LONDON — Federal Reserve Vice Chair for Supervision Michelle Bowman announced the initial findings of an independent review into the 2023 failure of Silicon Valley Bank, delivering the results in remarks at a luncheon hosted by the Lord Mayor of the City of London at Mansion House.
Bowman said she called for an independent review of SVB’s collapse in June 2023 to supplement the Federal Reserve’s internal review, and after being confirmed as vice chair for supervision, engaged the Starling Advisory Group to conduct the outside examination.
“Their report marks a pivotal moment not just in our understanding of what went wrong at SVB, but in our understanding of what went wrong within the Federal Reserve’s supervisory process,” Bowman said, noting that SVB’s collapse in March 2023 quickly spread to Signature Bank and First Republic Bank and threatened to spread further through the banking system before requiring extraordinary government intervention. “It fundamentally shook public confidence in the effectiveness of bank supervision. That loss of confidence demands our response. And transparency is where accountability begins.”
Bowman said the Starling report, the first in a planned series, was structured to be independent from Federal Reserve System staff and principals, a separation she said was essential to the integrity of its findings. The review was designed to answer three central questions: whether supervisory staff identified SVB’s vulnerabilities well before its failure, why staff did not take prompt action if they had, and whether supervisory actions or inactions contributed to the bank’s collapse.
“This review is not about assigning blame,” Bowman said. “Instead, it is about learning lessons from the past to avoid repeating them in the future.”
Seven Key Findings
The preliminary report outlines seven findings. It concludes that SVB failed due to a confluence of vulnerabilities, including unrealized accounting losses on its securities portfolio that exceeded its capital, a deposit base that was 94% uninsured and concentrated among venture capital-backed technology companies, and a lack of operational readiness to borrow from the Fed’s discount window when needed.
The report finds that Fed supervisory staff knew, or should have known, about these vulnerabilities as early as March 2022, but did not take prompt and decisive action to encourage or require SVB to reduce its interest rate risk or concentration of vulnerabilities despite that knowledge.
Notably, the report concludes that delays in supervisory action were not caused by the regulatory tailoring mandate in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, nor by any directive from the former vice chair for supervision to ease the intensity of supervision — the report notes that official had stepped down in October 2021, well before SVB’s vulnerabilities became most apparent in 2022.
Instead, the report attributes much of the supervisory inaction to a long-standing culture of risk aversion within the Fed, in which staff believed it was personally safer to take no action unless certain an action was exactly right. That culture was compounded, the report found, by a lack of clarity around decision rights, leaving supervisory staff uncertain who could authorize a given action.
The report also addresses claims that social media fueled the run on SVB, concluding that such accounts lack substantiation. Charles River Associates, analyzing the claim at Starling’s request, found no evidence that social media triggered or accelerated the run, noting that 96% of social media activity regarding the run occurred only after SVB’s failure had already become inevitable.
Initial Responses
Bowman said the Fed has not waited for the review’s completion to begin addressing the shortcomings it identified. The central bank has issued a Statement of Supervisory Operating Principles intended to refocus its supervisory approach, clearly defining its primary objectives as identifying significant threats to bank safety and soundness as early as possible and taking prompt, decisive action to address them. The statement redirects examiners to prioritize threats to a bank’s financial condition or U.S. financial stability rather than procedural or documentation issues, and expands the range of supervisory tools available to examiners to include formal observations alongside existing options such as Matters Requiring Attention and enforcement actions.
To address the cultural issues identified in the report, Bowman said examination teams will begin submitting monthly reports directly to the heads of supervision and their respective Reserve Banks, flagging any instance in which an examiner was uncertain whether the standard for supervisory action had been met or whether an action might conflict with the expectations of Board or Reserve Bank leadership. Bowman said the change is intended to empower examiners to escalate concerns without fear of repercussion while giving Fed leadership real-time visibility into where supervisory teams need clearer guidance.
Closing Remarks
Bowman said the failure of Silicon Valley Bank tested the financial system and exposed vulnerabilities both at the bank and within the Fed’s own supervisory processes that require honest assessment and meaningful reform. “The independent work of the Starling Advisory Group provides that honest assessment,” she said. “It is now our responsibility to follow through with meaningful reform.”
“The American people deserve a banking system that is safe, sound, and resilient,” Bowman said. “They deserve supervisors who constantly assess the banking system to identify vulnerabilities and have the will to act promptly and decisively when material vulnerabilities are identified. And they deserve leaders who are unafraid to examine their own shortcomings with the same rigor we apply to the institutions we supervise.”
By: BSB News wire