The Federal Reserve's Early Warning to Silicon Valley Bank

　　Early Signs of Trouble

　　The Federal Reserve's bank supervisors alerted Silicon Valley Bank's management as early as the fall of 2021 about the risks stemming from its unique business model, according to a top Fed official. However, the bank's managers failed to take the necessary steps to address the identified issues.

　　Michael Barr, the nation's top banking regulator, stated during a Senate Banking Committee hearing that the Fed is considering whether stronger bank rules are needed to prevent similar bank failures in the future.

　　Senate Banking Committee Hearing

　　The Senate Banking Committee hearing marked the first formal congressional inquiry into the March 10 collapse of Silicon Valley Bank and the subsequent failure of New York-based Signature Bank, the second- and third-largest bank failures in U.S. history.

　　The failures caused financial tremors in the U.S. and Europe, prompting the Fed and other government agencies to back all deposits at the two banks, despite nearly 90% of both banks' deposits exceeding the $250,000 insurance threshold. The Fed also established a new lending program to facilitate banks' access to cash if needed.

　　Financial Impact and Regulatory Review

　　The Federal Deposit Insurance Corp. (FDIC) estimated that resolving the two banks, including reimbursing depositors, would cost its insurance fund $20 billion, the largest impact in its history. The FDIC plans to recoup these funds through a levy on all banks, likely passed on to consumers.

　　The Fed's review of the Silicon Valley Bank collapse will consider the need for stricter regulations, including whether supervisors have the necessary tools to follow up on their warnings. The review will also examine the adequacy of liquidity and capital requirements for banks over $100 billion, which would have included Silicon Valley Bank.

　　Testimony and Analysis

　　Martin Gruenberg, chairman of the FDIC, and Nellie Liang, the Treasury undersecretary for domestic finance, also testified before the Senate Banking Committee. On Wednesday, all three testified before a House committee.

　　Gruenberg emphasized the importance of protecting depositors to prevent a broader bank run, which could have severe consequences even for healthy banks. He highlighted the significant deposits held by the top 10 depositors at Silicon Valley Bank, reflecting the wealth of its customers.

　　Democratic senators attributed the failures, in part, to the softening of stricter bank regulations enacted by the 2010 Dodd-Frank law in 2018. The 2018 law exempted banks with assets between $100 billion and $250 billion from maintaining sufficient cash or liquidity to cover 30 days of withdrawals. It also reduced the frequency of stress tests for banks of that size.

　　Economists and financial experts provided differing views on the role of regulations in the Silicon Valley Bank collapse. Some argued that the 2018 regulatory rollback contributed to the bank's vulnerability, while others maintained that the bank's business model was fundamentally flawed and would have struggled even with stricter liquidity requirements.

　　Criticism and Questions for the Fed

　　The Fed has faced criticism for its oversight of Silicon Valley Bank and its failure to prevent the collapse. Fed staffers had informed the central bank's board of governors about the risks posed by rising rates and the bank's risk-taking, but the full extent of the bank's vulnerability became apparent only during the unexpected bank run on March 9.

　　As the review of the collapse continues, Fed officials are likely to face tough questions from both parties in Congress about the adequacy of supervision and the need for stronger regulations to prevent similar failures in the future.