What caused the banking meltdown? Federal regulators testify

The financial regulators will testify about the collapse of Silicon Valley Bank and Signature Bank.

What caused the banking meltdown? Federal regulators testify

A top Federal Reserve official will tell lawmakers on Tuesday that Silicon Valley Bank collapsed because of mismanagement and sudden panic among depositors.

Michael Barr, vice-chairman of the Fed for supervision and Vice Chair of the Fed's Supervisory Committee, detailed in a prepared testimony that was released on Monday how SVB leadership had failed to manage interest rate risk and liquidity effectively.

Barr will testify before the Senate Banking Committee that "SVB's mismanagement is a textbook example."

Fed official explains that SVB’s late attempts to repair its balance sheet have only made things worse.

The bank took too long to fix its problems, and ironically the actions that it took to improve its balance sheet, triggered the run of uninsured deposits that ultimately led to its failure," Barr said, adding that the risk management and internal control were "inadequate."

On March 9, alone, SVB saw $42 billion in deposits withdrawn by panicked depositors. This panic was fueled partly by venture capitalists who urged tech startups to withdraw their funds.

Barr said that social media was flooded with talk of a run and that uninsured deposits acted fast to leave.

Barr revealed in his testimony that bank supervisors discovered "deficiencies", near the end 2021, with the bank's management of liquidity risk. This led to six supervisory findings relating to SVB’s liquidity stress tests, contingency funds and liquidity risk management.

Barr stated that in May 2022 supervisors will issue three findings relating to "ineffective board oversight", risk management weaknesses, and internal audit function failures. Last year, bank supervisors took additional steps that showed regulators were aware about problems at SVB.

Barr's testimony suggests that the Fed will review how the 2018 rollback Dodd-Frank could have contributed to SVBs failure. This rollback allowed SVB, then under President Donald Trump, to avoid stricter rules and stress tests on liquidity, funding and leverage.

Barr said that the Fed will evaluate whether applying these stricter rules to SVB helped it manage the risks which led to its failure.

Barr said that the recent events had highlighted how regulators need to enhance rules governing banks, and examine how social media, customer behaviour, rapid growth, and other developments have changed banking.