STATEWIDE – The California State Assembly Committee on Banking and Finance is holding an oversight hearing, May 10, to discuss the recent failure of Silicon Valley Bank, the second largest in US history. The committee will discuss where regulation and supervision fell short.
A recent Gallup poll found that amid turbulence in the U.S. banking system, nearly half of Americans are anxious about the safety of the money they have in accounts at banks or other financial institutions.
These findings are from a poll conducted April 3-25, a month after Silicon Valley Bank and Signature Bank collapsed. On the heels of these initial failures, First Republic Bank failed May 1. PacWest Bancorp says they’re exploring strategic options, including a potential sale or capital raising after shares dropped 40% on Thursday.
Silicon Valley Bank Failure
The upcoming oversight hearing is a reconvening of the committee’s informational meeting held at the beginning of April. According to the committee, Silicon Valley Bank’s collapse is due, in part, to its failure to manage risks.
According to the committee briefing document, Silicon Valley Bank was successful in banking with start-ups and venture capital customers, growing from around $60 billion to $209 billion between 2019 to 2022.
“However, SVB’s weaknesses began to emerge after the Federal Reserve raised interest rates to combat persistent inflation. Specifically, the Federal Reserve warned SVB leadership about the bank’s “interest rate risk,” which is a type of risk stemming from a changing interest rate environment,” said a statement of the Assembly Committee on Banking and Finance briefing document.
The committee says this interest rate risk, in combination with Silicon Valley Bank’s substantial amount of uninsured deposits (representing 88% of the bank’s deposits at the end of 2022) and a struggling tech sector, appear to have helped create the conditions for Silicon Valley Bank’s collapse in March 2023.
Silicon Valley Bank Collapse Timeline
- On Wednesday March 8, Silicon Valley Bank announced a sale of $21 billion in securities at a loss of $1.8 billion to raise liquidity and also announced it was conducting a capital raise. These announcements raised concerns among investors and customers that the bank could be in financial trouble.
- On Thursday, March 9, Silicon Valley Bank experienced a bank run as a growing number of the bank’s customers began to pull their money out of the bank. Silicon Valley Bank customers used social media and their personal networks to spread the word about pulling funds out of the bank. Approximately $42 billion was withdrawn from the bank in a single day, leaving Silicon Valley Bank with a negative cash balance of around $958 million.
- On Friday, March 10, the California Department of Financial Protection and Innovation took control of Silicon Valley Bank due to its inadequate liquidity and appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver of SVB. The FDIC announced that the insured portion of deposits (amounts less than $250,000) would be available to customers.
- On Sunday, March 12, purchaser bids for Silicon Valley Bank were due to the FDIC. According to testimony from the FDIC’s Martin Gruenberg, the FDIC received only one valid offer on the insured deposits and some of Silicon Valley Bank’s assets.
- On Sunday, March 26, the FDIC announced that it had sold most of Silicon Valley Bank’s assets to First Citizens Bank.
0% Reserve Requirement
Another factor to consider in Silicon Valley Bank’s collapse is the 0% reserve requirement. Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals.
The Federal Reserve announced, in March 2020, that the reserve requirement is being reduced to 0%.
“In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses,” says a March 2020 Federal Reserve press release.
As of November 2022, the 0% reserve requirement was still in effect.
Did regulators have concerns about Silicon Valley Bank?
The Federal Reserve provided some information about its supervision of Silicon Valley Bank and the issues identified by its examiners.
“Near the end of 2021, supervisors found deficiencies in the bank’s liquidity risk management, resulting in six supervisory findings related to the bank’s liquidity stress testing, contingency funding, and liquidity risk management,” said Federal Reserve Vice Chair for Supervision Michael S. Barr.
In addition, Barr says in May 2022, supervisors issued three findings related to ineffective board oversight, risk management weaknesses, and the bank’s internal audit function.