Fed Supervisors Knew of SVB Risks, Failed to Act

The Federal Reserve's supervisors knew about Silicon Valley Bank's critical vulnerabilities as early as March 2022, but failed to act promptly to reduce those risks. According to an independent review announced by Fed Vice Chair for Supervision Michelle Bowman, SVB entered its March 2023 collapse with a combination of vulnerabilities, including unrealized securities losses exceeding its capital and a deposit base that was 94% uninsured.

The review, conducted by Starling Advisory Group, also found that inadequate preparations to borrow from the Federal Reserve's discount window contributed to the bank's collapse. Bowman commissioned the review after becoming vice chair for supervision in 2023, following her call for an examination independent of the Fed's internal review.

The preliminary findings challenge a widely cited explanation for the speed of SVB's collapse: social media. According to Charles River Associates' analysis for Starling, no evidence was found that social media triggered or accelerated the run, with 96% of social-media discussion about the run occurring after the bank's failure had become inevitable.

The Fed has already begun responding to some of the problems identified, including supervisory operating principles designed to focus examiners on material threats to banks and financial stability. Examination teams will also submit monthly reports directly to senior supervision officials identifying cases in which examiners are uncertain whether supervisory action is warranted or consistent with leadership expectations.