Silicon Valley Bank Collapse: Regulators Caught Off Guard as Depositors Withdraw $42 Billion in a Day – Many to Blame

Regulators were caught off guard when depositors tried to pull over US$42 billion from Silicon Valley Bank (SVB) in a single day in early March, leading to a deposit flight across other regional banks. This “extraordinary scale and speed” of the run surprised officials, including Comptroller of the Currency Joseph Otting and Treasury undersecretary for domestic finance Nellie Liang. Representatives from both political parties expressed their disappointment over why regulators did not act more forcefully, despite the fact that Federal Reserve supervisors had raised issues with the bank for months.

Barr criticized SVB for not having a chief risk officer for months and how it modeled interest rate risk, but lawmakers said the response was not aggressive enough. Both the Fed and the Federal Deposit Insurance Corporation (FDIC) are expected to produce reports on the failure of SVB by May 1. The FDIC report will center around deposit insurance while the Fed’s report will concentrate on supervision and regulation.

Several lawmakers asked Barr to make available the Fed’s confidential communications around supervision. Barr told the House Financial Services Committee that he first became aware of stress at Silicon Valley Bank on the afternoon of March 9, but that the bank reported to supervisors that morning that deposits were stable. Gruenberg of the FDIC told lawmakers he also became aware of SVB’s stress that Thursday evening.

All three testifying said that regulators had sufficient tools to deal with the crisis once it happened, but Barr said the Fed could have done better on supervision. SVB and Signature became the second and third-largest bank failures in US history. Investors fled to safe havens like bonds while depositors moved funds to bigger institutions and money market funds.

Markets have since calmed after Swiss regulators engineered the sale of troubled Swiss giant Credit Suisse to rival UBS, and after SVB’s assets were sold to First Citizens Bancshares. However, investors remain wary of more troubles lurking in the financial system.

• The Fed was in discussions with Silicon Valley Bank the day before its collapse to move pledgable collateral to the discount window, a key facility long associated with providing emergency loans to banks. Some Democrats have argued that a 2018 bank deregulation law is to blame for the bank’s collapse. The White House is reportedly preparing plans for legislation that would reinstate those regulations on midsize banks.