Federal Reserve, FDIC, NYDFS and GAO Release Reports on the Failure of Silicon Valley Bank and Signature Bank

April 28, 2023

Today, the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC) and New York State Department of Financial Services (NYDFS) each released the results of their reviews of the failures of Silicon Valley Bank (SVB) and Signature Bank.

Separately, the GAO released a report on its review of agency actions taken in connection with the bank failures.

FRB Report on SVB

The FRB report on SVB, which was based on a review requested by FRB Vice Chair for Supervision Michael S. Barr, identifies four key factors that contributed to SVB’s failure:

  1. SVB’s board of directors and management failed to manage their risks;
  2. Supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity;
  3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough; and
  4. The FRB’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

 

In connection with the release of the report, Vice Chair Barr released a letter stating that “we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned [from the failure of SVB].”  The letter describes several areas of focus for potential changes in the FRB’s supervisory approach and regulatory framework.  The FRB also published six years of examination reports and supervisory letters related to SVB—materials that would ordinarily constitute confidential supervisory information that is not available to the public. 

FDIC and NYDFS Reports on Signature Bank

The FDIC report on Signature Bank, which was prepared by the FDIC’s Chief Risk Officer, Marshall Gentry, concludes the “root cause of [Signature Bank’s] failure was poor management,” stating that the bank’s board and management “pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls.”  The report also examines FDIC supervisory actions in connection with Signature Bank, and highlights the role of uninsured deposits and a client concentration in digital asset companies as contributing factors to the bank’s failure.

In connection with the release of the report, FDIC Chairman Martin J. Gruenberg released a statement acknowledging that the report “identifies areas where the FDIC’s supervisory efforts could have been more timely, forward looking, and forceful” and “includes thoughtful recommendations on matters for further study by the FDIC related to examination guidance, processes, and resources.”

The NYDFS report on Signature Bank similarly focuses on the rapid growth of the bank and issues with its risk control framework and liquidity risk management, and identifies areas for improvement with respect to NYDFS supervisory practices.

GAO Review

Separately, the GAO released a report on its review of agency actions taken in connection with the failures of SVB and Signature Bank.  The GAO report attributes “[r]isky business strategies along with weak liquidity and risk management”, rapid growth and reliance on uninsured deposits as contributing to the bank failures.  The report also examines supervisory actions taken prior to the bank failures, the actions taken by the U.S. Treasury, FDIC, and the FRB to invoke the systemic risk exception to the FDIC’s least cost resolution mandate, and the factors the Federal Reserve and Treasury considered to establish and backstop the Bank Term Funding Program (BTFP).

For additional information, please see:

  • FRB Press Release (link)
  • FRB Report (link)
  • SVB Supervisory Materials (link)
  • FDIC Press Release (link)
  • FDIC Report (link)
  • FDIC Chairman Statement (link)
  • NYDFS Press Release (link)
  • NYDFS Report (link)
  • GAO report (link)

Clients with questions should reach out to any of their regular contacts at Cleary Gottlieb or any of the partners or counsel listed on our website under Banking and Financial Institutions or Bankruptcy and Restructuring.

Additional Cleary Gottlieb content regarding SVB, Signature Bank and related developments can be found here.

Cleary Gottlieb is a trusted resource in the financial sector for clear and up-to-the-minute guidance on the evolving regulatory landscape. Our preeminent banking and bankruptcy and restructuring practices have been intimately involved advising the private sector and governments in times of crisis, including the 2008 financial crisis and in the federal government’s actions to stabilize the economy during the COVID pandemic. We have extensive experience advising banking institutions and their depositors, creditors, and investors through the FDIC resolution process.