Cantor: Feds weren’t paying attention in SVB failure

Silicon Valley Bank, Signature Bank, First Republic Bank and Credit Suisse have all found how difficult it’s been for American consumers to navigate the inflationary economy and keep solvent their investments and household budgets.

And while this banking crisis is nowhere near the banking collapse in 2008, which led to the federal taxpayer bailout of banks “too big to fail,” this crisis presents its own set of financial failures that should not have happened.

The Federal Reserve Board has monthly, quarterly, and annual reporting requirements for banks, with the data collected used for analyzing, and controlling the monetary and reserves requirements that each bank must maintain to remain solvent. The larger the institution, the more detailed and frequent the reporting. Thus, the mechanism for stress testing the financial viability of each large, regional, and community bank was in place, as was the mechanism to review the banks’ capital and liquidity.

Clearly, nobody at the Fed was paying attention to the data, as Silicon Valley Bank became the second largest bank failure in American history, a collapse that could and should have been avoided. It’s essential to ask what happened?

The journey to insolvency began in January 2019, when after receiving and analyzing documents that were circulated to employees of SVB’s venture capital division, the Fed issued a warning known as a “Matter Requiring Attention,” concerning SVB’s risk-management policies, a warning just below enforcement action. Then in 2020, the Fed again warned SVB that their systems to control risk did not meet the requirements for large financial institutions or bank holding companies with assets exceeding $100 billion. But warnings didn’t stop SVB.

During the onset of COVID-19 in 2020, SVB’s deposits grew rapidly, in part, fueled by government cash to offset the economic impact of the pandemic. Deposit growth continued in the first quarter of 2021 when the average level of interest-earning assets grew 76% as compared with the first quarter of 2020. The Federal Deposit Insurance Corp. (FDIC) data showed that SVB’s assets grew to $114 billon at the end of 2020, an increase from $70 billion in 2019. The rapid expansion of SVB continued as assets increased to nearly $209 billion by the end of 2021, with over 94% of SVB’s deposits uninsured.  The question is why SVB was allowed to double in size after the Fed raised concerns about SVBs risk management systems and why the Fed took no enforcement action when the weaknesses at SVB were apparent since 2019.

Then in 2022, as the Fed began increasing interest rates and removing $95 billion a month liquidity from the nations’ money supply to battle inflation, SVB found the value of its portfolio of mortgaged back securities and treasury bills tanking. The market value of SVB’s held-to-maturity bonds fell to $15.9 billion below their balance-sheet value at the end of September 2022, and slightly more than SVB’s $15.8 billion of total equity.

None of this happened overnight. SVB’s miserable financial condition had to be known months before its implosion. In fact, private stock analysts had warned about SVB’s exposure from interest sensitive investments, while regulators remained silent. With SVBs data screaming insolvency, how could bank regulators miss this?

It’s no time for politics. It’s time to get answers to the hard questions. This can’t happen again.

Martin Cantor is director of the Long Island Center for Socio-Economic Policy and a former Suffolk County economic development commissioner. He can be reached at [email protected].

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