Federal Reserve Releases Review Detailing Why Silicon Valley Bank Collapsed

Federal Reserve Blames Mismanagement for Silicon Valley Bank Collapse

The collapse of Silicon Valley Bank last month was due to mismanagement, according to officials at the Federal Reserve. The bank failed to properly assess macroeconomic risk and volatility within the technology sector, upon which the firm was heavily reliant. The implosion of Silicon Valley Bank prompted the government-backed company to secure both insured and uninsured accounts at the firm in order to prevent additional bank runs. Signature Bank collapsed days later, while other regional financial institutions such as First Republic Bank continue to languish as confidence in the sector diminishes.

“Textbook Case of Mismanagement”

Silicon Valley Bank imploded because of a “textbook case of mismanagement” as senior leadership “failed to manage basic interest rate and liquidity risk” and board members “failed to oversee senior leadership and hold them accountable,” according to a landmark review of the crisis released by the Federal Reserve, which is responsible for regulating private banks.

Heavy Reliance on Technology Companies

Silicon Valley Bank relied heavily on technology companies, many of which suddenly demanded to withdraw funds when a handful of venture capital firms voiced concerns about the financial institution’s solvency. The review added that Silicon Valley Bank “failed its own internal liquidity stress tests and did not have workable plans to access liquidity” amid volatile moments.

Monetary Policy and Rising Interest Rates

Monetary policymakers have worked to increase the target federal funds rate over the past year in an effort to combat inflation by hiking interest rates across the economy, prompting heavy losses when Silicon Valley Bank sold a long-term bond portfolio to fund withdrawals. Assets in the overall banking system are now $2 trillion lower than their book value due to the elevated interest rates, according to a recent study from the National Bureau of Economic Research.

Recession Forecasted

Officials at the Federal Reserve concluded in a meeting last month that the turmoil in the financial system which started with the Silicon Valley Bank collapse warrants a recession forecast for the end of the year. The review acknowledged that central bankers “did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity, and interest rate risk management,” meaning that the Silicon Valley Bank retained solid ratings even as “conditions deteriorated and significant risk to the firm’s safety and soundness emerged.”

Lessons Learned

The collapse of Silicon Valley Bank serves as a cautionary tale for financial institutions to properly assess macroeconomic risk and volatility within their respective sectors. It also highlights the importance of effective governance, liquidity, and interest rate risk management. As the banking system continues to face challenges, it is crucial for regulators and financial institutions to learn from past mistakes and take proactive measures to prevent future collapses.

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