Why Silicon Valley Bank went bankrupt, the Federal Reserve wants to investigate thoroughly before May!

 On the 28th local time, the US Senate Banking Committee will hold its first hearing on the collapse of Silicon Valley Bank and Signature Bank.

On the 27th, the Federal Reserve announced in advance the testimony of Micheal Barr, the full-time vice chairman in charge of supervision, who will attend relevant Senate hearings. According to the testimony, Barr said that the US banking industry remains resilient and will conduct a thorough review of the Silicon Valley Bank bankruptcy.

The Federal Reserve believes that the U.S. banking system is sound and resilient, with strong capital and liquidity. The Federal Reserve, in cooperation with the Treasury Department and the Federal Deposit Insurance Corporation (FDIC), took decisive action to protect the U.S. economy and strengthen public confidence in the banking system. These actions show that all parties are committed to ensuring the safety of all deposits, will continue to closely monitor the status of the banking system in the future, and are prepared to use all the tools of the Federal Reserve as needed for institutions of any size to ensure the safety and soundness of the system.

Barr believes that the events of recent weeks have raised questions "whether the Fed should do more to prevent isolated banking problems from undermining confidence in banks and threatening the stability of the banking system as a whole."

The U.S. Senate held a hearing on the bankruptcy of Silicon Valley Bank (Source: Xinhua News Agency)

Report to the public by May 1

Regarding the reason for the bankruptcy of Silicon Valley Bank, the Federal Reserve said that the bank's management did not effectively manage its interest rate and liquidity risks. The bank suffered a devastating and unexpected run on uninsured depositors in less than 24 hours.

The Fed demanded a thorough investigation into what happened, including oversight responsibilities for the bank. Barr said he would work to ensure that the Fed adequately explained any regulatory or supervisory failures and addressed them. The Fed reiterated that the review will be thorough and transparent and report to the public by May 1. The report will include confidential surveillance information, including surveillance assessments and related material, so that the public can make their own assessment. At the same time, the Fed welcomes and looks forward to external scrutiny.

The Fed sees Silicon Valley Bank as a classic case of mismanagement. The bank operates a centralized business model serving the technology and venture capital sectors. In the early days of the pandemic, deposits surged as the tech industry boomed. The bank invested the proceeds of these deposits in long-term securities, but the bank did not effectively manage the interest rate risk of these securities, nor did it develop effective interest rate risk measurement tools, models and indicators. At the same time, the bank failed to manage the risk of its liabilities. These liabilities consist primarily of deposits in venture capital firms and the technology sector, which are highly concentrated and potentially volatile. When the stress started to set in, eventually there was a bank run.

The SVB incident appears to have far-reaching consequences and damage to the broader banking system, Barr said. "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." With the approval of the U.S. Treasury Department, the Federal Reserve created a temporary lending facility, the Bank Term Funding Program. Together with the Bank's internal liquidity and stable deposits, other external sources, and discount window loans, the new facility provided ample supply for the entire banking system. fluidity.

The problem has already arisen?

The Fed noted that Silicon Valley Bank's problems arose early on. At the end of 2021, the regulatory agency found that the bank's liquidity risk management was insufficient, involving six indicators of liquidity stress testing, emergency funds, and liquidity risk control. In May 2022, Silicon Valley Bank was accused of having insufficient board oversight, weak risk management and insufficient internal audit function of the bank. In the summer of 2022, Silicon Valley Bank's management rating was downgraded. In October 2022, the regulator met with the bank's senior management and expressed concerns about the bank's interest rate risk profile. In November 2022, supervisors submitted the assessment results on interest rate risk management to the bank.

Barr revealed that the Fed's focus in the review is whether its own regulation is suitable for the rapid growth and vulnerability of Silicon Valley banks. While the Fed's framework focuses on size thresholds, size is not always a good indicator of risk, especially when banks employ unconventional business models.

In addition, recent events have shown that the Fed must increase its understanding of the banking industry in light of changing technologies and emerging risks, the Fed said. To this end, the Fed is analyzing what recent events have learned about the banking industry, customer behavior, social media, concentration and novel business models, rapid growth, deposit runs, interest rate risk, and other factors, considering how it regulates financial institutions and views financial stability

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