March 19, 2023
Yesterday’s post argued that the Fed must have known about SVB’s problems — and yet didn’t force the bank to de-risk. Today the New York Times finally focused on this issue.
The key points of the NYT article can be summarised briefly:
- “In 2021, a Fed review…found serious weaknesses in how [the bank] was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco… issued six citations…But the bank did not fix its vulnerabilities.
- “By July 2022, Silicon Valley Bank was in a full supervisory review…and was ultimately rated deficient for governance and controls.
- “Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.”
Then comes the absolutely critical point. The Fed has mounted an internal investigation into what went wrong. According to the NYT, the review will look at:
- “whether supervisors believed they had authority to escalate the issue, and if they raised the problems to the level of the Federal Reserve Board.”
In other words, it’s possible that the bank simply ignored Fed staff because staff concerns did not get the proper attention and support of Fed management.
Why not? Could it have something to do with the fact that the head of SVB was on the board of the SF Fed?
The Fed’s review is due on May 1. Even before that, we’ll get some answers pretty quickly, as the House of Representatives is launching hearings on March 29.