Fed Raised Concerns About SVB’s Risk Management in 2019

The Fed issued what it calls a Matter Requiring Attention, a type of citation that is less severe than an enforcement action. Regulators are supposed to make sure the problem is addressed, but it couldn’t be learned if the Fed held SVB to that standard in 2019.

Over time, the central bank issued numerous warnings to SVB, suggesting the bank’s problems were on the radar of the Fed, the bank’s primary federal regulator. A central-bank review of its oversight of SVB is due by May.

An SVB spokeswoman didn’t immediately respond to a request for comment. The San Francisco Fed, which shared jurisdiction over the bank with the Fed board in Washington, didn’t respond to a request for comment. 

SVB’s implosion was the second-biggest bank failure in American history. Its collapse marks the biggest test to date of the post-financial-crisis regulatory architecture designed to force banks to curtail risk and monitor it more closely. 

Risks to SVB’s financial condition were apparent for months before its failure. The bank’s parent company disclosed that the market value of its held-to-maturity bonds was $15.9 billion less than their balance-sheet value at the end of September 2022. That gap was slightly more than SVB’s $15.8 billion of total equity at the time. 

SVB’s large and concentrated number of uninsured depositors began to flee after the bank announced a capital raise and the sale of a large amount of securities at a loss. Former officials say the regulator’s rules treat such deposits as relatively stable, since they typically signal a longstanding business relationship.

Officials are seeking to contain the fallout from the failure of the Santa Clara, Calif., bank and a second firm, Signature Bank, which regulators said posed a threat to the financial system. Top U.S. banks said Thursday they would deposit $30 billion of their money into a third lender, First Republic Bank, after it faced a falling stock price and fleeing depositors.

Examiners had raised concern about SVB’s portfolio of securities, which lost significant value as the central bank raised interest rates. The bank was also seen as an unusual case for the banking regulators because its customers were so concentrated in venture-capital and tech startups, officials said.

The Fed applies more stringent rules to bigger banks, so SVB’s rapid growth over the past few years likely would have moved the bank into a progressively tougher form of supervision from the regulator. 

Following the 2019 warning, the Fed informed SVB in 2020 that its system to control risk didn’t meet the expectations for a large financial institution, or a bank holding company with more than $100 billion in assets, the presentation to employees at SVB’s venture-capital arm said. 

Large banks that don’t meet the Fed’s expectations are supposed to take corrective action to fix the problems or potentially face enforcement actions.

At that time, the bank was growing quickly as deposits poured in during the early months of the pandemic. The average level of interest-earning assets grew 76% in the first quarter of 2021, compared with the same period one year earlier, the presentation said.  

The bank’s assets rose to $114 billon at the end of 2020, from about $70 billion in 2019, the year the Fed voiced its concerns. They nearly doubled from 2020 to the end of 2021 to about $209 billion, according to Federal Deposit Insurance Corp. data. 

The Fed’s criticism of SVB’s risk-management systems raises the question of “why were they allowed to double their size after that,” said Keith Noreika, an executive vice president at Patomak Global Partners who served as acting Comptroller of the Currency in 2017. 

Write to Andrew Ackerman at [email protected] and Dave Michaels at [email protected]