April 1, 2023 / VOLUME NO. 255

The Risk of Complacency

This past week, Michael Barr, the vice chair for supervision for the Federal Reserve, gave Congressional testimony saying Silicon Valley Bank failed “because the bank's management did not effectively manage its interest rate and liquidity risk."

Regulators knew about those risks, documented them and communicated them to management, according to Barr. Examiners issued multiple supervisory findings related to liquidity stress testing, contingency funding, liquidity risk management, ineffective board oversight, risk management weaknesses and internal audit between the end of 2021 and May 2022. By the summer of last year, supervisors rated the bank as “not ‘well managed’” and subjected it to growth restrictions. 

The size, swiftness and spread of the bank’s failures may mean a transformation in the regulatory regime, specifically for large bank holding companies such as Silicon Valley Bank’s SVB Financial Group that are still below the level of globally systemic banks. But as Silicon Valley Bank’s ultimate failure shows, there’s only so much regulation and supervision can do, Barr said. Regulators can’t convince a bank management team of risk and danger if management doesn’t see it for themselves. 

“We need to ask why the bank was unable to fix and address the issues we identified in sufficient time,” he said. “It is not the job of supervisors to fix the issues identified; it is the job of the bank's senior management and board of directors to fix its problems.”

I’m reminded of the phrase “Guarding against complacency,” which appeared in the Office of the Comptroller of the Currency’s 2022 Bank Supervision Operating Plan, back in October 2021. Rates were still low and deposits were plentiful, yet the OCC was telling its examiners — and its regulated banks — to be careful about believing the mythic calm would never change and to stay vigilant against emerging and building risks. 

It is too late now for bankers to undo the bets they made in 2020 and 2021, whether that’s making longer-duration loans or loading up on U.S. Treasurys. And it’s too late for Silicon Valley Bank. But it’s not too late for banks to shake off complacency, take those risks seriously and act accordingly.

• Kiah Lau Haslett, managing editor for Bank Director

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