Domestic and Foreign Banks, September 28, 2017, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170928a.htm (extending the deadline for U.S. global systemically important banks); and Federal Reserve Board, Agencies Extend Deadline for 38 Resolution Plan Submissions, August 2, 2016, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20160802a.htm (extending the deadline for other domestic firms). Return to text

 167. Resolution Plans Required Rule. To file a tailored plan, a domestic firm needed to have less than $100 billion in total nonbank assets and be bank-centric (that is, their total IDI assets comprised 85 percent or more of the firm's total consolidated assets). Tailored resolution plans focused on the nonbanking operations of the firm and on the interconnections and interdependencies between the nonbanking and banking operations. Return to text