Silicon Valley Bank: A Detailed Look at Its Downfall Despite Federal Reserve Warnings

All products recommended by Bizreport are selected by our editorial team, independent of our parent company. Some of our stories include affiliate links. If you buy something through one of these links, we may earn an affiliate commission.

fed (1)

Silicon Valley Bank, a California-based financial institution that specializes in serving tech startups, has collapsed after a run on the bank by its depositors. The bank’s failure was attributed to a series of governance and control issues, including a failure to heed warnings from the Federal Reserve and other regulators about its vulnerability to financial shocks and cybersecurity threats.

According to reports, Silicon Valley Bank had been on the Federal Reserve’s radar for some time. In 2021, the Fed conducted a review of the bank‘s operations and identified serious weaknesses in its handling of key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations to the bank, highlighting its poor performance in ensuring it would have enough easy-to-tap cash on hand in the event of a crisis.

Despite these warnings, Silicon Valley Bank failed to address its vulnerabilities. By July 2022, the bank was under full supervisory review and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the bank to discuss its ability to gain access to enough cash in a crisis and its possible exposure to losses as interest rates rose.

It became clear to the Fed that the bank was using flawed models to determine how its business would fare as the central bank raised rates. Its leaders were assuming that higher interest revenue would substantially help its financial situation as rates went up, but this was out of step with reality. By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies, but at that point, the bank’s days were numbered.

The picture that has emerged is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems, even as they were raised by Fed supervisors. For instance, according to a person familiar with the matter, executives at the bank were told of cybersecurity problems both by internal employees and by the Fed but ignored the concerns.

The Federal Reserve Bank system has 12 districts, and the one overseeing California had a board of directors that included SVB’s CEO Greg Becker. While board members do not play a role in bank supervision, the optics of the situation are bad.

The collapse of Silicon Valley Bank has sent shockwaves through the tech startup community, which had long relied on the bank for financing and other services. The bank’s clients included some of the biggest names in Silicon Valley, including Uber, LinkedIn, and Nest.

In the aftermath of the bank’s collapse, questions have been raised about the adequacy of regulation in the financial sector. Some observers have criticized the Federal Reserve for failing to take more decisive action to address the bank’s problems, while others have called for more robust regulatory oversight of the tech startup ecosystem.

The failure of Silicon Valley Bank is likely to have significant ripple effects throughout the financial system. It serves as a reminder that even in a booming economy, financial institutions can fail, and that regulators must remain vigilant in identifying and addressing potential risks. In the case of Silicon Valley Bank, it appears that its leaders failed to heed warnings and neglected their responsibility to ensure the bank’s long-term viability, ultimately leading to its downfall.

Share:
Share

ABOUT THE AUTHOR

Chinonso Dioha
Chinonso Dioha, MBA
Business Advisor & Analyst
Chinonso Dioha is a highly-skilled professional SEO article writer, data analyst, and web content specialist with over 3+ years of experience writing viral articles, SEO articles, blog posts, marketing articles, health articles, and financial articles. He possesses thorough expertise in high-quality research, meeting and surpassing editorial objectives, and delivering high-quality service. Specialities include metaverse, e-commerce, technology, business, call-to-action, buying guides, how-to – articles, product reviews, sales and lots more.

ABOUT THE REVIEWER

Kristina Knight-1
Kristina Knight, Journalist , BA
Content Writer & Editor
linkedin
Kristina Knight is a freelance writer with more than 15 years of experience writing on varied topics. Kristina’s focus for the past 10 years has been the small business, online marketing, and banking sectors, however, she keeps things interesting by writing about her experiences as an adoptive mom, parenting, and education issues. Kristina’s work has appeared with BizReport.com, NBC News, Soaps.com, DisasterNewsNetwork, and many more publications.

+ 3 sources

Bizreport Advisor adheres to strict editorial integrity standards avoids using tertiary references. We have strict sourcing guidelines and rely on peer-reviewed studies, academic research. To ensure the accuracy of articles in Bizreport, you can read more about the editorial process here.

  1. Supervisory Developments. Board of Governors of the Federal Reserve System. Accessed March 20, 2023. https://www.federalreserve.gov/publications/2019-may-supervision-and-regulation-report-supervisory-developments.htm
  2. Smialek J. Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems. The New York Times. https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html. Published March 19, 2023. Accessed March 20, 2023.
  3. Before collapse of Silicon Valley Bank, the Fed spotted big problems. Moneycontrol. Published March 20, 2023. Accessed March 20, 2023. https://www.moneycontrol.com/news/world/before-collapse-of-silicon-valley-bank-the-fed-spotted-big-problems-10279271.html