California Bank Regulator Admits Fault in Silicon Valley Bank Failure

A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, Calif., on March 10, 2023. (Justin Sullivan/Getty Images)

California’s bank regulator stated in a new report that it was too slow to address the growing risks and issues at Silicon Valley Bank (SVB) and failed to push the troubled lender to fix its problems.

The California Department of Financial Protection and Innovation (DFPI) published a comprehensive review of what happened with SVB, admitting that staff were not fast enough to realize how large the company became during the coronavirus pandemic. DFPI officials also determined that regulators fell short of understanding the risks of banks becoming too big at such a rapid rate.

“SVB was slow to remediate regulator-identified deficiencies; and regulators did not take adequate steps to ensure the bank resolved problems as fast as possible,” the report stated.

“SVB’s unusually rapid growth was not sufficiently accounted for in risk assessments.”

In 2020, SVB had $57 billion in deposits, eventually peaking at $183 billion in 2022.

DFPI officials noted that rising interest rates contributed to liquidity hurdles amid falling deposits and investment losses.

The findings were similar to a recent 100-page U.S. central bank review spearheaded by Federal Reserve (Fed) Vice Chair for Supervision Michael S. Barr.

The Fed concluded that SVB executives and regulators were responsible for the company’s failures. The report noted that the board of directors and management did not tackle the company’s risks, Fed supervisors “did not fully appreciate the extent of the vulnerability” as it increased in size and complexity, and regulators did not employ sufficient measures to ensure SVB remedied its problems.

Michael Barr testifies at the Senate Banking, Housing, and Urban Affairs at the U.S. Capitol in Washington on May 19, 2022. (Tasos Katopodis/Getty Images)

“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” said Barr in a statement. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation.”

Meanwhile, the Federal Deposit Insurance Corp. (FDIC) also published a detailed overview of the banking turmoil, proposing three options for deposit insurance reform.

The FDIC concluded that targeted coverage—providing deposit insurance limits across account types—was the best option.

Social Media’s Role in Banking Turmoil

In addition to mismanagement and inadequate regulatory oversight, social media and digital banking technology fueled the bank runs on SVB and “contributed to its ultimate collapse,” the DFPI noted.

“Through the supervisory process, the DFPI will require banks to consider how to quantify and best manage existing and emerging risks posed by technology-enabled activities such as social media and real-time deposit withdrawals,” the report explained.

Fed researchers shared this view, citing social media as contributing to the banking turmoil.

“This run on deposits at SVB appears to have been fueled by social media and SVB’s concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed,” the Fed stated.

A 53-page working paper by a group of economists, titled “Social Media as a Bank Run Catalyst,” purported that conversations on Twitter helped fuel the SVB bank run and helped destabilize other financial institutions with abysmal balance sheets.

Is a Credit Crunch Forming?

The banking crisis and the central bank’s tightening efforts have had consequences for the broader economy as financial institutions tighten credit terms and witness loan demand fall.

According to the Fed’s much-anticipated quarterly Senior Loan Officer Opinion Survey (SLOOS), credit conditions for U.S. households and businesses tightened in the first few months of the year. It also revealed that more tightening standards are expected for the rest of 2023.

“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the release stated.

But the concerns surrounding liquidity positions, deposit outflows, and funding costs were more felt by mid-sized banks than their larger counterparts.

To prevent a contagion event in the banking system, the Fed, the Treasury Department, and the FDIC employed emergency measures in March to shield depositors and support the flow of credit to businesses and consumers.