Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (Part 2 of 2)
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recognize that their year-long
program for their risk-management framework to meet EPS was ineffective, until supervisors
started identifying issues in late 2021. Consultants who did the initial 2020 EPS gap assessment
with respect to SVBFG practices and helped execute the plan to close those gaps also failed to
design an effective program. During the Governance and Risk Management examination, the Fed-
eral Reserve’s CPC met with the incoming chair of the board of directors to communicate several
observations from the examination. Observations included that the board had failed to establish
appropriate risk management, internal governance structures were inadequate given SVBFG’s
growth, the board lacked large bank experience, and that internal audit coverage was inadequate.
The examination findings and the failure of management and the CRO to recognize the weak-
nesses in the consultant’s gap assessment and plan led to supervisors’ and SVBFG’s conclusion
that the CRO did not have the experience necessary for a large financial institution. The CEO
Supervision of SVBFG by Critical Risk Areas 49
indicated in February 2022 the intent to replace the CRO, who subsequently left SVBFG in April.
While it is the responsibility of the businesses and functions like finance and treasury to manage
risk in a safe and sound way in accordance with the board of directors’ risk appetite, the vacancy
in a post like CRO removes one layer of important internal oversight. Despite the CEO’s active
search for a new CRO, supervisors could have cited the violation of section 252.33(b) of Regula-
tion YY using an MRIA.78 In consultation with Board staff, supervisors decided not to issue the vio-
lation since the firm was actively searching for a CRO with the appropriate skills and experience.
The Governance and Risk Management examination highlighted a number of fundamental and crit-
ical weaknesses that provided the support for the downgrade of the LFI Governance and Control
rating to “Deficient-1” and the CAMELS Management and Composite ratings to “Less-than-
Satisfactory-3” on August 17, 2022.79 These broad deficiencies contributed to the management
failures highlighted in the liquidity and interest rate risk sections of this report. The difference
between a Deficient-1 and Deficient-2 rating is whether the findings “put the firm’s prospects for
remaining safe and sound through a range of conditions at significant risk” (Deficient-1) or the
findings instead “present a threat to the firm’s safety and soundness, or have already put the firm
in an unsafe and unsound condition” (Deficient-2).
The supervisory team, Reserve Bank leadership, Board staff, and the national LFBOMG agreed
that SVBFG’s safety and soundness did not appear threatened at the time of the rating. Financial
performance was still considered satisfactory, so the risk-management deficiencies did not appear
to threaten safety and soundness. They did not yet recognize the building liquidity and interest
rate risk. By early 2023, when SVBFG’s liquidity and interest rate risk profile had deteriorated,
and risk management was not making sufficient impact, a Governance and Control rating of
“Deficient-2” should have been considered.
SVBFG was responsive to concerns articulated in meetings and in the Governance and Risk
Management examination report. In April 2022, the CRO left the organization. New risk officers
with large bank experience were hired. While the search to fill the CRO position took until
December 2022, independent risk management was run by a committee of the senior risk offi-
cers. Many of these officers were new and “still completing baseline assessments,” according to
the August 17, 2022, letter.80
SVBFG board of directors materials from August 29, 2022, provided a summary of gaps in the
firm’s risk-management program, two full years after the initial efforts to meet EPS (figure 18).
78
12 C.F.R. § 252.33(b) requires a bank holding company to appoint a chief risk officer with appropriate experience to
manage the risks of a large, complex firm.
79
SVBFG and SVB 2021 Supervisory Ratings letter, August 17, 2022.
80
SVBFG and SVB 2021 Supervisory Ratings letter, August 17, 2022.
50 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Figure 18. SVBFG internal risk management gap assessment
Source: SVBFG internal material, August 29, 2022.
Supervision of SVBFG by Critical Risk Areas 51
The review of these materials provides indications that management was only addressing issues
in response to supervisory findings rather than being proactively focused on safe and sound
operation of the firm. SVBFG’s materials seemed focused on compliance with EPS or responding
to supervisory findings, rather than managing the actual risks of the firm. They had not yet demon-
strated that strong risk management, internal audit, and board oversight are critical to the safe
and sound operation of an institution.
Conclusions
The supervisory record shows that the Federal Reserve supervisors identified many, but not all,
of the relevant issues with respect to Governance and Controls. The SVBFG supervisory team
detected concerns related to governance and risk management starting in late 2021 through a
series of meetings and the risk-management findings of the liquidity examination. Based on the
supervisory record and interviews, certain factors impacted the pace at which supervisors acted
on those concerns.
The increasing requirements and the supervisory portfolio transition were one set of key factors.
Supervisors had rated SVBFG as “Satisfactory-2” in May 2021, only a few months before the
larger, more experienced team took over. When the new team observed weaknesses in governance
and risk management late in 2021, they were reluctant to issue a downgrade within seven months
of the issuance of the prior rating without doing more examination work to support a change in
view and related action.
A second factor was a focus on the apparent strong financial performance of SVBFG. Supervisors
saw financial performance and the lack of realized risk outcomes during this period as offsets to
underlying concerns related to governance and risk management.
Finally, in some instances, supervisors saw progress on remediation of supervisory findings or
risk-management gaps as positive developments on a relative basis, rather than citing the gap
that continued to exist relative to baseline expectations. An example of this is the CRO vacancy
in 2022. Supervisors could have cited the absence of a CRO as a violation of the EPS but waited
while SVBFG continued the ongoing search.
Liquidity Supervision
Overview
Liquidity is a financial institution’s capacity to meet its cash and collateral delivery obligations at a
reasonable cost.81 Liquidity risk is the risk that an institution’s financial condition or overall safety
and soundness is adversely affected by an inability (or perceived inability) to meet its obligations.
81
SR letter 10-6.
52 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
For SVB, an acute liquidity risk event on March 9–10, 2023, rapidly led to failure as depositors
lost faith in the ability of SVB to meet its obligations.
Liquidity risk is inherent in banking as a primary purpose of financial institutions is to serve as
a credit intermediary through gathering of short-term deposits and lending longer-term funds.
In performing this function, maturity transformation occurs as customer deposits are generally
shorter-term in nature (e.g., demand deposit accounts) than the loans financial institutions make
(e.g., 30-year mortgages). Although maturity transformation provides a key economic function, it
also gives rise to liquidity risk as depositors may request their funds back in a timeframe that is
not aligned with the timeframe within which a financial institution has invested the funds. SVBFG
relied on a concentrated and largely uninsured deposit base to fund the bank, and when depositor
faith was lost, SVB was not able to meet depositor withdrawal requests in part because of the
maturity transformation inherent in its business activities.
Due to the materiality of liquidity risk to financial institutions, regulatory authorities have extensive
requirements and expectations for the sound management of liquidity risk. SVBFG was subject to
SR letter 10-6 and the EPS of Regulation YY during the period reviewed. These expectations and
standards specify a range of sound liquidity risk-management practices, including board and
senior management oversight, establishment of liquidity risk tolerances, internal liquidity stress
tests (ILSTs), and contingency funding plans (CFPs), among other areas. SVBFG’s liquidity risk-
management practices were fundamentally flawed across multiple standards and were a direct
contributing factor to SVBFG’s failure.
Consistent with SVBFG’s governance and risk-management weaknesses, SVBFG’s capabilities for
managing liquidity risk were not suitable for a $200 billion firm. SVBFG’s funding inherently relied
on large, concentrated, and uninsured deposits. This construct, coupled with broadly deficient
liquidity risk-management practices, created an environment where SVBFG was neither prepared
for nor capable of responding to the acute liquidity event in March 2023. Throughout the period of
SVBFG’s rapid growth while in the RBO portfolio, supervisors also did not consistently identify and
communicate changes in SVBFG’s risk profile and the weakness in SVBFG’s liquidity risk manage-
ment. Supervisory assessments after SVBFG’s transition to the LFBO portfolio were more reflec-
tive of SVBFG’s practices; however, shortcomings in judgment and a slow pace to further act on
concerns led to missed opportunities for early intervention or to require timely remediation.
Liquidity Supervision of SVBFG in the RBO Portfolio
Supervisors communicated a consistently positive assessment of SVBFG’s liquidity position and
liquidity risk-management practices while SVBFG was in the RBO portfolio. This review found a
combination of factors that contributed to the underappreciation of liquidity risks and material
risk-management weaknesses that were not being appropriately identified.
Supervision of SVBFG by Critical Risk Areas 53
Supervision of Liquidity Risk Positions
While in the RBO portfolio, SVBFG’s balance sheet was growing and overwhelmingly skewed toward
large, uninsured deposits in non-maturity accounts from VC-backed and private equity clients. Fur-
ther, a substantial portion of SVBFG’s assets consisted of unencumbered investment securities,
with an increasing proportion designated as held-to-maturity (HTM) by 2021.
Liquidity risk analysis for firms in the RBO portfolio commonly relies on simple regulatory
reporting-based metrics and firms’ internal risk reporting. On the surface, SVBFG’s liquidity risk
appeared to be substantially mitigated by its growing deposit base and a large proportion of
assets invested in low-credit risk securities. In the case of SVBFG, these regulatory reporting
metrics and the firm’s risk reporting were not suitable for assessing the risk profile of the specific
deposit base.
Supervision of Liquidity Risk Management
Due in part to SVB’s “Strong-1” Liquidity rating and the perceived low level of inherent risk, the
examination of liquidity risk-management practices during the annual CAMELS and BHC exams
was not extensive. RBO “risk-focusing guidelines” led staff to conduct lighter reviews of areas
where either inherent risk was considered low or risk-management practices were satisfactory.
Typically, one person would cover multiple assignments (e.g., liquidity, interest rate risk, and the
investment portfolio).
Liquidity risk management was not thoroughly examined, and material gaps in supervisory con-
clusions occurred. Supervisory correspondence on liquidity risk management was consistently
favorable and included direct references to SVBFG’s practices being aligned with interagency guid-
ance. Later discussion of the 2021 Liquidity Target examination shows that a more thorough and
well-staffed examination by Federal Reserve subject matter experts revealed foundational issues.82
The limited scope approach to liquidity risk-management reviews at SVBFG and a lack of horizon-
tal perspectives may have contributed to the missed opportunities for more critical supervisory
assessments.
The impact of these supervision weaknesses is that SVBFG’s size and risk profile substantially
outpaced liquidity risk-management practices, and SVBFG was materially unprepared for the EPS
requirements that would come into effect.
82
SVBFG Liquidity Planning Target Supervisory letter, November 2, 2021.
54 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Supervisory Work in the LFBO program
Foundational liquidity risk-management weaknesses were identified in the first key supervi-
sory event after the transition to LFBO, the liquidity risk-management examination beginning in
August 2021.83 The review covered a baseline assessment of ILST, liquidity risk limits, and the CFP,
relative to interagency guidance in SR letter 10-6 and Regulation YY EPS. The liquidity examina-
tion was led by the FRBSF and included a broader set of Federal Reserve System subject matter
experts. Additionally, staff stated that use of work programs designed for LFBO firms, specifically
documents used by the HLR program, aided their ability to assess practices and consider expecta-
tions for firms subject to Regulation YY.
The examination cited foundational liquidity risk-management weaknesses across all areas
reviewed. Importantly, the weaknesses were assessed to be gaps relative to both interagency guid-
ance—applicable to banks of all sizes—and Regulation YY EPS that reflect heightened standards
for firms like SVBFG. In total, six supervisory findings were delivered in a November 2021 feed-
back letter: two MRIAs and four MRAs (table 8). These findings became the support for a liquidity
rating of “Conditionally Meets Expectations” and a downgrade of the CAMELS Liquidity rating to
“Satisfactory-2” in August 2022.
Table 8. Synopsis of SVBFG supervisory findings from the November 2021 letter on the liquidity
examination
Issue type Issue synopsis
MRIA Develop a plan to improve liquidity risk management practices to meet supervisory expectations and regulatory
requirements. The plan must address the supervisory findings, including liquidity stress testing and contingency
funding plans.
MRIA The independent liquidity risk function and internal audit provide insufficient oversight of risk management. SVBFG’s
liquidity risk profile has evolved, with recent inflows being concentrated in uninsured deposits. Independent review functions
have not kept pace.
MRA The primary ILST scenario does not sufficiently stress liquidity exposures and relies on assumptions that are not appropriate
for the firm. Deposit assumptions rely on incomparable peer benchmarks. The scenario is designed to evolve over time
rather than reflect a more immediate liquidity stress event.
MRA The approach to assessing risk in deposits for ILST does not appropriately consider key risk attributes (e.g., product and
customer type), which limits the ability to differentiate deposit risks in stress. The shortcomings in deposit segmentation
negatively impact the reliability of SVBFG’s liquidity buffer.
MRA Liquidity risk limits and supporting processes are insufficient for the size and complexity of activities. The static measures
used by SVBFG do not reflect correlations or stress outcomes.
MRA Multiple CFP deficiencies, including the lack of assessing potential funding sources and needs in stress and insufficient
testing of potential funding sources. Assumptions of available funding resources in a stress scenario are unrealistic.
Source: Federal Reserve communications with SVBFG, November 2, 2021.
83
SVBFG Liquidity Planning Target Supervisory letter, November 2, 2021.
Supervision of SVBFG by Critical Risk Areas 55
Supervisors, however, did not associate the foundational nature of the findings with concerns
about the adequacy of SVBFG’s liquidity position. Supervisors continued to assess SVBFG’s
inherent liquidity risk profile favorably in the August 2022 CAMELS and LFI ratings letter, stating
“…actual and post-stress liquidity positions reflect a sufficient buffer…”.84 Supervisors primar-
ily relied on the comparatively large percentage of the balance sheet held in cash reserves and
investment securities, and SVBFG’s estimated coverage relative to the U.S. LCR reduced require-
ments as drivers of the favorable liquidity position assessment.
Based on the severity of the six findings from the 2021 liquidity examination, however, a more
negative assessment (e.g., “Deficient-1” for Liquidity) would have been supportable. For example,
the severity of the concerns on ILST alone may have been sufficient to warrant a negative view on
the adequacy of SVBFG’s liquidity position. Since the Global Financial Crisis, ILST has become the
industry and supervisory standard for measuring an individual firm’s liquidity risk profile and deter-
mining required levels of liquidity. Without an acceptable ILST, it is difficult to determine whether a
firm’s liquidity position is adequate or deficient.
Evolution of Liquidity in 2022
In addition to monitoring SVBFG’s remediation progress from the 2021 liquidity examination,
supervisors were tracking developments impacting SVBFG’s risk profile. The deterioration of
SVBFG’s liquidity profile was evident in reporting by SVBFG, such as the results of its ILST. Super-
visors were moving toward including these adverse developments in supervisory communications
(e.g., likely rating downgrades upon the completion of the 2023 HLR and the in-process MOU).
However, these communications did not materialize in a timely manner, and at times assessments
relied on supervisory judgment that did not show elevated concerns for the actual liquidity posi-
tion, only risk-management practices.
Consistent with the weaknesses in liquidity supervision during the RBO period, multiple factors
contributed to an underappreciation of liquidity risk and lack of timely communication of concerns.
• Declines in client deposits in 2022:Q2. Market conditions contributed to reductions in client
deposits at SVB in the second quarter of 2022 as technology and venture clients were drawing
down their balances. At a May 24, 2022, monthly liquidity continuous monitoring meeting,
SVB management highlighted targeted actions, such as pricing promotions, to attract and retain
deposits, but at this time there were no material signs of stress. The June and July information
provided by SVB on the newly implemented ILST highlighted weakness in the liquidity
risk profile.
84
SVBFG and SVB 2021 Supervisory Ratings letter, August 17, 2022.
56 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
• Shortfalls in internal liquidity stress tests in 2022:Q3. In response to the 2021 Liquidity
examination MRAs, SVBFG developed and implemented an updated ILST. SVBFG became
subject to the Regulation YY EPS on July 1, 2022, including a 30-day liquidity buffer based
on ILST results (figure 19).85 SVBFG reports show there was not a sufficient balance of highly
liquid assets that could be readily sold or “monetized.” SVBFG management and supervisors
characterized the 30-day deficit as an “operational shortfall” because of deficiencies in
SVBFG’s contingent funding options and current capabilities for executing these options.
Conversely, the 90-day deficit was viewed as a “real shortfall” (i.e., SVBFG did not have
sufficient liquidity to meet projected outflows in the timeframe). SVBFG management planned
to undertake86 actions by year-end 2022 to expand capacity for repurchase agreement
funding and managing aspects of the funding structure and investment portfolio to remediate
the modeled shortfalls. The 2022 LFI and CAMELS ratings letter assessed the liquidity
position as adequate, and concerns were focused on the 2021 Liquidity examination issues.
SVBFG, however, was apparently out of compliance with the Regulation YY 30-day liquidity
buffer requirement and the modeled shortfalls represented a material safety-and-soundness
concern. Given the apparent violation of Regulation YY, an MRIA providing a directive to the
board and senior management to immediately take action to remedy the ILST deficit through
Figure 19. Summary of SVBFG internal liquidity stress test
Source: SVBFG internal material, June 21, 2022.
85
12 C.F.R. § 252.35(b).
86
Source: SVBFG internal materials.
Supervision of SVBFG by Critical Risk Areas 57
raising additional liquidity would have been appropriate. The liquidity ratings should have been
downgraded.
• Deposit pressures continue to erode SVBFG’s liquidity position in 2022:Q3. As deposit
outflows increased, the ILST shortfalls increased. Despite modeled shortfalls of roughly
$18 billion for the 30-day point at August 31, 2022, and roughly $23 billion for the 90-day
point at September 30, 2022, the supervisory record displays that the assessment of inherent
liquidity risk did not materially change and the assessment of liquidity risk-management
practices was improving.
• Management recognizes liquidity risk in 2022:Q4. Year-to-date deposit trends and potential
risks heading into 2023 were first substantively reported by bank management to the SVBFG
board of directors in 2022 in board materials.87 They highlight the deposit trends and financial
risks facing SVBFG and the actions being considered to restructure the balance sheet. The plan
presented by bank management at the November 2022 board of directors strategy meeting
indicates more significant measures were deemed necessary to improve SVBFG’s liquidity
and protect against the risk of continued deposit pressures and to meet modeled liquidity
needs over the 30- and 90-day points (figure 20). Importantly, these materials and supporting
Figure 20. Presentation to the SVBFG board on potential balance sheet management actions
Source: SVBFG internal material, November 8–9, 2022.
87
Source: SVBFG internal materials.
58 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
discussions from the continuous monitoring meetings continued to characterize the ILST 30-day
shortfalls as “operational” rather than substantive breaches of Regulation YY.
• Management responses in 2022:Q4. Most significantly, management began actions to address
liquidity pressures by increasing Federal Home Loan Bank (FHLB) advances, initiating efforts
to increase repurchase agreement capacity and incorporating new stress assumptions that
lowered liquidity requirements, among other actions. Most substantively, management targeted
changes to ILST assumptions in October 2022 that had the effect of reducing the size of the
modeled liquidity shortfall. They updated methodologies for unfunded lending commitments and
intraday liquidity that reduced requirements in the combined scenario at the 30-day horizon by
approximately $8 billion and $5 billion, respectively. Supervisors were aware of these changes
and planned to evaluate their reasonableness during the upcoming 2023 HLR assessment of
ILST. Management’s intent behind the changes is not clear from SVBFG governance materials
or interviews with supervisors. However, based on the materially less-conservative nature of
the changes and the timing coinciding with periods of severe ILST shortfalls, it would have
been reasonable for supervisors to express concern with SVBFG’s liquidity position and risk-
management practices. Changing model assumptions, rather than improving the actual liquidity
position, is not an appropriate way to restore compliance with limits.
2023 Horizontal Liquidity Review
HLR is the Federal Reserve System’s horizontal program for evaluating liquidity risk at LFBO firms.
HLR is an annual exercise to assess select liquidity risk-management practices, and SVBFG
participated for the first time in 2023. Supervisors viewed this assessment as critical for the
SVBFG liquidity rating. SVBFG was in-scope for the ILST and buffer monetization workstreams,88
as well as a review of SVBFG’s progress against outstanding supervisory issues from the 2021
Liquidity examination. The HLR team had not yet conducted internal vetting sessions to calibrate
and finalize recommended supervisory feedback prior to SVBFG’s failure, so these are not final
conclusions.
The preliminary HLR assessment was that SVBFG’s ILST did not meet supervisory expectations
and an MRIA would be recommended. Specific areas of concern focused on SVBFG’s insufficiently
supported deposit outflow speed assumptions and, to a lesser degree, the recent changes to
make lending commitments and intraday assumptions less conservative. Regarding the deposit
outflow concerns, supervisors determined that SVBFG had insufficiently supported a key assump-
tion that a material portion of deposit outflows in stress would not occur until days 31–90. To
88
SVBFG 2023 LFBO Horizontal Liquidity Review Entry Letter, November 17, 2022. Buffer monetization refers to a firm’s
ability to sell high-quality liquid assets/highly liquid assets against regulatory requirements set forth in Regulation YY,
Regulation WW (if applicable), and safety-and-soundness expectations established in SR letter 10-6.
Supervision of SVBFG by Critical Risk Areas 59
remediate this concern, additional deposit outflows would likely have been incorporated inside
30 days, leading to further deterioration in the ILST 30-day metric.89
Regarding the buffer monetization workstream, the preliminary HLR assessment was that material
weaknesses remained in SVBFG’s CFP, particularly the quantification, evaluation, and operational
testing of contingent funding sources. The most significant concerns related to SVB’s insufficient
monetization capacity and options for repurchase agreement funding as well as the lack of oper-
ational testing of all contingent funding sources, particularly the discount window. SVBFG’s ILST
shortfall remediation plan from July 2022 cited the need to expand capacity and options for repo
funding, including increased bilateral relationships, FICC direct membership, tri-party, and the Fed-
eral Reserve’s Standing Repurchase Agreement facility, among other sources.90 These efforts were
not complete by March 2023.
Liquidity in 2023
Supervisory engagement with SVBFG in January and February 2023 occurred through continuous
monitoring meetings, and the supervisory record shows supervisors had limited concerns on the
liquidity position. Only concerns with liquidity risk management practices were communicated to
SVBFG, not the substantive liquidity positions. SVBFG’s internal materials included incrementally
more detailed updates on the heightened liquidity risk profile. SVBFG management highlighted
to its board that the CFP remained activated on the lowest level, efforts continued to pursue the
funding restructuring initiatives (i.e., FHLB advances, brokered CDs, and unsecured term debt)
discussed in November 2022, and breaches persisted on some risk metrics. However, neither the
January nor February 2023 board meeting materials indicate any increasing consideration of the
restructuring options that would be enacted in March 2023.
Supervisors had limited interaction with SVBFG management about the proposed restructuring
prior to the events of March 8 and after. After the public announcement on March 8, the DST
increased the frequency of communication as SVBFG provided updates on its rapidly evolving
liquidity situation. Supervisors focused on the potential for the firm to pledge additional collateral
to the FHLB or the discount window, but SVBFG’s inadequate preparedness to access contingent
funding sources likely contributed to the failure of the bank on the morning of Friday, March 10.
The acute liquidity stress on March 9 was far beyond historical precedents for how quickly a large
financial institution can fail. Still, weaknesses in SVBFG’s preparedness for a contingent liquidity
89
Supervisors noted that sensitivity analysis was conducted to assess the potential impact on ILST if additional deposit
outflows from days 31–90 were included inside 30 days; results indicated a worst-case scenario of an additional
$27 billion of deposit outflows within 30 days.
90
Source: SVBFG internal materials.
60 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
event may have contributed to SVBFG’s inability to access contingent funding sources in a time of
need. SVBFG was not able to monetize (immediately raise funds against) its investment securities.
SVBFG had not arranged for enough access to repo funding and had not signed up for the Federal
Reserve’s Standing Repurchase Agreement facility. SVBFG had limited collateral pledged to the
Federal Reserve’s discount window, had not conducted test transactions, and was not able to
move securities collateral quickly from its custody bank or the FHLB to the discount window. While
contingent funding may not have been able to prevent the failure of the bank after the historic run
on the bank, the lack of preparedness may have contributed to how quickly it failed.
Conclusions
This review of the supervisory record shows that the Federal Reserve supervisors identified some,
but not all, of the liquidity risk-management issues that proved pivotal in the failure of SVBFG.
Moreover, supervisory responses, in hindsight, were not rapid enough given the widespread defi-
ciencies at SVBFG, deteriorating financial conditions, and the specific combination of shocks that
SVBFG faced.
From the perspective of RBO supervision, supervisors relied heavily on asset liquidity to evaluate
liquidity risk, which led to an underappreciation of the inherent risks in SVBFG’s distinctive deposit
base and growing investment in HTM securities. Moreover, standard liquidity risk metrics and the
risk-focusing guidelines routinely used in the RBO portfolio proved inadequate for SVBFG. Because
of the perception of a strong liquidity position, supervisors did not pursue extensive risk-manage-
ment reviews and supervisory staffing remained relatively light, despite the rapid growth of SVBFG.
From the LFBO perspective, supervisors did not appropriately assess the liquidity impacts of
emerging signs of liquidity stress and SVBFG’s increasingly material balance sheet restructuring
efforts. Supervisors did not accurately reflect the implications of ILST liquidity shortfalls in the
assessment of liquidity. As a result, liquidity ratings for SVB and SVBFG were not appropriately
updated in 2022 and 2023 to reflect the multiple data points that displayed fundamental weak-
nesses in the liquidity position and risk-management practices. This combination left SVBFG
acutely vulnerable to the shocks that materialized.
Interest Rate Risk and Investment Portfolio Supervision
Background
Sensitivity to market risk reflects the degree to which changes in interest rates, foreign exchange
rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or
capital.91 For SVB and SVBFG, market risk primarily reflects exposure to changing interest rates.
91
Board of Governors of the Federal Reserve System, Commercial Bank Examination Manual.
Supervision of SVBFG by Critical Risk Areas 61
Supervisors and regulators recognize that some degree of interest rate risk (IRR) is inherent
in the business of banking.92 At the same time, however, institutions are expected to have
sound risk-management practices in place to measure, monitor, and control IRR exposures.
SR letter 10-1 emphasizes the importance of effective corporate governance, policies and proce-
dures, risk-measuring and monitoring systems, stress testing, and internal controls related to the
IRR exposures of institutions. The framework begins with sound corporate governance and covers
strategies, policies, risk controls, measurements, reporting responsibilities, independent review
functions, and risk-mitigation processes. Importantly, effective IRR management not only involves
the identification and measurement of IRR, but also provides for appropriate actions to control
this risk.
The key metrics used to measure IRR include
• Earnings at risk (EaR) or net interest income (NII) at risk: This is an IRR metric that captures
short-term exposure to interest rate movements. It measures NII volatility generally over a one-
year horizon based on yield curve shocks. For example, firms will shock interest rates by 100,
200, or more basis points (bps) in either direction then estimate the impact to NII. A variety of
different yield curve shocks and twists can be used for this exercise. Deposit assumptions are
important for this analysis as firms must assume the amount of the market rate movement
they will pass through to deposit accounts (also known as “deposit betas”).
• Economic value of equity (EVE): This is an IRR metric that estimates the structural
mismatches of a bank balance sheet relative to yield curve movements. It is often viewed as a
longer-term measure as it is a discounted cash flow approach that estimates the present value
(PV) of balance sheet cashflows to estimate economic equity (PV of assets – PV of liabilities
= economic value of equity). The IRR portion of this exercise comes from shocking interest
rates by various amounts (e.g., +/− 100, 200, or more bps) to estimate exposures as cashflow
paths change. Deposit assumptions are important in this exercise, so cashflows must be
estimated based on customer characteristics.
Interest Rate Risk Management at SVBFG
SVBFG had fundamental weaknesses in risk management. SVBFG management was focused on
a short-term view of IRR through the NII metric and ignored potential longer-term negative impacts
to earnings highlighted by the EVE metric. Management believed that SVBFG was asset sensitive,
meaning NII would increase in rising rate environments, but did not consider idiosyncratic risks
to SVBFG or the uniqueness of its customer base and the manner in which it could be impacted
by rate increases. SVBFG had risk-measurement weaknesses as highlighted by SVBFG’s internal
audit weaknesses and lack of governance and controls. SVBFG did not conduct back-testing, had
92
Board of Governors of the Federal Reserve System, “Interagency Advisory on Interest Rate Risk,” SR letter 10-1
(January 11, 2010), https://www.federalreserve.gov/boarddocs/srletters/2010/sr1001.htm.
62 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
limited sensitivity testing, and did not have an adequate second line function to provide review and
challenge to decisions and model assumptions.
SVBFG’s interest rate risk policy, which is a firm’s governing document for the management and
measurement of IRR, exhibited many weaknesses.93 The policy did not specify scenarios to be
run, how assumptions should be analyzed, how to conduct sensitivity analysis, or articulate model
back-testing requirements. Further, there was no description of how limits were set and calibrated.
It was also not apparent that limits had been reviewed for potential recalibration or that the cur-
rent level of the limits had been supported since at least 2018. Management should ensure limits
are appropriate for a firm’s business model, earnings base, and capital position. Lastly, the policy
did not specify the ongoing reporting requirements for threshold breaches over prolonged periods.
Interest Rate Risk Modeling, Limits, and Reporting
SVBFG’s risk appetite statement (RAS) set by the board, which sets limits within which the bank
controls the risk, only included the NII metric and not the EVE metric. Further, the NII metric was
included only as a down 100 bps 12-month ramp instead of a range of plausible shocks. Ramp
scenarios gradually adjust rates and are less stressful than an immediate rate shock. The NII met-
ric is a short-term view of risk. In the 2017 RAS, it states that managing interest rate risk within
defined policy limits allows the firm to achieve a level of profitability that enhances shareholder
value.94 It is clear that NII and profitability were the focus for SVBFG.
As EVE was not part of the risk appetite, there is no evidence that the full board was aware of the
status of the EVE metric or that it was breaching limits for years. Communication of the EVE limit
breaches did, however, go to the Risk Committee of the board. The board of directors is responsi-
ble for overseeing the establishment, approval, implementation, and annual review of IRR man-
agement strategies, policies, procedures, and risk limits. The full board should understand and
regularly review reports that detail the level and trend of the institution’s IRR exposure.
SVBFG only used the most basic IRR measurement. Only parallel rate curve changes were mod-
eled. Non-parallel shifts were not being reported to the Asset/Liability Committee (ALCO). Non-
parallel shifts allow management to understand the sensitivity of the portfolio to different move-
ments in the shape of the yield curve and are an important piece in understanding IRR sensitivity.
The ALCO was provided with sensitivity analysis that showed the impact of shifts in key model
assumptions only on an infrequent basis.
SVBFG’s IRR results showed that there was a mismatch between the repricing of assets and
liabilities on the bank’s balance sheet. The results showed that SVBFG had historically been
93
Source: SVBFG internal materials.
94
Source: SVBFG internal materials.
Supervision of SVBFG by Critical Risk Areas 63
asset sensitive, which means that NII increased as rates increased. This was due to the nature of
SVBFG’s balance sheet that had consisted of predominantly non-interest-bearing deposits on the
liability side and a mix of floating rate loans and fixed rate securities on the asset side. SVBFG
expected to benefit in a rising rate environment, as it generally assumed that deposit betas would
be low.
In response to EVE breaches, SVBFG made model changes that reduced the level of risk depicted
by the model. In similar fashion to the response to liquidity shortfalls, management changed
assumptions rather than the balance sheet to alter reported risks. In April 2022, SVBFG made
a poorly supported change in assumption to increase the duration of its deposits based on a
deposit study conducted by a consultant and in-house analysis.95 Under the internal models in
use, the change reduced the mismatch of durations between assets and liabilities and gave the
appearance of reduced IRR; however, no risk had been taken off the balance sheet.96 The assump-
tions were unsubstantiated given recent deposit growth, lack of historical data, rapid increases in
rates that shorten deposit duration, and the uniqueness of SVBFG’s client base.
Balance Sheet Mismanagement
In early 2022, at a time when rates were rising rapidly, SVBFG became increasingly concerned
with decreasing NII if rates were to decrease, rather than with the impact of rates continuing to
increase. This was based on observed yield curve inversion that could be an indication of an
impending recession and a subsequent decrease in rates. The bank began positioning its balance
sheet to protect NII against falling interest rates but not rising ones. SVBFG was very focused on
NII and profits and the NII sensitivity metrics were showing that NII was exposed to falling rates.
Rising rates were seen as an opportunity to take profits on hedges, and the bank began a strategy
to remove hedges in March 2022, which were designed to protect NII in rising rate scenarios but
also would have served to constrain NII if rates were to decrease. Protecting profitability was
the focus.
This strategy of removing hedges extended the duration of the securities portfolio and caused
the EVE metric to worsen throughout 2022 (figure 21). SVBFG was expecting the deposit duration
lengthening would be an offset to the increasing investment portfolio duration, but this only pro-
vided temporary relief from the EVE metric breaching limits. Instead, rates rose, investment portfo-
lio duration lengthened, deposits shifted from non-interest bearing to interest bearing, and liability
duration fell.97 This mismatch of durations on the asset and liability sides of the balance sheet
caused the EVE metric to worsen and breach SVBFG’s EVE limits once again. Importantly, there
95
Source: SVBFG internal materials.
96
Source: SVBFG internal materials.
97
Source: SVBFG internal materials.
64 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Figure 21. SVBFG EVE sensitivity in a +100bp shock scenario
Note: Data as of October 2022.
Source: SVBFG internal material, December 16, 2022.
was no evidence that management made the full board aware that the EVE metric was breaching
limits for years.
SVBFG’s margins were getting squeezed and the models were not able to keep pace. As SVBFG
experienced non-interest-bearing deposit outflows in 2022, it shifted to more costly interest-
bearing deposits and wholesale borrowings. In July 2022, firm management stated that this shift
in funding mix was actually a good thing because it gave interest expense some room to fall in a
down-rate scenario. In July 2022, SVBFG removed the rest of the hedges protecting NII from rising
rates, and management started to think about adding hedges to gain NII if rates were to decrease.
SVB remained steadfast in its commitment to protecting NII in down-rate scenarios but did not
protect against rising rate environments.
Compounding the poor balance sheet management was a lack of oversight by independent risk
management and internal audit. SVBFG had a Financial Risk Management group, but it acted more
in collaboration than as an effective challenge to the business. Internal audit had findings related
to incorrect data inputs, inadequate governance of IRR models, and inaccurate NII position dating
back to December 2020 but did not have the internal stature to drive remediation.
Federal Reserve Supervision
SVB’s CAMELS rating for Sensitivity to Market Risk was “Satisfactory-2” from 2018 until the 2022
CAMELS vetting on November 1, 2022, when it was planned to be downgraded to “Less-than-
Satisfactory-3.” The downgrade was not finalized or issued because SVB failed before the letter
Supervision of SVBFG by Critical Risk Areas 65
was sent to the firm. During the initial vetting of the 2022 CAMELS exam on October 11, 2022,
the Sensitivity rating remained “Satisfactory-2”.
Subsequent to that vetting, SVBFG’s models were no longer showing an increase in NII from rising
rates as was previously reported. SVBFG management indicated that NII and NIM would decline in
the fourth quarter of 2022, and net income would decline substantially by year-end 2022. Based
on this new information, there was a follow-up vetting for the Sensitivity rating on November 1,
2022. Supervisors issued an MRA on IRR simulation and modeling (table 9).98
Table 9. Synopsis of SVBFG supervisory finding from the November 2022 letter on interest rate risk
Issue type Issue synopsis
MRA SVBFG’s interest-rate risk simulations are unreliable. The simulation forecasts are directionally inconsistent with actual
performance. Net interest income and the net interest margin both fell, while the model predicted increases.
Source: Federal Reserve communications with SVBFG, November 15, 2022.
Conclusions
A review of the supervisory record shows that Federal Reserve supervisors identified some but
not all of the interest rate risk-management issues that contributed to the failure of SVBFG.
Supervisory responses for IRR were not rapid or severe enough given the fundamental issues in
this area that actually drove poor decisions at SVBFG.
Beginning in the RBO portfolio, Federal Reserve supervisors did not conduct an in-depth review
of IRR and investment portfolio management. Instead, IRR and the investment portfolio were
assessed through CAMELS exams that focused on key assumption changes and new models,
versus reviewing IRR models and risk-management practices. Only one examiner was responsible
for reviewing IRR and the investment portfolio, and, in some cases, would also review liquidity
and model risk management (MRM) during a two-to-three-week timeframe. That level of resources
proved insufficient.
Examiners’ conclusions with respect to SVBFG’s IRR practices highlighted several areas of con-
cern that were either not raised as findings or were communicated as written advisories or verbal
observations. Limit breaches with respect to the EVE metric were evident in the 2020, 2021, and
2022 CAMELS exams. In the 2020 CAMELS exam, the examiner proposed an advisory on the lack
of escalation, monitoring, and taking actions to remediate breaches. Additionally, in several
CAMELS exams (2020, 2021), examiners identified issues related to lack of sensitivity testing,
98
SVB 2022 CAMELS Examination Supervisory letter, November 15, 2022.
66 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
back-testing, gaps with policies, ineffective control functions, and lack of oversight from senior
management and the board of directors. During the 2021 CAMELS exam, the examiner proposed
an observation related to lack of sensitivity testing of key assumptions. Still, the lack of controls
and oversight demonstrate fundamental weaknesses in risk management that should have been
communicated to SVBFG through an MRIA.
SVBFG’s transition from RBO into the LFBO portfolio did not materially increase the level of
supervisory scrutiny of interest rate risk for some time. The LFBO supervisors conducted quar-
terly monitoring meetings with corporate treasury and the CFO, some of which should have
raised supervisory concern. In January 2022, SVBFG discussed increasing the duration of its
deposit assumptions. The proposed change was not aligned with SVBFG’s actual experience. In
April 2022, SVBFG presented a gap assessment against SR letter 10-1, highlighting fundamen-
tal weaknesses, such as limited scenarios, limited behavioral models, lack of timely reporting,
data quality issues and limited data quality controls, and limited formal governance and review of
results. At that time, supervisors did not document any supervisory concerns, changes to ratings,
or changes to the 2022 supervisory plan.
After the firm transitioned to the LFBO portfolio, the supervisory team discussed conducting an
IRR exam during 2022 but decided to defer this to the third quarter of 2023 in order to priori-
tize governance and liquidity exams. During 2022, coverage of SVBFG’s management of IRR was
mainly through continuous monitoring and the 2022 CAMELS exam with limited scope on IRR
where one examiner was responsible for multiple risks. In the fall of 2022, management identified
that internal IRR models were unreliable, and supervisors issued an MRA. Supervisors should
have conducted comprehensive IRR and investment portfolio reviews, with adequate resources,
and communicated findings through MRIAs. Exams staffed with limited resources, high-level scope,
lack of IRR regulations, and the high-level nature of existing guidance (SR letter 10-1) all impeded
supervisors from conducting a thorough assessment.
Overall, Sensitivity to market risk had been rated Satisfactory for many years, which reduced the
urgency to conduct a deep-dive IRR review because supervisory planning is risk-focused, and areas
with findings or that are poorly rated garner more supervisory focus.
67
Additional Topics
Federal Reserve Surveillance and Risk Analysis
The Federal Reserve System (FRS), including the Board of Governors and Reserve Banks, pro-
duces a wide range of surveillance, analysis, and reports related to supervised institutions
and the broader financial system that are available to examiners and staff around the FRS.
These reports provide context for bank-specific supervision by identifying industry trends and
emerging risks.
Internal Surveillance Reports
Internal surveillance reports issued during 2022 and early 2023 highlighted several fundamen-
tal risks that were central to SVBFG’s failure, including rising interest rate risk and liquidity risk,
as well as more idiosyncratic risks to SVBFG such as its technology-sector focus and deposit
concentration.99
Several reports produced by the Board of Governors across portfolios cited rising interest rate risk
throughout 2022. For example, the Board produces a broad Supervision Risk Report twice a year,
which includes “top risks” and “watch list” risks. Interest rates and inflation became “watch list”
issues in mid-year 2022 and “top risks” by the year-end 2022 report. In particular, the year-end
2022 report identified the potential impact of higher rates on asset values, liquidity and earnings,
and credit conditions (figure 22).
The theme of higher rates was the focus of a special report on risks associated with unrealized
losses on investment securities in June 2022. SVBFG was included in a list of banks with the
highest ratios of unrealized losses relative to common equity tier 1 (CET1) capital and was larger
than any bank ranked higher. Other reports during the second half of 2022 continued to warn of
interest rate risk and added rising concerns around liquidity risk, more generally.
A separate set of reports focuses on the LFBO portfolio, and several included SVBFG-specific
commentary. A 2021:Q4 report indicated SVBFG was in breach of internal policy limits for eco-
nomic value of equity (EVE) at risk and a modest outlier on the benefit to EVE from a −100bps
rate shock. During 2022, LFBO reports cited interest rate risk and liquidity risk as elevated
and identified deposit competition and post-pandemic outflows as challenges for LFBOs includ-
ing SVBFG, which was identified alongside others as experiencing outflows. Two reports noted
risk-management concerns at SVBFG as well.
99
Surveillance reports may contain confidential supervisory information related to other institutions that are continuing
to operate.
68 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Figure 22. Summary from year-end 2022 Supervision Risk Report
Source: Internal Federal Reserve report.
Finally, several reports produced by the FRBSF surfaced relevant risk themes. The materials
highlighted the 12th District as having a higher share of non-maturity deposits (NMDs) than
pre-pandemic and that the level of NMDs/total assets exceeded that of other Federal Reserve
Districts. By 2022:Q4, it was reported that 12th District banks’ outflows of NMDs were more rapid
than in other Districts and that this may be explained by the higher exposure to NMDs exceeding
$250,000. FRBSF also runs LFBO surveillance screens on a quarterly basis. SVBFG failed earn-
ings screens from 2022:Q1 onwards and began failing the screen for liquidity as of 2022:Q4.
Finally, a 2022:H1 monitoring report noted that SVBFG may face higher credit risk given its
start-up focus, was ranked medium risk on unrealized losses/accumulated other comprehensive
income (AOCI), and was viewed as high risk on deposit mix and competition.
Additional Topics 69
Supervision Committee
The Federal Reserve Supervision Committee (SC) includes senior staff from the Federal Reserve
Board and the officer in charge of supervision at each Reserve Bank and leads the execution of
the Federal Reserve’s supervisory responsibilities, including the identification of significant super-
visory issues.
In late 2021 and then again in September 2022, the SC heard presentations around supervisory
planning that included SVBFG. In September 2022, the committee heard the results of an LFBO
foundational supervisory plan project. This presentation discussed the framework utilized for
supervisory resource allocation decisions and noted SVBFG was assigned to cohort 4 (the lowest
tailoring category), resulting in a lower level of examination resources.
The 2021 System Risk Report, reviewed by the SC, did not include interest rate risk or liquidity risk
as “top risks” and was more focused on risks from the low interest rate environment at that time.
By late 2022 and early 2023, however, the SC meetings featured liquidity and interest rate risk on
numerous occasions. Presentations in September and October focused on risks from rising rates,
including unrealized securities losses, negative tangible common equity (TCE), FHLB lending limits,
and the supervisory approach to managing these issues.
Discussions around liquidity risk intensified in February 2023 and included a report on LISCC and
LFBO high-quality liquid asset trends, RBO and CBO loan to deposit ratios, and discount window
use; a roundtable discussion focused on tightening liquidity conditions, including liquidity profiles,
liquidity risk management, the link between unrealized losses and non-core funding sources and
held-to-maturity classifications, and the potential impact on minority depository institutions; a dis-
cussion of the effectiveness of supervision and examiner training related to elevated liquidity risk;
and an update on inflation and rising rates moving from “watch list” to “top risks” and enhanced
monitoring efforts in these areas.
Large and Foreign Banking Organization Management Group (LFBOMG)
A review of meeting documents from 2021, 2022, and 2023 showed several instances where
SVBFG and related risks were discussed by the LFBOMG. This section focuses on horizontal per-
spective and broader risk issues.
The LFBOMG first discussed SVBFG in May 2021 when the group received an initial overview as
SVBFG joined the portfolio. A discussion of the 2022 horizontal liquidity review (HLR), which did
not include SVBFG, noted that internal liquidity stress testing was a heightened area of focus in
light of removal or relaxation of the liquidity coverage ratio (LCR) for some banks in 2019.
70 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
In August 2022, the LFBOMG reviewed horizontal capital exam (HCE) and HCR results. SVBFG was
part of the HCR that included current expected credit losses (CECL), Internal Audit, and several
idiosyncratic elements (Risk Identification, Scenario Design, Capital Plan). The results for SVBFG
were weaker than average with SVBFG described as “partially consistent with expectations”
for CECL and Internal Audit and generally consistent with expectations for the idiosyncratic ele-
ments.100 The material included a discussion around AOCI, but only for banks that were covered
under the HCE, which did not include SVBFG because of its size.
The LFBOMG also held an August 2022 discussion on supervisory planning around proposed risks
for 2023. Within a plan to cover the “top risks” of the macroeconomic and geopolitical environ-
ment, post-pandemic surge deposit flows and interest rate risk (IRR) management were listed as
“watch list” items for focus within cross-portfolio discussion groups. It was noted in August 2022
that the System Risk Council would be including interest rate risk as a watch area for 2022.
In January 2023, the LFBOMG met to discuss supervisory assessments. Staff noted that SVBFG’s
Governance and Controls rating would remain at “Deficient-1,” that SVB’s CAMELS “S” rating
would be downgraded for interest rate sensitivity, and the group had no concerns regarding these
ratings. It was noted that the Liquidity rating could be up- or downgraded going forward, depending
on the future path of deposit outflows. The notes also include a mention of a February 14, 2023,
meeting with the Board on supervision topics (discussed below), including the impact of rising
rates on AOCI and FHLB borrowing with specific reference to SVB.
Federal Reserve Board Briefing
The Board of Governors received an informational briefing on February 14, 2023, entitled “Impact
of Rising Rates on Certain Banks and Supervisory Approach.”101 This presentation highlighted the
range of impacts of rising rates on banks, including rising net interest margins for most banks,
but potentially large unrealized market value losses in investment securities for some. The report
concluded that banks with large unrealized losses “face significant safety and soundness risks.”
The briefing concluded with a discussion of supervisory next steps, including conducting internal
training and raising industry awareness through an “Ask the Fed” session and external articles.
Staff identified SVBFG as an example of financial risks including a discussion of SVBFG executing
its CFP, a planned downgrade of SVB’s CAMELS “S” sensitivity rating to “Less-than-Satisfactory-3,”
a supervisory MRA around IRR modeling, and heightened supervisory attention. SVBFG was cho-
sen as an example of supervisory concerns at a large bank with substantial exposure to interest
rate risk.
100
SVBFG 2022 LFBO Horizontal Capital Review Supervisory letter, August 19, 2022.
101
Board of Governors of the Federal Reserve System, “Impact of Rising Rates on Certain Banks and Supervisory
Approach,” S&R Quarterly Presentation, February 14, 2023.
Additional Topics 71
External Federal Reserve Risk Perspective
The Federal Reserve Board of Governors publishes a semiannual Supervision and Regulation
Report each May and November to inform the public and provide transparency about its supervi-
sory and regulatory policies and actions, as well as current banking conditions.
The May 2022 report assessed banking system conditions as strong, even as geopolitical ten-
sions and associated risks were rising.102 Capital and liquidity were assessed as strong and
ample, and the report noted technology and innovation-related risks as priorities.
The November 2022 report assessed the financial condition of banks as generally sound.103
Expanding net interest margins were noted as a positive factor as interest rates rose, balanced
by declining values of investment securities and the potential for rising credit risk associated with
floating rate loans. A box on the “Effects of Securities Depreciation on Banks’ Capital and Liquidity
Positions” showed the impact of higher rates on securities valuations and the associated risks.
Finally, the report noted that supervisors were focused on remediation of supervisory findings as
well as monitoring the potential effects of the current economic environment on banks’ operations
and condition.
Federal Reserve Banks also periodically release information relating to top risks and areas of
focus for supervision in their respective Districts. These assessments are not uniform across
Districts and include presentations made to local bankers and banking associations, banking
conference materials, speeches by senior supervisory officers, and periodic reports for use by the
public and banking community. Given the range of formats, the level of detail provided on each risk
varies considerably.
A review of this material shows that core banking risks such as liquidity, capital, asset quality,
commercial real estate, and interest rate risk featured most prominently across Reserve Banks.
The figure below reports the number of Reserve Banks where a publication cited a specific risk;
for example, liquidity risk was included in documents published by seven separate Reserve
Banks.104 Secondary topics included crypto, earnings (related to compressing margins), cyber risk,
and balance sheet trends (figure 23).
102
Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Gover-
nors, May 2022), https://www.federalreserve.gov/publications/files/202205-supervision-and-regulation-report.pdf.
103
Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Gover-
nors, November 2022), https://www.federalreserve.gov/publications/files/202211-supervision-and-regulation-
report.pdf.
104
Where a Reserve Bank provided multiple published documents and the same risks were included, only one instance of
the risk is recorded for purposes of the figure. This reflects material from 10 Reserve Banks. Two Reserve Banks did
not publish risk information.
72 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Figure 23. Risks highlighted in Reserve Bank publications
Liquidity
Capital
Asset quality
Commercial real estate
Interest rate risk
Crypto
Earnings
Cyber
Balance sheet trends
Operational resiliency
Economic conditions
Climate
BSA/AML
Fintech
Reputational risk
0 1 2 3 4 5 6 7 8
Source: Review of public Reserve Bank risk-related reports, presentations, and speeches between March 2022 and
March 2023. List is indicative and not necessarily exhaustive.
Conclusions
This review of the Federal Reserve surveillance and analysis shows a broad-based approach that
considers a wide range of traditional risks across portfolios. Overall, this analysis appears largely
fit for purpose and consistent with the mandate of the Federal Reserve with a strong appreciation
of how macroeconomic and financial topics can impact traditional banking risks. The issues most
relevant to the failure of SVBFG—rising interest rates, impact on securities valuation, and liquidity
pressure—were identified, analyzed, and escalated. The reviews did not consider the potential for
extreme tail events like a rapid outflow of deposits or the systemic implications of broad runs on
uninsured deposits.
It is unclear how these assessments actually informed the supervisory process or outcomes. The
discussion with the Board of Governors on February 14, 2023, for example, was informational in
nature rather than focused on the significant risks to safety and soundness or systemic risks.
Incentive Compensation
Supervision of performance management and incentive compensation (PM/IC) programs of large
financial institutions is typically covered as part of the evaluation of a firm’s board effectiveness.
This can include governance exams with a board effectiveness component or horizontal exam-
inations of board effectiveness. Supervisors may also conduct targeted exams to review the
PM/IC programs at large firms. Additionally, incentive compensation programs are covered under
Additional Topics 73
compliance exams (to ensure misconduct or policy violations are being reflected in compensation)
and material business line exams.
The overarching assessment of board effectiveness at a firm informs its overall Governance and
Controls rating.
Supervisory Expectations for Incentive Compensation Policies
Examiners use several supervisory guidance documents for supervision of performance man-
agement and incentive compensation, assessing if a firm’s programs pose safety and sound-
ness concerns. The Board, together with the Office of the Comptroller of the Currency (OCC) and
the Federal Deposit Insurance Corporation (FDIC), has outlined its supervisory expectations for
incentive compensation arrangements in the 1996 Interagency Guidelines Establishing Standards
for Safety and Soundness (1996 Safety and Soundness Guidelines) and the 2010 Interagency
Guidance on Sound Incentive Compensation Policies (2010 Incentive Compensation Guidance).
Under the 1996 Safety and Soundness Guidelines, the Board has noted that compensation
involving amounts paid that are “unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal shareholder” is prohibited as an unsafe and
unsound practice.105
Similarly, the 2010 Incentive Compensation Guidance was designed to help ensure that incen-
tive compensation policies do not encourage irresponsible risk-taking and are consistent with
safe and sound banking practices.106 The 2010 Incentive Compensation Guidance applies to all
Board-supervised firms and is based on three main principles.107 First, a firm’s incentive compen-
sation arrangements should not incentivize employees to take risks that are beyond the firm’s
ability (or willingness) to effectively identify and manage. Second, incentive compensation arrange-
ments should be compatible with effective risk management and controls. Finally, incentive com-
pensation arrangements at firms should be supported by strong corporate governance practices,
including active and effective oversight by boards of directors.
In addition to the 1996 Safety and Soundness Guidelines and 2010 Incentive Compensation
Guidance, supervisory expectations regarding incentive compensation governance arrangements
105
12 C.F.R. pt. 208, app. D-1.
106
Guidance on Sound Incentive Compensation Policies, 75 Fed. Reg. 36,395 (June 25, 2010), https://www.
federalregister.gov/documents/2010/06/25/2010-15435/guidance-on-sound-incentive-compensation-policies.
107
Guidance on Sound Incentive Compensation Policies. If incentive compensation payments are too closely tied to short-
term revenue or profits, without appropriate adjustments for the risks associated with the business generated, the
potential for the incentive compensation arrangement to encourage irresponsible risk-taking may be strong. In addition,
incentive compensation arrangements should be implemented so that actual payments vary based on risks or risk
outcomes.
74 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
and practices for certain institutions are contained in the Board’s Supervisory Guidance on Board
of Directors’ Effectiveness.108
The Board also has issued regulations with specific requirements for the compensation of individ-
uals performing certain roles at Board-regulated institutions.109 Further, the Board, together with
five other federal financial regulatory agencies, issued proposals in 2011 and 2016 to implement
the incentive compensation provisions in section 956 of the Dodd-Frank Act. An implementing rule,
however, has not yet been finalized.
Coverage of Incentive Compensation at SVBFG
The RBO and LFBO exam teams did not conduct a dedicated examination of PM/IC practices at
SVBFG since 2017. However, the exam teams covered PM/IC indirectly through governance exam-
inations. The RBO exam team conducted a Corporate Governance Exam in 2019,110 and the LFBO
exam team conducted a Governance and Risk Management Exam in 2022.111 During the 2022
exam, the exam team identified major weaknesses in SVBFG’s incentive compensation program
and board oversight of the program that had not been uncovered in the 2019 exam, and this
resulted in the issuance of an MRIA on board effectiveness.
Supervisors concluded that SVBFG’s incentive compensation decisions were primarily based
on SVBFG’s financial performance, with minimal to no linkage to risk management and control
factors. For example, the team found that “risk management deficiencies, identified by inde-
pendent risk functions or through regulatory examinations, have not been meaningfully con-
sidered by [SVBFG’s] incentive compensation decisions.”112 In relation to the 2021 year-end
self-assessment of several executives—including the chief executive officer (CEO) and chief finan-
cial officer (CFO)—compensation and incentives remained unchanged with their cash bonuses and
equity awards being based on return on equity (ROE), allowing for certain adjustments, and total
shareholder return (TSR) despite the executives not achieving the objective of building out the
risk-management program to LFI standards.113
The LFBO exam team also noted weaknesses regarding the board Compensation & Human Capital
Committee’s (Compensation Committee) oversight of the incentive compensation program. The
Compensation Committee did not receive the appropriate performance evaluation documentation
that the CEO used to inform compensation recommendations. The Compensation Committee
108
Board of Governors of the Federal Reserve System, “Supervisory Guidance on Board of Directors’ Effectiveness,”
SR letter 21-3 (February 26, 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm.
109
See, e.g., 12 C.F.R. § 252.22(b)(3)(i); 12 C.F.R. § 248.4(a)(2)(v).
110
SVBFG Target Corporate Governance/Global Risk Management Supervisory letter, November 19, 2019.
111
SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022.
112
SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022.
113
The only executive who received a reduction in pay in the 2021 performance year due to not meeting risk-management
expectation was the chief risk officer (CRO).
Additional Topics 75
relied solely on the CEO’s recommendations regarding operating committee executive compensa-
tion.114 Supervisors’ interviews with the Compensation Committee chair indicated that the Com-
pensation Committee decided not to reduce incentive compensation, despite the known weakness
in the enterprise risk-management program, fearing this would lead to increased attrition of senior
executives due to executives’ compensation already being lower than peer firms.
The May 31, 2022, MRIA required SVBFG to develop “mechanisms to hold senior management
accountable for meeting risk management expectations.”115 In response, SVBFG’s board commit-
ted to enhancing its incentive compensation program and performance management process to
better hold senior management accountable for risk-management expectations. In the proposed
plan submitted in August 2022, SVBFG’s board outlined proposed enhancements to the PM/IC
program, including incorporating goals related to risk management and risk metrics into the perfor-
mance evaluation process and incentive compensation decisions.
In January 2023, the Compensation Committee of SVBFG’s and SVB’s boards of directors
approved stock incentive bonuses to executives and employees for 2022 performance. The
Compensation Committee also approved cash incentive bonuses to senior executives for their
2022 performance. Despite SVBFG’s deteriorating condition and SVBFG’s negative cash balance,
cash bonuses were paid to several SVBFG executives and staff for their 2022 performance on
March 10, 2023, despite the failure of SVB that day.
When SVBFG failed, it was in the process of redesigning its incentive compensation program in
response to supervisory criticisms and identified deficiencies in the 2022 LFBO governance and
risk-management exam. SVBFG’s new Chief Human Resources Officer and the Compensation
Committee of the board of directors had begun approving action items to implement reforms to
the incentive compensation policies and were in the preliminary stages of developing procedures
to correct the identified issues.
Conclusions
The incentive compensation arrangements and practices at SVBFG encouraged excessive risk
taking to maximize short-term financial metrics. SVBFG’s compensation practices also did not
adequately reflect longer-term performance, nonfinancial risks, or unaddressed audit or supervi-
sory issues. Nor did they include sufficient opportunities for SVBFG’s internal control functions to
provide feedback or challenge. Stronger or more specific supervisory guidance or rules on incen-
tive compensation for firms of SVBFG’s size, complexity, and risk profile—or more rigorous enforce-
ment of existing guidance and rules—may have mitigated these risks.
114
Based on review of the Compensation Committee package, the board received the CEO’s compensation recommenda-
tions without any supporting documentation (e.g., performance evaluation results).
115
SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022.
76 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Assessment of the Federal Reserve Approval of SVB Financial Group
Applications
Background
The Federal Reserve, in its role as a primary federal regulator, reviews applications submitted by a
wide range of financial institutions for approval to undertake various transactions, including merg-
ers and acquisitions (M&A), and to engage in new activities. The Federal Reserve reviews and acts
on proposals filed under a wide range of provisions of law.
Applications are filed with the responsible Reserve Bank. The Board has delegated authority to the
Reserve Banks to act on most applications that do not raise significant policy, legal, or supervisory
issues.116 The Board acts on proposals that raise significant policy, legal, or supervisory issues or
otherwise do not meet the criteria for delegation established by the Board.
Overview of SVB Financial Group and SVB Applications Activity 2018–23
During the review period, the Federal Reserve approved an application filed by SVBFG under the
Bank Holding Company Act (BHC Act) to merge with Boston Private Financial Holdings, Inc. (Boston
Private). The Federal Reserve also acted on three prior notices under Regulation K to make foreign
investments and 69 requests for prior approval to make public welfare investments filed by SVB
under Regulation H. Given the nature of public welfare investments, they are not considered part
of the internal review.117 SVBFG and SVB also submitted a request for an exemption from Regu-
lation L to allow a prohibited management interlock that was ultimately withdrawn. Because Greg
Becker, CEO of SVB and president and CEO of SVBFG, also served as a director on the board of
the FRBSF starting on January 1, 2019, the three Regulation K prior notices (and the public wel-
fare investments) were not eligible to be acted upon by FRBSF and instead were acted on by the
Secretary of the Board (table 10).118
116
Reserve Banks may consult with Board staff on proposals that raise policy, legal, or supervisory issues prior to acting.
In instances where a Reserve Bank could act on an application except for the fact that the Reserve Bank may not
act because a director, senior officer, or principal shareholder of any company or bank involved in the transaction is a
director at that Reserve Bank, the Board has delegated authority to the Secretary of the Board to act on these appli-
cations. See 12 C.F.R. § 265.5(c)(2). The Board also has delegated authority to act on certain types of applications to
Board staff.
117
Public welfare investments made in compliance with Regulation H, 12 C.F.R. § 208.22, generally are not viewed as risky
and often provide tax benefits to the banks involved. Further, these investments are considered beneficial to communi-
ties and individuals in underserved areas. SVB’s aggregate public welfare investments represented less than 10 per-
cent of the bank’s capital and surplus.
118
In cases where the Reserve Bank may not act because of a Reserve Bank director interlock, the Secretary of the Board
has delegated authority to take actions that would otherwise have been acted upon by the Reserve Bank. 12 C.F.R.
§ 265.5(c)(2).
Additional Topics 77
Table 10. Applications related to SVBFG and SVB, 2018–23
Filing Filing
Applicant
Filing ID received disposition Applicant Proposal description
assets
date date
101145 8/29/2019 9/25/2019 Silicon $62.4 billion Silicon Valley Bank to invest an additional $35 million
Valley Bank in SPD Silicon Valley Bank Co., Ltd., Shanghai,
People’s Republic of China, pursuant to section
211.9(f) of Regulation K.
103866 1/29/2021 2/26/2021 Silicon $113.8 billion Silicon Valley Bank to invest an additional $39 million
Valley Bank in SPD Silicon Valley Bank Co., Ltd., Shanghai,
People’s Republic of China, pursuant to section
211.9(f) of Regulation K.
104030 2/24/2021 6/10/2021 SVB Financial $142.4 billion (1) SVB Financial Group to merge with Boston Private
Group Financial Holdings, Inc. (total consolidated assets of
Silicon $140.3 billion $10.5 billion), and thereby indirectly acquire Boston
Private Bank & Trust Company; both of Boston,
Valley Bank
Massachusetts; (2) Boston Private Bank & Trust
Company to merge with and into Silicon Valley Bank;
(3) Silicon Valley Bank to acquire 19 branch offices
of Boston Private Bank & Trust Company; and
(4) Silicon Valley Bank to exercise trust powers.
105380 10/21/2021 2/2/2022 Silicon $188.3 billion Silicon Valley Bank to invest an additional $1.8 billion
Valley Bank in SVB UK, Ltd., London, United Kingdom, pursuant to
section 211.9(f) of Regulation K.
Source: Federal Reserve applications records.
Filing to Merge with Boston Private Financial Holdings, Inc.
For applications filed under section 3 of the BHC Act119 and the Bank Merger Act (BMA),120 the Fed-
eral Reserve must assess several statutory factors, including factors such as competitive effects;
financial and managerial resources; convenience and needs of the community; anti-money launder-
ing issues; and the extent to which a proposed acquisition, merger, or consolidation would result
in greater or more concentrated risks to the stability of the U.S. banking or financial system.
On February 24, 2021, SVBFG filed a section 3 application requesting approval to merge with
Boston Private Financial Holdings, Inc. (Boston Private), a bank holding company with approxi-
mately $10.5 billion in total consolidated assets, and thereby indirectly acquire Boston Private
Bank & Trust Company (BP Bank). SVB also requested approval to merge with BP Bank.121 The
Board of Governors was required to act on the proposal because it exceeded the delegation crite-
ria for financial stability.122 The Board approved the proposal on June 10, 2021.
119
12 U.S.C. § 1842.
120
12 U.S.C. § 1828(c).
121
SVB also requested approval to establish branches at the locations of BP Bank’s branches and to change the general
character of its business to engage in trust activities.
122
The delegation criteria require Board action for any proposal where (1) the consolidated assets of the pro forma organi-
zation equal or exceed $100 billion, and (2) the consolidated assets of the target exceed $10 billion.
78 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
The Board’s Division of Research and Statistics (R&S) is responsible for completing the financial
stability analysis related to applications acted on by the Board. R&S staff concluded that the pro-
posed merger would not result in meaningfully greater or more concentrated risks to the financial
stability of the United States.
The Board’s Division of Supervision and Regulation (S&R) is responsible for assessing the finan-
cial and managerial considerations and future prospects for applications acted on by the Board.
In its evaluation of this proposal, S&R mergers and acquisitions staff’s analysis focused on the
supervisory record and financial condition of SVBFG and Boston Private and their subsidiary banks
and the pro forma financial condition and financial projections of the combined organization.
SVBFG was rated as “Satisfactory-2” at the time of the application.
The S&R mergers and acquisitions recommendation memorandum states that SVBFG transitioned
from the RBO portfolio to the LFBO portfolio in the first quarter of 2021. There is no assessment
of the bank’s readiness to move into the LFBO portfolio or the planned supervisory strategy.
Regulation K Notices
For prior notices to make foreign investments under Regulation K, the investor “shall at all times
act in accordance with high standards of banking or financial prudence, having due regard for
diversification of risks, suitable liquidity, and adequacy of capital.”123
SVB submitted several notices under Regulation K for foreign investments. These included (i) a
$35 million investment in August 2019 and a $39 million investment in January 2021 in SPD
Silicon Valley Bank Co., Ltd, Shanghai, China and (ii) a $1.8 billion investment in October 2022
in SVB UK Ltd, London, England. The supervisory CPC highlighted supervisory issues that SVB
needed to remediate at the time of the October 2022 notice and recommended that it not be
approved. The Board LFBO analyst had a similar recommendation due to recent liquidity risk
management issues and outstanding information technology and European exchange rate mecha-
nism issues. Ultimately, however, staff decided that there were not sufficient grounds to object to
the notice.
Tying
SVB’s loan agreements with certain borrowers required them to use other services of SVB or
an SVB affiliate, including maintaining their primary operating deposit accounts with SVB.124 The
agreements did not, however, prohibit these borrowers from obtaining similar accounts or services
123
12 C.F.R. § 211.8(a).
124
Some borrowers also were required to maintain their operating and securities accounts with SVB and to obtain asset
management, letters of credit, and cash management services from SVB or an SVB affiliate.
Additional Topics 79
from other providers. The types of covenants included in SVB’s loan agreements are often seen as
prudent credit risk management tools because they provide lenders insight into a borrower’s finan-
cial condition and ability to repay a loan. As part of its standard supervision, Federal Reserve staff
reviewed SVB’s loan portfolio. During general discussions with SVB of its loan agreements, staff
became aware of the requirement to use other services of SVB or SVB’s affiliates. Federal Reserve
staff is not aware of any requirements SVB imposed on its borrowers to obtain services other than
those identified in this report.
Banking law generally prohibits “tying arrangements,” under which a bank extends credit or pro-
vides other services on the condition or requirement that the customer obtain some other prod-
uct or service from the bank or an affiliate.125 However, the law permits a bank to condition the
availability or price of any product on a requirement that the customer obtain a “loan, discount,
deposit, or trust service” from the bank or an affiliate of the bank.126 SVB’s arrangement qualifies
for this exception.127
Volcker Rule
The Volcker rule generally prohibits any banking entity from engaging in proprietary trading (the
proprietary trading provisions) or from acquiring or retaining an ownership interest in, sponsoring,
or having certain relationships with a hedge fund or private equity fund (covered funds) subject to
certain exemptions.128 The Board, OCC, FDIC, Securities and Exchange Commission (SEC), and
Commodity Futures Trading Commission (CFTC) share authority for implementing the Volcker rule
and issued a final rule implementing these provisions in December 2013 and amendments in
2019 and 2020.129
One of the main purposes of the Volcker rule is to prohibit banking entities from engaging in
“high-risk proprietary trading,” which includes “leveraged, short-term speculation.”130 As discussed
125
See 12 U.S.C. § 1972(1)(A)–(B).
126
12 U.S.C. § 1972(1)(A); 12 C.F.R. § 225.7(b)(1).
127
See Board of Governors of the Federal Reserve System, “Legal Interpretations: Frequently Asked Questions about
Regulation Y,” last updated December 30, 2021, https://www.federalreserve.gov/supervisionreg/legalinterpretations/
reg-y-frequently-asked-questions.htm.
128
12 U.S.C. § 1851.
129
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 79 Fed. Reg. 5,535 (January 31, 2014), https://www.federalregister.gov/documents/2014/
01/31/2013-31511/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with;
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 84 Fed. Reg. 61,974 (November 14, 2019), https://www.federalregister.gov/documents/2019/
11/14/2019-22695/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with;
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds
and Private Equity Funds, 85 Fed. Reg. 46,422, 46,442–8 (July 31, 2020), https://www.federalregister.gov/
documents/2020/07/31/2020-15525/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-
relationships-with.
130
See 156 Cong. Rec. S5894 (daily ed. July 15, 2010) (statement of Sen. Merkley), https://www.govinfo.gov/content/
pkg/CREC-2010-07-15/html/CREC-2010-07-15-pt1-PgS5870-2.htm.
80 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
above, SVBFG’s losses arose from SVBFG’s long-term holding of long-duration securities, the very
“long-term, multi-year investments” that were excluded from the scope of the Volcker rule. More-
over, the vast majority of SVBFG’s securities were U.S. Treasuries and agency-issued or guaranteed
mortgage-backed securities that are excluded from the prohibition on proprietary trading.131 The
activities that led to SVBFG’s failure were not the activities that the Volcker rule was intended to
address.
Other provisions of the Volcker rule likely were relevant to the operations of SVBFG. For example,
SVB hedged its interest rate exposure in 2021 by holding certain financial instruments. These
financial instruments were held for approximately one year and thus would have been presumed to
not be subject to the proprietary trading provisions.132 Similarly, SVBFG held investments in certain
venture capital funds that may have been covered funds subject to the restrictions of the Volcker
rule. The Volcker rule excludes “qualifying venture capital funds,” as defined by the SEC regula-
tions from the restrictions of the covered fund provisions.133
SVBFG was presumed to be in compliance with the Volcker rule because it had limited trading
assets and liabilities, and SVBFG had no obligation to affirmatively demonstrate compliance with
the regulation on an ongoing basis.134 This presumption, along with the reduced recordkeeping
requirement for SVBFG’s fund investments,135 resulted in limited documentation that Federal
Reserve staff could review to determine whether SVBFG would have been in compliance with the
Volcker rule or met the requirements of any applicable exceptions, including without the presump-
tion of compliance or absent the changes to the regulations.136
131
Both the statute and all versions of the Volcker rule regulations exclude from the prohibition on proprietary trading
purchase or sale of Treasury securities, certain agency-issued MBS, and state and municipal securities. See 12 U.S.C.
§ 1851(d)(1)(A); 12 C.F.R. § 248.6(a).
132
See 12 C.F.R. § 248.3(b)(4). This change reversed the presumption in the 2013 rule, which provided that positions held
for fewer than 60 days were presumed to be subject to the trading provisions. 12 C.F.R. § 248.3(b)(2) (2018).
133
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 85 Fed. Reg. 46,422, 46,442–8 (July 31, 2020); 12 C.F.R. § 248.10(c)(16). These revisions
became effective October 1, 2020.
134
See 12 C.F.R. § 248.20(g). SVB had less than $1 billion in trading assets and liabilities.
135
See 12 C.F.R. § 248.20(e) (imposing recordkeeping requirement only for firms with the largest amount of trading).
136
SVBFG sought and received an extension of the date by which the firm was required to conform or divest legacy illiquid
fund investments. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170607a.htm. See also
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20161212b.htm. There is no evidence that these
fund investments had a material impact on SVBFG’s financial condition.
81
Federal Reserve Regulation
Regulatory Framework
Background
The Global Financial Crisis in 2008–09 had a profound impact on the U.S. banking system and
the Federal Reserve’s oversight framework. To address weaknesses in the banking sector that
were evident in that period, the Board established a set of enhanced prudential standards (EPS)
for large banking organizations. These standards implemented elements of section 165 of the
Dodd-Frank Act, which directed the Board to establish EPS for bank holding companies and foreign
banking organizations with total consolidated assets of $50 billion or more.137 This included liquid-
ity, capital, stress testing, and resolution planning requirements. Regulations implementing these
standards were issued in order to improve the resilience of large banking organizations as well as
reduce the impact of a large banking organization’s failure on U.S. financial stability.
As mentioned earlier, the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) amended section 165 of the Dodd-Frank Act by raising the $50 billion minimum asset
threshold for general application of EPS to $250 billion. Additionally, EGRRCPA provided the Board
with discretion to rebut the statutory presumption and apply EPS to bank holding companies with
total assets of $100 billion or more but less than $250 billion.
In response, the Board established categories for determining application of the EPS to large
U.S. banking organizations and foreign banking organizations in the 2019 tailoring rule.138 The
rule established four categories of standards (Category I through IV) based on risk-based indica-
tors (a banking organization’s total assets and levels of cross-jurisdictional activity, off-balance
sheet exposure, nonbank assets, and weighted short-term wholesale funding)139 with increasingly
stringent requirements for larger and more complex firms whose failure could impact U.S. financial
stability.140 The banking agencies also issued updates to the capital and liquidity rules that aligned
with the Board’s 2019 tailoring rule.141
137
Dodd-Frank Act § 165, 12 U.S.C. § 5365.
138
See Tailoring Rule Visual, footnote 24.
139
Short-term wholesale funding is defined in the instructions to the FR Y-15 report. Instructions for Preparation of Banking
Organization Systemic Risk Report, https://www.federalreserve.gov/reportforms/forms/FR_Y-1520160930_i.pdf.
140
Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and
Foreign Banking Organizations, 84 Fed. Reg. 59,032 (November 1, 2019), https://www.federalregister.gov/
documents/2019/11/01/2019-23662/prudential-standards-for-large-bank-holding-companies-savings-and-loan-
holding-companies-and-foreign.
141
Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements, 84 Fed. Reg. 59,230
(November 1, 2019), https://www.federalregister.gov/documents/2019/11/01/2019-23800/
changes-to-applicability-thresholds-for-regulatory-capital-and-liquidity-requirements.
82 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
The changes due to EGRRCPA, the 2019 tailoring rule, and related rulemakings had a significant
impact on the level of requirements to which SVBFG was subject in 2018 and beyond.142 Had
these changes not been made to the framework, SVBFG would have been subject to enhanced
liquidity risk management requirements, full standardized liquidity requirements (i.e., LCR and
NSFR), enhanced capital requirements, company-run stress testing, supervisory stress testing at
an earlier date, and tailored resolution planning requirements. Further, the enhanced requirements
that did apply to SVBFG were not immediately effective because of lengthy transition periods pre-
scribed by the relevant regulations.
The “Regulations that Applied to SVBFG” section describes the requirements that applied to
SVBFG prior to its failure (see figure 24). In addition, the “Pro Forma Impact of EGRRCPA and
Tailoring” section presents analysis of the requirements that would have applied to the firm in the
absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings and notes whether SVBFG
would have met those requirements.
Figure 24. Regulatory timeline
Oct. 2022 Oct. 2023
June 2021 2052a reporting Would have Oct. 2024
SVBFG crossed requirements updated Dec. 2022 become subject Stress capital
$100B average Apr. 2022 to include certain SVBFG crossed to 70% LCR buffer would
total consolidated First capital NSFR-related elements $50B STWF and 70% NSFR have become
assets threshold plan submitted and other enhancements threshold requirements effective
Oct. 2019 July 2022
Federal Jan. 2022 Jan. 2022 SVBFG became subject June 2024
Reserve First 2052a SVBFG begins to internal liquidity Mar. 2023 SVBFG would
finalizes liquidity compliance with stress testing and Dec. 2022 SVB is have received
tailoring monitoring capital planning tailored risk-management Submitted SVB placed in first supervisory
rule report submitted requirement requirements resolution plan resolution stress test results
Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct.
2021 2022 2023 2024
Regulatory threshold Other
142
On July 2, 2018, the Federal Reserve granted SVBFG an extension of time to comply with certain prudential require-
ments. The substantive effect of this action was superseded by the Federal Reserve’s July 6, 2018, public statement
on EGRRCPA, and the 2019 tailoring rule.
Federal Reserve Regulation 83
Regulations that Applied to SVBFG
Liquidity
SVBFG became subject to liquidity risk management and internal liquidity stress testing (ILST)
requirements that apply to Category IV firms starting in the third quarter of 2022. Key require-
ments included the following:
• SVBFG’s board was required to approve on an annual basis and review on a semi-annual basis
the level of risk that SVBFG could assume, as well as review SVBFG’s liquidity risk policies and
procedures.
• SVBFG’s risk committee was required to approve SVBFG’s CFP outlining SVBFG’s strategy for
dealing with liquidity needs during a stress event.
• SVBFG was also required to conduct cash flow projections, implement a CFP, and establish
an independent review function tasked with assessing the effectiveness of its liquidity risk
management framework.
• SVBFG was required to conduct quarterly ILSTs that included an overnight, 30-day, 90-day, and
one-year timeframe and hold a buffer of highly liquid assets to meet its projected net stressed
cash flow need over a 30-day period.
SVBFG was also subject to monthly liquidity reporting under the Federal Reserve Board’s
FR 2052a Complex Institution Liquidity Monitoring Report (FR 2052a). SVBFG began submitting
these reports in January 2022.
In addition to the EPS for liquidity risk management, there are two standardized liquidity require-
ments for certain large banking organizations: the LCR and NSFR. The LCR seeks to strengthen
firms’ short-term resilience to funding shocks by requiring large firms to hold a minimum amount
of high-quality liquid assets to meet total net cash outflows in a 30-day stress period. The NSFR
rule seeks to mitigate the risks of firms supporting their assets with insufficient amounts of stable
funding by requiring them to maintain a minimum level of stable funding to support their assets,
funding commitments, and derivative exposures over a one-year time horizon. Category IV firms
were not subject to the LCR or NSFR unless they had $50 billion or more in average weighted
short-term wholesale funding. SVBFG crossed the $50 billion threshold in average weighted
short-term wholesale funding in December 2022 and would have been required to comply with
reduced LCR and NSFR requirements at a 70 percent calibration at the start of the fourth quarter
of 2023.143
143
For both the reduced LCR and reduced NSFR applicable to Category IV firms, the denominator is multiplied by
70 percent, thereby reducing the amount of high-quality liquid assets or available stable funding needed to meet the
LCR and NSFR, respectively. 12 C.F.R. § 249.30(c), Table 1; 12 C.F.R. § 249.105(b), Table 1. Unlike other firms subject
to the LCR or NSFR, Category IV firms’ depository institution subsidiaries are not subject to either requirement. All other
requirements of the LCR rule apply to such firms, including the rule’s maturity mismatch requirement.
84 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Based on the liquidity data reported by SVBFG, SVBFG would have met the reduced LCR require-
ment at the 70 percent calibration in the months leading up to its failure (see table 11).144 Internal
analysis also indicates that SVBFG would have been able to meet the 70 percent reduced NSFR
requirement. However, SVBFG did not maintain a sufficient liquidity buffer to meet its own ILST
prior to its failure. It should be noted that for the time period displayed in table 11, SVBFG was
not subject to the LCR requirement, and it is possible that SVBFG would have managed its liquidity
position differently and had different ratios had it been subject to the LCR requirement, including
quarterly public disclosures.
Table 11. SVBFG reduced liquidity coverage ratio (LCR)
Percent
3/31/22 4/29/22 5/31/22 6/30/22 7/29/22 8/31/22 9/30/22 10/31/22 11/30/22 12/30/22 1/31/23 2/28/23
Reduced LCR 102.1% 102.1% 102.2% 101.8% 102.1% 102.0% 102.5% 102.5% 102.4% 103.1% 102.7% 102.5%
Source: FR 2052a and Federal Reserve calculations.
Capital
Pursuant to the 2013 capital rule,145 banking organizations, including SVBFG and SVB, are sub-
ject to several risk-based and leverage-based standards, including minimum requirements and
buffers.146 These requirements remained unchanged as SVBFG and SVB crossed the $100 billion
threshold.
SVBFG and SVB were required to maintain minimum risk-based ratios and the tier 1 leverage
capital ratio.147 They were also required to hold additional capital of 2.5 percent of risk-weighted
assets (capital conservation buffer) on top of the minimum risk-based regulatory capital ratios in
order to avoid limitations on capital distributions (e.g., dividends and share buybacks) and discre-
tionary bonus payments.
144
Federal Reserve staff’s estimates of the firm’s LCR and NSFR (both full and reduced figures) are based on the data the
firm reported in its 2052a filing.
145
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions,
Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Require-
ments, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 78 Fed. Reg. 62,017
(October 11, 2013), https://www.federalregister.gov/documents/2013/10/11/2013-21653/regulatory-capital-
rules-regulatory-capital-implementation-of-basel-iii-capital-adequacy-transition.
146
Risk-based capital standards are calculated as a ratio of a firm’s regulatory capital (numerator) to risk-weighted assets
(denominator), which take into account the underlying risk of a firm’s assets. By contrast, the tier 1 leverage ratio uses
regulatory capital as the numerator and a measure of total assets (unweighted) as the denominator. Leverage-based
requirements treat all assets equally and are generally meant to serve as a backstop to risk-based requirements. See
12 C.F.R. §§ 217.10–11.
147
SVBFG and SVB were subject to the following minimum regulatory capital requirements: a common equity tier 1 capital
ratio of 4.5 percent, a tier 1 capital ratio of 6 percent, a total capital ratio of 8 percent of risk-weighted assets, and a
leverage ratio of 4 percent. The leverage ratio (or tier 1 leverage ratio) is calculated as tier 1 capital to total on-balance
sheet assets.
Federal Reserve Regulation 85
SVBFG and SVB exceeded the minimum and capital conservation buffer requirements for the
CET1 ratio consistently from 2017 to 2022 (see figure 25).148 SVBFG and SVB also exceeded the
minimum plus buffer requirements for the tier 1 and total risk-based capital ratios, as well as the
minimum tier 1 leverage ratio for the same period.149
Figure 25. SVBFG and SVB common equity tier 1 (CET1) capital ratios
Percent
20
Minimum requirement (4.5%) + capital conservation buffer (2.5%)
Minimum requirement (4.5%)
15
10
5
0
2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022
SVBFG SVB
Note: Values are as of year-end.
Source: FR Y-9C and Call Report.
Stress Testing and Capital Planning
SVBFG was required to comply with the capital plan rule beginning on January 1, 2022, and to sub-
mit its first capital plan by April 5, 2022.150 The capital plan must include an assessment of the
expected uses and sources of capital over the subsequent nine quarters, assuming both expected
and stressful conditions.
In addition to the capital plan submission, SVBFG was also subject to the supervisory stress test
on a two-year cycle and to the stress capital buffer requirement, which would be provided every
other year to align with the two-year supervisory stress test cycle. The stress capital buffer require-
ment uses the results of the supervisory stress test to resize a firm’s 2.5 percent capital
148
SVBFG would have been subject to a stress capital buffer calculated based on its supervisory stress test results; how-
ever, given the transition period in the stress test rule, the stress capital buffer would not have applied until 2024.
149
Staff used regulatory reporting data from the FR Y-9C, Schedule HC-R, Part 1, item 47 and FFIEC 031, Schedule RC-R,
Part 1, item 49.
150
12 C.F.R. § 225.8.
86 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
conservation buffer. Due to the transition period, SVBFG’s first supervisory stress test would have
occurred in 2024.151 SVBFG would have received notice of its first stress capital buffer require-
ment by June 30, 2024, which would have become effective on October 1, 2024.152 Finally, from
2014 to 2018, SVBFG and SVB were required to conduct an annual company-run stress test.153
After 2018, following the enactment of EGRRCPA, they were no longer required to conduct
company-run stress tests.
Resolution
Under the 2019 revisions to the resolution planning rule, SVBFG was not subject to a resolution
plan requirement when it became a Category IV firm.154
The FDIC requires certain IDIs to submit plans detailing how they could be resolved in an efficient
manner in the event of their failure (the IDI rule).155 SVB became subject to the IDI rule in 2021
when its total assets on a four-quarter average basis breached $100 billion and submitted its IDI
plan on December 1, 2022, with an as-of date of December 31, 2021. EGRRCPA did not impact
the IDI rule.
Pro Forma Impact of EGRRCPA and Tailoring
EGRRCPA, the 2019 tailoring rule, and related rulemakings changed the requirements applicable
to certain firms. Prior to passage of EGRRCPA and the 2019 tailoring rule, a number of additional
requirements, such as the full LCR requirement, recognizing unrealized gains and losses on AFS
securities in capital, advanced approaches capital requirements, and a supplementary leverage
ratio, applied to firms with total consolidated assets of at least $250 billion or consolidated total
on-balance sheet foreign exposure of at least $10 billion.
The firm had more than $10 billion in on-balance sheet foreign exposure starting in the second
quarter of 2020, so it would have been subject to these rules prior to its failure absent changes to
151
Under the supervisory stress test rules, a firm that crosses the $100 billion threshold by September 30 must comply
with the stress test rules beginning on January 1 of the second calendar year after the bank holding company crosses
the threshold. 12 C.F.R. § 252.43(b)(1). For Category IV firms, the Board conducts a supervisory stress test and
publishes the results in even-numbered years. 12 C.F.R. § 252.44(d)(1), table 1. Even though the firm was not yet
subject to the supervisory stress test, SVBFG began reporting the stress test regulatory reports to the Board in 2021.
See Board of Governors of the Federal Reserve System, “Instructions for the Capital Assessments and Stress Testing
information collection (Reporting Form FR Y-14Q),” 5–8, modified September 2022, https://www.federalreserve.gov/
apps/reportingforms/Download/DownloadAttachment?guid=c4ef7d8e-9242-4384-bd8c-fe458e753bb2.
152
See 12 C.F.R. §§ 225.8(c)(1), (h); 12 C.F.R. § 252.43(b)(1); 12 C.F.R. § 252.44(d)(1).
153
12 C.F.R. §§ 252.14-17 (2019).
154
The 165(d) resolution planning requirements apply when a domestic bank holding company meets the relevant asset
threshold as determined based on the average of the company’s four most recent FR Y-9Cs. See 12 C.F.R. § 243.2.
(defining “covered company”); Resolution Plans Required, 84 Fed. Reg. 59,194 (November 1, 2019), https://www.
federalregister.gov/documents/2019/11/01/2019-23967/resolution-plans-required.
155
12 C.F.R. § 360.10.
Federal Reserve Regulation 87
its business model in response to the requirements.156 This section outlines the requirements that
would have applied under the previous regulatory framework (see table 12). It should be noted
that had the prior criteria been in place for the application of heightened requirements, SVBFG may
have proactively managed its asset size and on-balance sheet foreign exposure to avoid becoming
subject to these additional requirements.
Table 12. Key requirements for SVBFG and SVB
Requirements for a firm with SVBFG/SVB’s March 1, 2023,
SVBFG/SVB’s requirements as a Category IV firm as of
profile in absence of EGRRCPA/2019 tailoring rule/
March 1, 2023
related rulemakings
● U.S. risk-based and leverage capital requirements ● U.S. risk-based and leverage capital requirements
– No advanced approaches risk-based capital requirements – Advanced approaches risk-based capital requirements
– Can make a one-time election to opt out of the requirement to – AOCI reflected in regulatory capital
reflect AOCI in regulatory capital – Supplementary leverage ratio
– No supplementary leverage ratio
– Capital conservation buffer
– Capital conservation buffer – Countercyclical capital buffer
– No countercyclical capital buffer
● Stress testing and capital planning ● Stress testing and capital planning
– No company-run stress testing requirement – Annual and mid-cycle company-run stress test
– Biennial supervisory stress test and stress capital buffer – Annual supervisory stress test and stress capital buffer
requirement calculation in even-numbered years (would have requirement calculation
applied in 2024 after phase-in) – Annual capital plan
– Annual capital plan
● Liquidity and risk management ● Liquidity and risk management
– No LCR or NSFR requirement – Full LCR and NSFR requirements
– Quarterly internal liquidity stress test – Monthly internal liquidity stress test
– Tailored liquidity risk management standards – Full enhanced liquidity risk management standards
– Monthly liquidity data reporting – Monthly liquidity data reporting
– Enhanced risk management and risk committee requirements – Enhanced risk management and risk committee requirements
● Resolution planning ● Resolution planning
– No holding company resolution plan – Holding company resolution plan: after initial filing, tailored plan
– IDI-level plan requirement under FDIC’s IDI resolution planning (with plans generally due every two years)
rule on a three-year cadence – IDI-level plan requirement under FDIC’s IDI resolution
planning rule
Note: The left-hand column lists requirements for SVBFG/SVB, as applicable, as of March 1, 2023, as a firm subject to Category IV standards
following adoption of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), the related 2019 tailoring rule, and
related rulemakings. The right-hand column lists the requirements SVBFG/SVB, as applicable, would have been subject to in the absence of
EGRRCPA/2019 tailoring rule/related rulemakings.
Liquidity
In absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings, SVBFG would have been
subject to additional liquidity risk management, ILST, and standardized liquidity requirements. The
156
Federal Reserve Board staff analyzed the FFIEC 009 regulatory reporting data submitted by SVB to determine the date
it would have crossed the $10 billion foreign exposure threshold. Based on the data, SVB crossed the $10 billion for-
eign exposure threshold in the second quarter of 2020. SVBFG likely also crossed $10 billion at the same time.
88 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
additional liquidity risk management requirements include establishing specific liquidity risk limits,
weekly collateral monitoring, and requirements for monitoring intraday exposures. Rather than a
quarterly ILST, SVBFG would have been subject to this requirement on a monthly basis157 as well
as monthly liquidity reporting to supervisors.
In addition, SVBFG would have been subject to the full LCR requirement and the full NSFR require-
ment.158 SVBFG also would have been subject to quarterly public disclosures of its LCR and of
its NSFR.
Based on SVBFG’s liquidity reporting to Federal Reserve supervisors, SVBFG would not have
met the full LCR requirement over the time periods shown below. For example, SVBFG’s
December 2022 full LCR would have been approximately 91 percent, a shortfall relative to the
100 percent requirement (see table 13). To meet the full LCR requirement, SVBFG would have
had to obtain approximately $8 billion in additional high-quality liquid assets. The estimates for
February 2023 show an even larger shortfall of approximately $14 billion. The shortfall numbers
likely understate SVBFG’s need because firms generally maintain a buffer above the minimums to
account for potential volatility in the ratio and peer comparisons related to public disclosure.
Table 13. SVBFG full liquidity coverage ratio (LCR)
Percent
3/31/22 4/29/22 5/31/22 6/30/22 7/29/22 8/31/22 9/30/22 10/31/22 11/30/22 12/30/22 1/31/23 2/28/23
Full LCR 99.3% 97.8% 92.6% 89.5% 90.7% 83.9% 73.2% 87.3% 97.0% 90.8% 87.2% 82.6%
Source: FR 2052a and Federal Reserve calculations.
The LCR rule also requires a firm to have the operational capability to monetize its liquid assets
and to test this capability periodically. In addition, the LCR rule places limits on the composition of
assets that qualify as high-quality liquid assets. If SVBFG had been subject to the LCR, it may have
adopted more proactive monitoring or managing of its liquidity position and mix of liquid assets.
Based on SVBFG’s liquidity reporting to Federal Reserve supervisors, estimates for SVBFG’s NSFR
suggest that it would have been above the 100 percent requirement under the NSFR rule.
157
See 12 C.F.R. § 252.34–35 (2019).
158
See 12 C.F.R. § 249.1(b)(1) (2019). The NSFR rule was proposed but not finalized prior to issuance of the 2019 tailor-
ing rule and related rulemakings. The proposed scope of application of the NSFR aligned with the scope of the LCR, and
for the purposes of this review this analysis assumes that in the absence of the tailoring rule and related rulemakings,
the NSFR’s scope would have been finalized to align with the LCR’s.
Federal Reserve Regulation 89
Capital
In the absence of EGRRCPA, the 2019 tailoring rule, and related rulemakings, SVBFG would have
been subject to the advanced approaches capital framework.159 These additional capital stan-
dards include recognizing unrealized gains and losses on AFS securities in capital, using advanced
approaches methodologies to calculate risk-based capital requirements, and a supplementary
leverage ratio requirement.
Recognizing unrealized gains and losses on AFS securities in its CET1 capital would have reduced
SVBFG’s capital by $1.9 billion. This would have resulted in a drop in the CET1 capital ratio
from 12.1 percent to 10.4 percent as of the end of the fourth quarter of 2022 (table 14 and
table 15).160
Table 14. SVBFG impact of accumulated other Table 15. SVBFG impact of accumulated other
comprehensive income (AOCI) opt-out removal comprehensive income (AOCI) opt-out removal
Millions of dollars on common equity tier 1 (CET1)
Millions of dollars
Regulatory
2022:Q4
capital input CET1 capital Actual
Adjusted
Available-for-sale securities— and ratio 2022:Q4
amortized cost 28,602 CET1 capital 13,697 11,817
Available-for-sale securities— CET1 ratio 12.1% 10.4%
fair value 26,069
Source: FR Y-9C and Federal Reserve calculations.
Available-for-sale securities—
unrealized gains/losses −2,533
Impact of AOCI opt-out removal −1,880
Source: FR Y-9C and Federal Reserve calculations.
The decrease in its regulatory capital may have led SVBFG to operate differently. For example,
SVBFG may have raised additional capital or may have made different business decisions.
Under the pre-2019 capital rule, SVBFG would have been required to calculate its risk-based
capital ratios using both the standardized and advanced approaches where the higher require-
ment would apply. SVBFG was never required to calculate its advanced approaches ratios, so it is
unknown whether its capital would have been impacted based on this metric.
159
The firm crossed the $10 billion foreign exposure threshold in the second quarter of 2020, meaning that it would have
had to comply with SLR and AOCI recognition starting in 2021. Due to transition arrangements, SVBFG would not yet
have been required to calculate its risk-weighted assets using advanced approaches methodologies before its failure
in March 2023. See 12 C.F.R. § 217.100(b)(1)(i)(B)(2) (2019) for advanced approaches applicability for SVBFG and
12 C.F.R. § 217.100(b)(1)(ii)(B) and (C) (2019) for advanced approaches applicability for SVB prior to 2019 tailoring
rule and related rulemakings. See also 12 C.F.R. § 217.121(a)(1) (2019).
160
SVBFG’s unrealized losses started in early 2022 and peaked in the third quarter of that year. The $1.9 billion impact
reflects the adjustment to capital through the opt-out from recognition of AOCI, which primarily reflects unrealized gains
and losses adjusted for taxes, and certain other adjustments.
90 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
In addition, SVBFG would have been subject to a minimum supplementary leverage ratio of
3 percent starting in 2021. SVBFG would have met this requirement based on regulatory report
estimates available.161
Stress Testing and Capital Planning
Under the pre-2019 regulatory framework, SVBFG would have been subject to additional stress
testing requirements as follows: (1) annual and semiannual company-run stress test requirements
and (2) annual supervisory stress test, capital planning, and stress capital buffer requirements
effective in 2020. The removal or delay of these requirements may have contributed to SVBFG
having weaker capital planning and stress testing processes.
In the absence of EGRRCPA and the Board’s 2019 tailoring rule, and after SVBFG crossed the
$50 billion asset threshold and transition periods, SVBFG would have been subject to annual and
mid-cycle company-run stress tests and would have had to explore its own idiosyncratic stress
scenarios in its company-run stress test.162 This may have helped it to identify firm-specific risks.
SVBFG also would have been subject to continued controls and oversight of its stress testing
processes.
Prior to EGRRCPA and the Board’s 2019 tailoring rule, firms with a four-quarter average of
$50 billion in total consolidated assets or more were subject to annual supervisory stress
tests.163 SVBFG would therefore have been subject to its first supervisory stress test in 2020,
and annually thereafter.164 In addition, SVBFG would have submitted its first capital plan by
April 5, 2019, and would have been subject to its first stress capital buffer requirement in 2020,
and annually thereafter.
Resolution Planning
Under the 2011 rule, barring the passage of EGRRCPA and the Board’s rules implementing
it, SVBFG would have been required to submit a resolution plan to the agencies beginning in
July 2019.165 In administering the 2011 rule, however, the agencies extended plan filing deadlines
to at least two years to permit sufficient time for plan review, development of meaningful feedback,
161
SVB does not report the SLR or total leverage exposure information in its regulatory reporting filings.
162
See 12 C.F.R. § 252.55 (2019).
163
12 C.F.R. §§ 252.43(a)(1)(i), 252.44 (2019).
164
Starting in 2018, SVBFG also would have been required to submit the Capital Assessments and Stress Testing reports
(FR Y-14), which provides data that inform the Board’s stress testing process. See Instructions for the Capital Assess-
ments and Stress Testing information collection. See footnote 151.
165
See Resolution Plans Required, 76 Fed. Reg. at 67,323 (November 1, 2011), https://www.federalregister.gov/
documents/2011/11/01/2011-27377/resolution-plans-required.
Federal Reserve Regulation 91
and for firms to address the feedback.166 The 2011 rule also permitted certain firms to file less
detailed tailored plans after filing their initial plan absent the agencies’ objection.167 Given its
bank-centric profile, SVBFG would likely have been able to file a tailored resolution plan after its
initial resolution plan filing on at least a two-year cadence. As noted above, SVB became subject
to the IDI rule in 2021 and submitted its IDI plan on December 1, 2022. More than 98 percent of
SVBFG’s assets were in SVB.
Conclusions
A comprehensive assessment of changes from EGRRCPA, the 2019 tailoring rule, and related
rulemakings show that they combined to create a weaker regulatory framework for a firm like
SVBFG. In the absence of these changes, SVBFG would have been subject to enhanced liquidity
risk management requirements, full standardized liquidity requirements (i.e., LCR and NSFR),
enhanced capital requirements, company-run stress testing, supervisory stress testing at an ear-
lier date, and tailored resolution planning requirements. These requirements may have resulted in
SVBFG’s having increased capital and liquidity that would have bolstered its resilience. The require-
ments may also have encouraged closer scrutiny of the firm’s financial position, and SVBFG may
have more proactively managed its liquidity and capital positions or maintained a different balance
sheet composition. Further, the long transition periods provided by the rules that did apply further
delayed the implementation of requirements such as stress testing that may have contributed to
the resiliency of the firm.
166
See Federal Reserve Board, Agencies Extend Next Resolution Plan Filing Deadline for Certain Domestic and
Foreign Banks, September 28, 2017, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170928a.
htm (extending the deadline for U.S. global systemically important banks); and Federal Reserve Board, Agencies
Extend Deadline for 38 Resolution Plan Submissions, August 2, 2016, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20160802a.htm (extending the deadline for other domestic firms).
167
Resolution Plans Required Rule. To file a tailored plan, a domestic firm needed to have less than $100 billion in total
nonbank assets and be bank-centric (that is, their total IDI assets comprised 85 percent or more of the firm’s total
consolidated assets). Tailored resolution plans focused on the nonbanking operations of the firm and on the intercon-
nections and interdependencies between the nonbanking and banking operations.
93
Observations for Federal Reserve
Oversight
This section outlines policy and implementation issues that could be considered to enhance the
Federal Reserve’s oversight program in order to promote the safety and soundness of individual
financial institutions and the stability of the financial system. They are informed by recent events
related to SVBFG and SVB, but they are not meant to be narrowly reactive to the specific combina-
tion of vulnerabilities and shocks that led to the failure of SVBFG. Rather, the SVBFG experience
offers an opportunity for a broad assessment of how Federal Reserve oversight functions in theory
and in practice.
Lessons Learned from Earlier Bank Failures
Following the Global Financial Crisis in 2008 and 2009, the Federal Reserve Board conducted an
evaluation of how it carries out its regulatory and supervisory responsibilities. That review contrib-
uted to fundamental changes to the oversight of the largest, most systemically important insti-
tutions. For example, SR letter 12-17 set out a new framework for the consolidated supervision
of large financial institutions that was designed to both enhance the resiliency of banks to lower
the probability of failure and to reduce the impact on the broader economy in the event of failure
or distress.
It is instructive to review the lessons learned from that evaluation. An internal, non-final report
entitled “Enhancing the Effectiveness of Supervision”168 outlined several issues that are pertinent
to the SVBFG experience:
• supervisors did not provide a comprehensive picture of large firms’ vulnerabilities;
• a realization that financial institutions of all types were more vulnerable to a rapid erosion in
market liquidity than was recognized;
• historical focus on firm-specific risks rather than systemic issues;
• experience with rapid growth in size and complexity that might not be appropriately managed
under existing prudential standards;
• supervisors who identified deficiencies but did not always demand swift corrective action or
hold managers accountable when deficiencies were identified and communicated; and
• too little focus on low probability/high severity events.
168
Board of Governors of the Federal Reserve System, Enhancing the Effectiveness of Supervision, April 2010 (draft).
94 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Similarly, the Federal Reserve Bank of New York (FRBNY) commissioned an external review to draw
on lessons learned from the Global Financial Crisis and make recommendations to the FRBNY.169
The non-final report, Report on Systemic Risk and Bank Supervision, focused on systemic risk
issues but also had relevant insights for bank supervision that link to the SVBFG experience:
• a focus on recognition of risks rather than actions;
• an observation that banks’ internal risk-management processes were sometimes ineffective
and trumped by profit pressures;
• an excessive risk aversion and deference from supervisors, particularly during profitable
periods;
• a shift toward reviewing risk processes rather than the risk itself;
• misaligned incentive compensation frameworks;
• delay from a consensus-driven culture that smooths over complex issues;
• a focus on relative rather than absolute assessments; and
• a need for independent analysis to challenge supervised firms.
These reviews focused on the largest, most systemically important firms, which are now super-
vised as part of the LISCC program. The fact that smaller institutions such as SVBFG can drive
systemic disruptions suggests that one might consider lessons from these reviews and devel-
opment of the LISCC portfolio for a broader range of firms where distress could have systemic
implications.
These reviews after the Global Financial Crisis had a significant impact on the structure of super-
vision in the Federal Reserve System, but both were conducted and circulated largely within the
Federal Reserve and never formally completed.
The Federal Reserve’s Office of Inspector General (OIG) is required to complete a review of the
agency’s supervision of a failed institution when the projected loss to the Deposit Insurance Fund
is material. In 2011, the OIG reviewed 35 state member bank failures that occurred between
2009 and 2011 to identify common themes related to the cause of failure and the role of Federal
Reserve supervision.170
169
David Beim and Christopher McCurdy, “Report on Systemic Risk and Bank Supervision” (New York: FRBNY,
August 2009), Draft, https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2009-08-05%20FRBNY%20Report%20
on%20Systemic%20Risk%20and%20Supervision%20Draft.pdf.
170
Board of Governors of the Federal Reserve System, Office of Inspector General, “Summary Analysis of Failed Bank
Reviews” (Washington: Board of Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_
Cutting_Final_Report_9-30-11.pdf.
Observations for Federal Reserve Oversight 95
While the driving force behind these small bank failures was largely related to asset quality and
economic deterioration, some findings echo the SVBFG experience:
• management pursuing robust growth exceeded the banks’ risk management and funding
strategies;
• strategic choices that proved to be poor decisions; and
• incentive compensation programs that inappropriately encouraged risk taking.
Moreover, the OIG noted that many “examiners identified key safety and soundness risks, but did
not take sufficient supervisory action in a timely manner to compel the Boards of Directors and
management to mitigate those risks. In many instances, examiners eventually concluded that a
supervisory action was necessary, but that conclusion came too late to reverse the bank’s deterio-
rating condition.”171
Issues for Consideration
This report identified a number of issues relevant for how the Federal Reserve designs and imple-
ments its supervisory and regulatory program. As discussed throughout the report, the failure of
SVBFG reflects a complex interaction of many factors, some of which were idiosyncratic to the
management and business model of SVBFG and how oversight was executed, while others were
broader, with the potential to impact the effectiveness of the oversight program.
The observations are organized around four broad themes: (1) enhance risk identification,
(2) promote resilience, (3) change supervisor behavior, and (4) strengthen processes. The ideas
are meant to be feasible in that they fall within the Federal Reserve’s existing authorities and
support the Federal Reserve’s existing mandates. These are not full-fledged proposals and are not
intended as a checklist of specific actions. Rather, they represent ideas that may warrant further
consideration by policymakers based on observations related to the failure of SVBFG and broader
environmental changes, such as technological innovations that impact the pace of financial flows.
Many options involve difficult trade-offs that must be considered carefully by policymakers; e.g., a
more forceful oversight program may increase resilience but may also add burden or hinder finan-
cial intermediation.
Enhance Risk Identification
A foundational piece of any risk-management framework is the ability to identify material risks.
This is true for both firms and for supervisors, and a substantial portion of risk management is
dedicated to effective risk identification.
171
Board of Governors of the Federal Reserve System, Office of Inspector General, Summary Analysis of Failed Bank
Reviews (Washington: Board of Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_Cutting_
Final_Report_9-30-11.pdf.
96 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
The SVBFG experience shows that weak risk identification can have severe consequences: SVB
failed to identify its true liquidity risk and interest rate risk, and supervisors failed to appreciate
how those shortcomings created a much more vulnerable firm in the current economic and finan-
cial environment. Supervisors can reconsider what types of foundational exams are most relevant
for firms of all sizes to ensure appropriate identification of risks.
Supervisors can also consider how to develop a more robust understanding of the risks banks
face and how those might be evolving with the economic, financial, and technological environ-
ment. For example, a “portfolio entrance exam” as firms grow quickly and prepare for heightened
supervisory standards would allow supervisors to make informed judgments more quickly. This is
particularly true for some smaller institutions with distinctive business models where traditional
metrics are potentially less relevant. More detailed data on depositor concentration and net
stressed liquidity positions through a review of liquidity would provide greater insight into liquidity
risk and possible depositor dynamics in the current environment. A reassessment of the drivers of
systemic risk could facilitate development of a stronger tailoring regime that reflects the current
economic environment and the drivers of systemic impact.
Promote Resilience
The goal of risk management is not to eliminate risk but to understand risks and to control them
within well-defined and appropriate risk tolerances and risk appetites. From society’s perspective,
resilient firms are more likely to provide financial services across a range of potential outcomes,
and prudential oversight helps mitigate well-known market failures that might lead the private sec-
tor to under-invest in resilience. This is a question about how much ex ante self-insurance against
extreme events is required and ultimately reflects policymaker objectives.
The need for resilience is particularly important in periods of rapid change and heightened uncer-
tainty when shocks can materialize in unexpected ways, such as the unprecedented pace of
deposit flows. As indicated in the previous reviews mentioned above, rapid growth itself is often a
sign of increased risk where additional oversight and mitigants are needed. The supervisory and
regulatory program could consider ways to promote resilience of firms with well-identified, mate-
rial risk-management weaknesses, rapid growth, or substantive business model changes. This
could be through, for example, higher capital or liquidity buffers or activity restrictions. By contrast,
SVBFG had a long runway to meet higher standards even as it was growing rapidly.
To further strengthen resilience, supervisors could consider a number of specific steps. Stronger
incentives to manage risk effectively linked to compensation or activity restrictions could fur-
ther align private and social objectives for a safe and sound banking system. Requirements for
stronger operational capacity to access alternative forms of funding in stress could help cushion
shocks. Supervisors could reconsider how to best reflect interest rate risk in regulatory capital
assessments.
Observations for Federal Reserve Oversight 97
Change Supervisor Behavior
Supervision requires consequential judgments about issues that directly impact individual firms
and the broader financial system. These judgments must be forward-looking and are necessarily
made with imperfect information, particularly in the case of potential tail events with systemic
consequences, but also must be fair, evidence-based, and consistent. The SVBFG experience
suggests a supervisory program that was overly focused on oversight requirements rather than the
underlying risks. In some cases, significant risks were treated by SVBFG more as a process to fix
than as a clear and present threat to the viability of a firm.
The supervisory record on SVBFG shows a focus on consensus-building and a perceived need
to form ironclad assessments about what had already gone wrong and less on judgments with
a more open mind about what could go wrong. This hesitancy to move decisively is particularly
difficult to overcome during periods of strong economic growth and business performance. To
complement the more structured stress testing program, supervisors could also engage in narra-
tive-based “pre-mortem” exercises or reverse stress testing to think critically about idiosyncratic
scenarios and tail events that could lead to acute distress at individual firms.
This experience also suggests an opportunity to shift the culture of supervision toward a greater
focus on inherent risk, and more willingness to form judgments that challenge bankers with a
precautionary perspective. Individual examiners and supervisors often identified core issues but
then failed to take collective action. This could include additional training and portfolio rotations to
better understand a range of perspectives. Moreover, supervisors in other jurisdictions have devel-
oped approaches based in behavioral science that incorporate data on institutional attitudes and
norms related to risk factors, such as complacency, overconfidence, short-term focus, and lack of
effective challenge that can reveal institutional blind spots and contribute to vulnerabilities like
those seen at SVB.172 The Federal Reserve could investigate these tools through a pilot program.
172
See, e.g., Australian Prudential Regulation Authority, “Transforming Governance, Culture, Remuneration and Accountabil-
ity: APRA’s Approach,” APRA (2019), https://www.apra.gov.au/sites/default/files/Transforming%20governance,%20
culture,%20remuneration%20and%20accountability%20-%20APRA%E2%80%99s%20approach.pdf; Australian Prudential
Regulation Authority, “No Room for Complacency on Bank Risk Culture,” APRA (2022), https://www.apra.gov.au/news-
and-publications/no-room-for-complacency-on-bank-risk-culture; “Culture and Behaviour Risk Guideline,” Office of the
Superintendent of Financial Institutions, last modified February 28, 2023, https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/
gdn-ort/gl-ld/Pages/cbrsk_dft.aspx#:~:text=OSFI%27s%20Culture%20and%20Behaviour%20Risk%20Guideline%20
is%20principles-based,scope%2C%20complexity%20of%20operations%2C%20strategy%2C%20and%20risk%20profile;
Central Bank of Ireland, Behaviour and Culture of the Irish Retail Banks (Dublin: Central Bank of Ireland, July 2018),
https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-
banks.pdf?sfvrsn=2; De Nederlandsche Bank, Supervision of Behaviour and Culture (Amsterdam: De Nederlandsche
Bank, 2015), https://www.dnb.nl/media/1gmkp1vk/supervision-of-behaviour-and-culture_tcm46-380398-1.pdf;
De Nederlandsche Bank, Moving from Reflex to Reflection (Amsterdam: De Nederlandsche Bank, January 2023),
https://www.dnb.nl/media/chhehw04/moving-from-reflex-to-reflection.pdf; Monetary Authority of Singapore, “Culture
and Conduct Practices of Financial Institutions,” Monetary Authority of Singapore (2020), https://www.mas.gov.sg/-/
media/MAS/MPI/Guidelines/Information-Paper-on-Culture-and-Conduct-Practices-of-Financial-Institutions.pdf; Financial
Stability Board, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (Basel: FSB, April 2014),
https://www.fsb.org/wp-content/uploads/140407.pdf; Financial Stability Board, Strengthening Governance Frame-
works to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors (Basel: FSB, April 2018), https://www.fsb.org/
wp-content/uploads/P200418.pdf.
98 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank
Strengthen Processes
The report shows a complex oversight program that involves multiple categories, triggers, phase-in
periods, rule sets, runways, and supervisory expectations. This complexity has evolved with the
complexity of the banking sector and is undoubtedly warranted in parts, but it is also an imped-
iment to both firms and their supervisors as they navigate through a challenging rule set with
discrete cliff effects.
A simpler and stronger oversight program and tailoring framework could be both more efficient
and more effective. For example, greater clarity on portfolio expectations, well-defined internal
governance over ratings, an explicit supervisory plan for firms transitioning between portfolios,
and reduced complexity of the regulatory structure could shift some bandwidth at both supervised
firms and the Federal Reserve away from the supervisory process and more toward understanding
and effectively managing the fundamental risk itself. Supervisors could also systematically elevate
focus on long-dated, material issues to promote more rapid remediation.
Conclusions
These considerations reflect initial observations drawn from a review of the failure of SVBFG and
SVB. Further development and consideration will require careful discussion of trade-offs, costs and
benefits, potential unintended consequences, and practical implication issues.
The goal of such an exercise is to learn the general lessons from this particular experience and
to help meet the Federal Reserve’s safety and soundness objectives across a wide range of
potential risks.
99
Glossary
ALCO – Asset/Liability Committee
Committee within a bank responsible for overseeing its funding strategy and interest rate risks.
AOCI – Accumulated Other Comprehensive Income
Accounting term for an account on a bank’s balance sheet that includes unrealized gains and
losses for certain investment securities not included in net income.
BME – Broadly Meets Expectations
One of the four categories within the Federal Reserve’s Large Financial Institution (LFI) supervisory
rating system. The Broadly Meets Expectations rating indicates that the firm’s financial resources,
practices, and capabilities are viewed as generally being in safe and sound condition.
CAMELS – Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to
Market Risk
Confidential supervisory rating system for insured depository institutions (e.g., banks).
CBO – Community Banking Organization
Banking organizations with less than $10 billion in total assets.
CDFPI – California Department of Financial Protection and Innovation
State of California bank regulator.
CECL – Current Expected Credit Losses
Accounting term for the methodology used by banks to establish reserves for credit losses.
CET1 – Common Equity Tier One
CET1 is primarily qualifying common stock and related surplus and retained earnings, plus or
minus regulatory deductions or adjustments (such as AOCI) as appropriate.
CME – Conditionally Meets Expectations
One of the four categories within the LFI supervisory rating system. The Conditionally Meets Expec-
tations rating indicates that the aspects of the firm’s practices and capabilities are viewed as
generally being in safe and sound condition, but there are certain material financial or operational
weaknesses in a firm’s practices or capabilities that need to be addressed.
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CSI – Confidential Supervisory Information
Confidential bank-specific information given to examiners, supervisory views, or assessments of
examiners. CSI is generally confidential by law unless public release is specifically authorized.
D-1 – Deficient-1
One of the four categories within the LFI supervisory rating system. The Deficient-1 rating indicates
that financial or operational deficiencies in a firm’s practices or capabilities put the firm’s pros-
pects for remaining safe and sound at significant risk.
D-2 – Deficient-2
One of the four categories within the LFI supervisory rating system. The Deficient-2 rating indicates
that financial or operational deficiencies in a firm’s practices or capabilities present a threat to the
firm’s safety and soundness or have already put the firm in an unsafe and unsound condition.
DST – Dedicated Supervisory Team
Team of examiners focused on a single bank.
EGRRCPA – Economic Growth, Regulatory Relief, and Consumer Protection Act
Law passed by Congress in May 2018.
EPS – Enhanced Prudential Standards
Regulatory requirements for large and complex banking organizations that are heightened relative
to requirements for smaller, less complex institutions.
FRBSF – Federal Reserve Bank of San Francisco
One of the 12 Federal Reserve Banks in the Federal Reserve System. It covers the states of
Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington, and serves
American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands.
G-SIB – Global Systemically Important Bank
A banking firm whose failure would cause the most harm to the U.S. financial system and the
broader economy.
HCE – Horizontal Capital Exam
Annual exam of capital position and risk-management practices of certain large banking organiza-
tions with at least $250 billion in assets at the same time.
HCR – Horizontal Capital Review
Annual exam of capital position and risk-management practices of certain large banking organiza-
tions with less than $250 billion in assets at the same time.
Glossary 101
HLR – Horizontal Liquidity Review
Annual exam of liquidity position and risk-management practices of certain large regional banking
organizations with more than $100 billion in assets at the same time.
HQLA – High-Quality Liquid Assets
Assets that can easily and immediately be converted to cash at little to no loss in value.
IDI – Insured Depository Institution
Any bank or savings association of which the public’s deposits are insured by the Federal Deposit
Insurance Corporation (FDIC).
ILST – Internal Liquidity Stress Test
A firm’s internally generated liquidity stress test based on risks determined by the firm.
LCR – Liquidity Coverage Ratio
Regulatory liquidity requirement that requires certain large firms maintain a minimum level of
high-quality liquid assets.
LFBO – Large and Foreign Banking Organization
Supervisory portfolio that includes U.S. firms with total assets of $100 billion or more and all for-
eign banking organizations (FBOs) operating in the U.S. regardless of size. Does not include U.S.
firms identified as G-SIBs, which are in the LISCC supervisory portfolio.
LFBOMG – Large and Foreign Banking Organization Management Group
An advisory group within the Federal Reserve System that helps to coordinate supervisory activi-
ties for the LFBO portfolio.
LFI – Large Financial Institutions Rating System
Confidential holding company rating system for bank holding companies $100 billion and above
in size.
LISCC – Large Institution Supervision Coordinating Committee
Supervisory portfolio that includes U.S. firms identified as G-SIBs.
MIS – Management Information Systems
Information used for decisionmaking at a bank.
MRA – Matter Requiring Attention
Calls for action to address weaknesses that could lead to deterioration in a bank’s soundness.
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MRIA – Matter Requiring Immediate Attention
Calls for immediate action and priority attention to address important or lingering weaknesses that
could lead to further deterioration in a bank’s soundness.
RBO – Regional Banking Organization
Banking organizations with total consolidated assets between $10 billion and $100 billion.
RBOMG – Regional Banking Organization Management Group
An advisory group within the Federal Reserve System that helps to coordinate supervisory activi-
ties for the RBO portfolio.
RFI – Risk Management, Financial Condition, and Impact Bank Holding Company Rating System
Confidential holding company rating system for banking holding companies less than $100 billion
in size.
RWA – Risk-Weighted Assets
A bank’s assets or off-balance-sheet exposures, weighted according to risk.
SC – Supervision Committee
An advisory committee to the directors of the Federal Reserve Board’s Divisions of Supervision
and Regulation and the Division of Consumer and Community Affairs, composed of the heads of
supervision from each Reserve Bank and senior officers from the Board.
Find other Federal Reserve Board publications (www.federalreserve.gov/publications/default.htm) or order
those offered in print (www.federalreserve.gov/files/orderform.pdf) on our website. Also visit the site for more
information about the Board and to learn how to stay connected with us on social media.
www.federalreserve.gov
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