{"id":5352,"date":"2023-04-07T16:30:06","date_gmt":"2023-04-07T21:30:06","guid":{"rendered":"https:\/\/blogs.luc.edu\/compliance\/?p=5352"},"modified":"2023-04-07T16:30:06","modified_gmt":"2023-04-07T21:30:06","slug":"the-role-of-regulators-during-the-collapse-of-silicon-valley-bank","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/compliance\/?p=5352","title":{"rendered":"The Role of Regulators During the Collapse of Silicon Valley Bank"},"content":{"rendered":"

Kristen Salas Mationg<\/em><\/p>\n

Associate Editor<\/em>\u00a0<\/em><\/p>\n

Loyola University Chicago School of Law, JD 2024<\/em><\/p>\n

On March 10th<\/sup>, 2023, Silicon Valley Bank<\/a> (SVB) collapsed practically overnight, followed only two days later by the collapse of Signature Bank.\u00a0 Prior to its collapse, SVB uniquely served a single category of customers \u2013 start-ups.\u00a0 As the largest bank failure since the 2008 financial crisis, SVB\u2019s bankruptcy resulted in significant consequences for the tech industry.\u00a0 While SVB has since been acquired by First Citizens BancShares<\/a>, the House Financial Services Committee is currently seeking answers from both regulators and SVB executives about how such a failure could have occurred and how to prevent it from happening again.<\/p>\n

<\/p>\n

Where SVB went wrong<\/strong><\/p>\n

Before its collapse, SVB played a crucial role to start-up companies.\u00a0 Established in 1983, SVB offered many start-ups a form of credit that traditional banks found too risky because young companies are typically unprofitable. That debt, usually secured by a start-up\u2019s venture financing, helped companies survive until their next round of financing.<\/p>\n

While SVB\u2019s failure appears to have happened overnight, SVB\u2019s problems began with its investment decisions many years ago.\u00a0 When interest rates were low, virtually at zero percent, SVB invested billions of dollars in government bonds<\/a>.\u00a0 However, because of rising inflation, the Federal Reserve has raised interest rates to a range of 4.75 to 5 percent. Because higher interest rates lower bond prices, the Fed\u2019s decision to hike interest rates resulted in a significantly diminished value of SVB\u2019s bond portfolio.\u00a0 Additionally, due to rising interest rates, start-up companies began depositing less money in SVB because more money had to go toward the increased rate of borrowing.<\/p>\n

Ultimately, the bank collapsed on March 10th<\/sup> because SVB announced<\/a> that it lost nearly $2 billion selling assets after an unexpected decline in deposits.\u00a0 In panic, 25% customers yanked their deposits from SVB within 48 hours and the FDIC was forced to shut down the bank midday on Friday, March 10th<\/sup>.<\/p>\n

The role of the Federal Reserve, Treasury, and FDIC<\/strong><\/p>\n

In an attempt to find out how SVB\u2019s collapse occurred seemingly overnight, the House Financial Services Committee initiated hearings<\/a> on March 29th<\/sup>, 2023 to probe both regulators and SVB executives about why the bank failure was not prevented earlier.<\/p>\n

Seemingly, it was a combination of both bank management and a lack of regulator oversight that contributed to the bank\u2019s swift collapse.\u00a0 SVB reportedly went months without a Chief Risk Officer, and reported to supervisors that deposits were stable on March 9th<\/sup>, only a day before the bank\u2019s collapse.<\/p>\n

While the FDIC did step in quickly to shut down SVB once deposits were pulled, regulators\u2019 lack of supervision prior to the collapse left both Democrat and Republican lawmakers frustrated.<\/a>\u00a0 While regulators criticized SVB\u2019s lack of a Chief Risk Officer and poorly modeled interest rate risk, lawmakers pointed out that regulators failed to be aggressive about raising these issues with the bank.\u00a0 Though Fed Vice Chair of Supervision Michael Barr stated that the Fed had flagged problems with SVB as early as 2021, Senator Jon Tester responded<\/a> \u201cIt looks like regulators knew the problem, but no one dropped the hammer.\u201d<\/p>\n

While SVB\u2019s bank failure appears to be a result of poor bank management and a lack of aggression from regulators, officials from the Fed, FDIC and Treasury vowed to improve bank oversight during their Congressional testimony on March 28th<\/sup> before Senate and House finance committees.\u00a0 Specifically, regulators said that they would release reports<\/a> on May 1 detailing the management and regulatory supervision of the failed banks.<\/p>\n

The future of banking regulations<\/strong><\/p>\n

The White House, Congress, and regulators themselves are pushing for tougher banking regulations to protect consumers.\u00a0 On March 30th<\/sup>, 2023, the White House released a statement<\/a> urging regulators to strengthen safeguards and supervision for large regional banks, emphasizing that the Trump administration rolled back many regulatory requirements that could have prevented the collapse of SVB.\u00a0 Specifically, the Biden administration is calling for liquidity requirements and enhanced liquidity stress testing\u201d originally created under the Dodd-Frank Act in 2010, annual supervisory capital stress test requirements, mandating comprehensive resolution plans and \u201cstrong capital requirements for banks, at an appropriate time after a considerable transition period.\u201d<\/p>\n

These tightened regulations will inevitably result in more oversight from regulators in an effort to stabilize the banking system and to prevent a repeat of the sudden bank collapses seen this month.\u00a0 Because the administration\u2019s regulatory push does not require approval from Congress for regulators to implement these tightened changes, the administration hopes that regulators will take action and follow up on the White House\u2019s directive.<\/p>\n","protected":false},"excerpt":{"rendered":"

On March 10th, 2023, Silicon Valley Bank (SVB) collapsed practically overnight, followed only two days later by the collapse of Signature Bank.\u00a0 Prior to its collapse, SVB uniquely served a single category of customers \u2013 start-ups.\u00a0 As the largest bank failure since the 2008 financial crisis, SVB\u2019s bankruptcy resulted in significant consequences for the tech industry.\u00a0 While SVB has since been acquired by First Citizens BancShares, the House Financial Services Committee is currently seeking answers from both regulators and SVB executives about how such a failure could have occurred and how to prevent it from happening again.<\/p>\n","protected":false},"author":155,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[252,604,817,834,851,1953],"class_list":["post-5352","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-banking","tag-department-of-the-treasury","tag-fdic","tag-federal-reserve","tag-finance","tag-technology"],"_links":{"self":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/5352","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/users\/155"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5352"}],"version-history":[{"count":0,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/5352\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5352"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5352"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5352"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}