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California Regulator Faults Self, Technology for SVB Closure

California Regulator Faults Self, Technology for SVB Closure

Posted: May 10 2023
State and federal banking regulators did not take steps to ensure that Silicon Valley Bank quickly addressed problems identified by supervisors before its collapse, the California Department of Financial Protection and Innovation stated. In its report, the state agency identified several causes for SVB’s failure and pledged to take action to reduce the likelihood of similar events in the future. In addition to possible changes to its supervisory approach, DFPI said it would require California banks to better manage technological risks posed by social media and real-time withdrawals.

The report noted that while the Federal Reserve Bank of San Francisco was the primary regulator of the bank, both the Fed and DFPI had initiated supervisory actions related to SVB’s risk management, liquidity and interest rate risk simulations in the months before its failure. Both agencies failed to press SVB to fix those problems, the report concluded. “SVB had undertaken corresponding remediation efforts, but the regulators did not take adequate measures to ensure SVB did so with enough speed.”

DFPI pledged to take action to address the shortcomings identified in the report, including working with federal regulators to develop stronger systems to remediate deficiencies promptly, and continuing work to develop large bank supervisory plans for all banks with assets of more than $10 billion. However, the report also concluded that digital banking technology and social media accelerated the volume and speed of the run on SVB, which contributed to its ultimate collapse. As a result, the agency will require banks in the state to factor in such risks.

“Going forward, the DFPI will require banks to consider their susceptibility to real-time deposit withdrawals and reputational risk posed by viral social media posts or from short sellers in publicly traded scenarios,” the report said. “Examiners will discuss with bank management what kind of social media monitoring a bank is conducting and how the bank intends to confront reputational and public relations concerns in the digital age.”
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