Fed Publishes SVB Report; Banking Survey Reveals Predictions

At the time of its failure, Silicon Valley Bank had 31 unaddressed safety-and-soundness supervisory warnings from regulators, which was triple the average number of peer banks at that time according to a 118-page report published this week by  the Federal Reserve.

The Fed announced the results from this special review of supervision and regulation of the bank, which can be viewed here. Findings include the following:

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

The report discusses in detail the management of the bank and the supervisory and regulatory issues surrounding the failure of the bank. It goes through the recent supervisory history of Silicon Valley Bank and includes more than two dozen documents containing the bank’s confidential supervisory information, such as supervisory letters, examination results, and supervisory warnings.

The report and documents detail the bank’s rapid growth, as well as the challenges Federal Reserve supervisors faced in identifying the bank’s vulnerabilities and forcing the bank to fix them.

U.S. GAO Report on Failed Banks
In addition, the U.S. Government Accountability Office (GAO) also released its own report on the failures of Silicon Valley Bank and Signature Bank. It indicates that risky business strategies, along with weak liquidity and risk management, contributed to these recent failures. In both banks, rapid growth was an indicator of risk.

Furthermore, the report states that in the five years prior to 2023, regulators identified concerns with Silicon Valley Bank and Signature Bank. However, both banks were slow to mitigate the problems the regulators identified, and regulators did not escalate supervisory actions in time to prevent the failures.

The League will also provide a more detailed review of the results from this report as well. The news release for the GAO report can be found here.

1Q 2023 Banking Outlook Survey
According to a newly released survey, about 53 percent of U.S. financial institutions expect marketplace deposit growth to increase between now and late 2023 — and 47 percent of respondents say deposit-account interest rates paid to credit union members and bank customers will continue jumping higher in tandem.

That was the response from 44 U.S. credit unions, 147 banks, and 16 other financial institutions surveyed in S&P Global Market Intelligence’s latest First-Quarter 2023 U.S. Banking Outlook Survey, which asks respondents questions about deposit growth, loan growth, future interest rates, and more.

Other survey respondent findings include the following:

• About 47 percent expect their financial institution will be paying at least 3.5 percent at the end of 2023 on a 1-year certificate of deposit (CD) product, which is significantly higher than the average annual percentage yield of 1.98 percent for a $10,000 balance in the same produce as of April 7.
• 16 percent believe deposit growth will remain flat.
• 35 percent expect “personal auto loan” credit quality to deteriorate over the next 12 months.

U.S. Bank Marketplace: More Findings
Looking ahead, S&P Global Market Intelligence’s U.S. Bank Market Report for 2023 is forecasting the following:

• Significantly higher interest rates, a continuing crisis of banking confidence, and liquidity concerns — all leading to pressure on financial institutions’ net interest margins.
• Economic uncertainty due to persistently high inflation and notable increases in interest rates. Recent turmoil in the financial markets should cause banks to build reserves for loan losses in 2023.
• Taken altogether, margin compression and increased credit costs will take a bite out of bank earnings in 2023.
• The headwinds to earnings could prompt some banks that had previously contemplated selling to another financial institution to finally take the plunge and partner with that/those other institution(s).
• Many mid-size and regional banks — as well as those below $50 billion in assets — could see a new regulatory focus emerge that focuses on liquidity sources and deposit makeup. Regulators and bankers could view investments in bond portfolios differently after the shakeout that occurred with Silicon Valley Bank and Signature Bank earlier this year, which might place greater importance on shorter-term, liquid investments.
• In the wake of the Silicon Valley Bank failure, both regulators and bankers will seek to limit uninsured deposit concentration and “outsized exposure to single industries.”

Additional Analysis, Reports, & Presentation Slides
You can also review the latest release this past week:

• This past week’s webinar presentation slides: Q2 Outlook for Commercial Banks: What’s Next for Bank Performance and the Economy (Unacceptably High Inflation Spelling Economic Weakness and the Fed).
• Economic Data & Analysis.
• Quarterly Chart Book for U.S. Banks in Q1’23: Examining the Liquidity Crunch.
• Over Half of Bankers Expect Deposit Growth; Deposit Rates to Jump.