Capitol Hill's SVB autopsy spotlights risks of tech and 'nontraditional' banks

This week, members of Congress from both sides of the aisle lobbed questions, and outright accusations, at regulators who they claim dropped the ball as Silicon Valley Bank took on a reckless risk profile in the years preceding its collapse in March.

A critical takeaway from these hearings is that regulatory systems are ill-suited to sufficiently assess the niche banking practices of lenders like SVB and Signature Bank, which enabled mismanagement and reckless risk-taking by members of the leadership teams at both banks. Regulators' inability to adapt their processes to modern banking practices is a piece in the puzzle of why the Fed's playbook failed.

"Recent events have showed that we must evolve our understanding of banking, particularly in light of changing technologies and emerging risks," Michael S. Barr, the Federal Reserve's vice chair for supervision, said in his opening remarks to the House Financial Services Committee. Barr added that the Fed's focus on bank size ignored risks posed by SVB's "nontraditional business model."

The bank run took hold so swiftly in part because SVB catered to a specialized depositor base that's highly connected, and the rise of tech-enabled banking facilitated a $42 billion outflow in a single day. SVB's specialization in the VC ecosystem meant that startups' high cash burn and declining venture investment hit the bank harder than others. SVB also had an unusual portfolio of Treasury and agency bonds, so when interest rates jumped up, its investments lost value.

"Clearly, many [SVB] customers forgot their own financial prudence," charged Rep. French Hill, R-Ark., during the session.

As early as November 2021, Fed supervisors were warning of problems at SVB and flagged six "matters requiring attention." But these issues were able to fly under the radar for months before facing aggressive scrutiny. By October 2022, when Fed supervisors raised concerns with SVB's CFO, the bank had been without a chief risk officer since April and had been issued with a composite liquidity rating of 3, or "not well managed."

"These events are a wake-up call," said Rep. Maxine Waters, D-Calif.

It took even longer for a fully-fledged review of the bank's practices to be launched. In mid-February of this year, Barr was made aware of SVB's interest rate risks. He was still awaiting the outcome of a full review when the bank run started.
 

SVB's collapse and the private market fallout: Complete coverage

Regulators attributed much of SVB's downfall to mismanagement, as well as reckless liquidity and interest rate risks, though they conceded that they may also have failed in their oversight duties.

"I don't mean to shirk responsibility here," Martin Gruenberg, chair of the FDIC, said in the House hearing. Barr, as well as Nellie Liang, the Treasury Department's undersecretary for domestic finance, reiterated his sentiment.

SVB marked itself out as an unusual lender. Its modus operandi was to cater specifically to the venture and startup world. It made a name for itself wining, dining and partying with Silicon Valley startup founders and VCs, and offering generous venture debt credit lines that early-stage founders couldn't find anywhere else. It had few depositors with accounts under the FDIC-insured limit of $250,000, and although many of its depositors eventually graduated to bigger banks, several stayed with SVB as they grew.

Before its collapse, SVB's top 10 accounts held a combined $13 billion in deposits.

What the hearings have illuminated is that federal regulators have no special provisions or monitoring system in place for such a nontraditional client base, nor for the crop of fintech neobanks that have sprung up over the last two decades.

Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., have introduced legislation that would re-impose the original $50 billion threshold at which a bank is considered a "systemically important financial institution" under the Dodd-Frank Act. In 2018 under the Trump administration, that threshold was raised to $250 billion.

Warren, a politician known for challenging corporate overreach and pushing for tougher financial regulation, pressed regulators on whether even stricter standards—covering capital and liquidity of all banks with assets over $100 billion—might be necessary to prevent future collapses.

Both the Fed and the FDIC will publish their reports on SVB's collapse on or before May 1. The Fed report will, Barr said, "take an unflinching look at the supervision and regulation of SVB before its failure," and include normally confidential supervisory information. The FDIC will publish two reports: one examining policy options for federal deposit insurance and a second, written by the FDIC's chief risk officer, covering the FDIC's own supervision of SVB.