Fed review blames staff inaction, not deregulation, for Silicon Valley Bank collapse

Key points

• Starling Advisory Group found Fed staff knew or should have known about SVB's risks by March 2022 but failed to take decisive action.
• The report attributes the failure to a 'culture of risk aversion' and unclear decision-making, rather than the 2018 regulatory rollback.
• SVB’s deposits were 94% uninsured and concentrated in venture capital-backed tech firms, creating a high risk of a bank run.
• The review dismisses theories that social media accelerated the bank run, citing analysis by Charles River Associates.
• The findings have sparked political conflict, with Senator Elizabeth Warren calling the review a partisan effort to justify deregulation.

Background

This report follows the 2023 collapse of Silicon Valley Bank, the second-largest banking failure in U.S. history. Previous internal Fed reviews had already identified supervisory shortcomings, but this independent assessment provides a definitive external perspective. The timing coincides with the Federal Reserve's first interest rate hike in three years and ongoing political pressure from the Trump administration to reshape the Fed's leadership and regulatory stance.

How outlets are covering it

CNN and CNBC emphasize the political implications, noting that the report implicates Fed Governor Michael Barr, a Biden appointee, and may be used by the White House to force his removal. CNN highlights that the report absolves Barr’s predecessor, Randal Quarles, and notes concerns about Starling’s ties to Trump-aligned figures. The Financial Times focuses on the legal aftermath, detailing a recent court ruling that rejected SVB’s claims for $1.7 billion in deposits, citing 'negligent' investment strategies that prioritized yield over safety. While CNN and CNBC frame the issue around regulatory failure and political maneuvering, the FT underscores the direct financial consequences for the bank’s estate and the role of hedge funds in the litigation.

Why it matters

The report validates long-standing concerns about regulatory complacency within the Federal Reserve and provides a factual basis for potential political shifts in the Fed’s leadership. It also clarifies that the 2018 deregulation laws were not the primary cause of the SVB failure, shifting the blame to operational inaction. This distinction is crucial for future banking policy, as it suggests that stricter oversight and clearer decision-making protocols, rather than just regulatory rollbacks, are needed to prevent similar crises. The political fallout may lead to significant changes in the Fed’s supervisory division, including potential staff reductions and leadership turnover.

What to watch

The Federal Reserve has not released the full Starling report, and it is unclear when or if it will be made public. Political pressure may intensify, potentially leading to attempts to remove Fed Governor Michael Barr from the Board of Governors. The Fed’s Vice Chair for Supervision, Michelle Bowman, has already begun reducing the size of the supervision and regulation division by approximately 30%, signaling a broader shift in the agency’s approach to bank oversight. Future regulatory frameworks may prioritize decisive action and clearer decision rights to prevent similar supervisory failures.