California Banking Regulators to Improve Supervision after SVB Collapse

In a review of the oversight and regulation of Silicon Valley Bank ("SVB"), the California Department of Financial Protection ("DPFI") ​​​highlighted factors that led to the bank's failure, and identified improvements to its supervisory practices going forward.

DPFI concluded that SVB (i) grew at a "rapid pace" without implementing sufficient risk management and (ii) faced liquidity challenges due to rising interest rates that caused SVB’s startup investments to lose value. In addition, DPFI said that social media, in reaction to SVB’s announcement that it liquidated a bond portfolio at a loss of $1.8 billion, accelerated the outflow of deposits, with the help of digital banking technology.

In conjunction with the Federal Reserve Bank of San Francisco ("FRBSF"), DPFI explained that it was responsible for supervising SVB. In the years leading up to the bank’s failure, DPFI said it had (i) identified bank management practice deficiencies, and (ii) initiated supervisory actions in response to SVB’s risk management, liquidity and interest rate examinations. DPFI said that while SVB took remedial steps, DPFI and FRBSF did not act fast enough in addressing the issues identified.

In response to its findings, DPFI plans to:

• work with federal regulators to (i) address deficiencies more promptly and (ii) continue to develop large bank supervisory plans with an increased focus on timelines for corrective actions;
• review its internal staffing processes to ensure staffing numbers are sufficient to address the accelerated growth or increased risk profile of financial institutions with assets totaling over $50 billion;
• examine banks’ uninsured deposit levels, with a focus on banks with over $50 billion in total assets; and
• require banks to assess risk management solutions for addressing risks posed by technology-enabled activities, such as "social media and real-time deposit withdrawals."