The collapse of Silicon Valley Bank (SVB) and Signature Bank in the US have led to a review of the current regulatory regime by the country’s financial watchdogs.

While they say that the banking system is essentially sound, Federal Reserve vice chair for supervision Michael Barr said that he is conducting a comprehensive review of how agencies monitor banks. Federal Deposit Insurance Corporation Martin Gruenberg will also conduct a review, according to the news agency Reuters. 

Weaknesses

Barr said that his team had found deficiencies at SVB in 2021 and 2022 and had imposed restrictions on the bank’s ability to grow. But the full extent of those weaknesses only became apparent in March when the bank faced a run from investors.

“It is not the job of supervisors to fix the issues identified; it is the job of the bank’s senior management and board of directors to fix its problems,” his testimony to the US House of Representatives said.

“The picture that has emerged thus far shows SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank,” he added. Supervisors found poor interest rate and liquidity risk management.

Supervision review

Barr said that the Federal Reserve organised its regulatory activity around the size of a bank’s assets. But he said this measure is not always a good proxy for risk in banks that have non-traditional business models.

On the other hand, interest rate and liquidity risk are well-established financial sector risks. Barr said he would review whether supervisors could identify and mitigate risks at banks that pose a material threat to the bank – especially since the collapse of large financial institutions can have serious knock-on effects in the wider economy.

Warning

The Bank of England warned US regulators about the risks at SVB before its demise, according to the Financial Times. Governor Andrew Bailey said that it had been concerned about concentration risk.

“The concentration of clients was the ‘predominant’ driver of the PRA’s assessment of how much extra capital SVB UK had to hold on top of standard regulatory minimums, alongside the bank’s exposure to changes in interest rates,” the FT quoted Bailey as saying.