Treliant Takeaway…Federal Reserve Releases Review of Silicon Valley Bank

Federal Reserve Board Review of the Supervision and Regulation of Silicon Valley Bank (SVB)

• Source: federalreserve.gov

Treliant Takeaway:

The Federal Reserve Board (FRB) released its internal review of the supervision and regulation of SVB. These findings will likely bring additional regulatory focus to banking risk management and corporate governance. Treliant has developed regulatory readiness assessment scopes to support banks in enhancing risk management readiness to prepare for increased regulatory scrutiny.

Our teams are comprised of former industry executives (CROs, CCOs, CFOs), senior regulators (OCC and OTS), business leaders and technical experts with successful track records in managing risks and meeting regulatory expectations throughout regulatory and economic cycles. Our solutions are aligned to meet financial institutions needs covering Risk Management, Credit Solutions, Compliance and Operations, Financial Crimes and Fraud Compliance, Mortgage, Data and Analytics, and Managed Services.

Treliant’s experienced professionals will customize readiness assessments to meet each bank’s unique circumstances and needs as we have done through prior bank crisis challenges and regulatory reaction. 

Likely Areas of Increased Bank Regulatory Focus:

Balance Sheet Management – Liquidity, ALM/IRR, Concentrations, Modeling Risks, Capital Adequacy

Crisis Management – Leadership, Risk Mitigation, Communication, Stress Testing, Resolution Planning

Strategic and Reputation Risk – Strategic and Reputation Risk Assessments, ERM Capability Review, Adequacy of Board Credible Challenge

Credit Portfolio Review – Credit Monitoring, Concentrations, CECL/Stress Modeling, Loan Review, Asset Resolution

Corporate Governance – Risk Appetite, Risk Metrics/Reporting, Audit Scope, Board/Committee Actions, Compensation Incentives

Highlights:

The final report of the Federal’s supervision and regulation of Silicon Valley Bank released by Michael Barr, Vice Chair for Supervision provides a summary of key findings, additional recommendations for supervision and regulation, and a comprehensive report covering SVB’s history along with Federal Reserve’s oversight along the way.  The report provides a roadmap for financial institutions, particularly regional banks, to prepare for heightened regulatory focus and examination reviews.  Treliant outlined our key takeaways above and there are many others within the full report.

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

The FRB overview also highlighted several broader issues exposed in the failure of SVB, including the combination of social media coverage with a highly networked client base and rapid technology enable deposit withdrawals, as well as systemic impacts through contagion, and the need for strong capital. The FRB also stressed the need to continuously evaluate the supervisory or and regulatory framework, which will take time for drafting regulations or guidance, going out for public comment and finally issuing the documents. Any formal statutory changes would require action by Congress first and then a similar regulation drafting process.

The FRB outlines various recommendations under the headings of Stronger Supervisory Framework and Stronger Regulatory Framework. Key considerations in the Supervisory category include adoption of heightened standards, focus on concentrations, continuity across portfolios (i.e regional to large), higher capital and liquidity for weak risk management and strengthened culture. The Regulatory recommendations covered revisiting the $100 billion threshold for higher standards, and additional considerations for interest rate risk, liquidity risk, capital requirements, stress testing and compensation incentives.