SVB report explores existing record, leaves new insights for later

David Paul Morris/Bloomberg

• Key insight: The first report from the external review of the failure of Silicon Valley Bank in 2023 largely is a recap of conclusions reached in the three prior reports on the failure conducted by the Fed, Government Accountability Office and Office of the Inspector General.  
• Expert quote: "[Social media] mechanisms may have accelerated the transmission of information and the movement of funds, but they did not create the financial condition to which depositors reacted." — Starling Trust Science report on Silicon Valley Bank failure
• Forward Look: The Starling report sought to substantiate the assertions of the earlier reports on the bank's failure and found most of those conclusions valid, but said the role of social media and supervisory changes highlighted in the 2023 Federal Reserve report were not important factors leading to the bank's demise.

The first report from the Federal Reserve's external review of its supervision of Silicon Valley Bank appears to break little new ground on the core issues that led to the bank's failure in 2023. But then again, it wasn't supposed to.

Starling Trust Science's preliminary report, released to the public on Monday, is an assessment of the prevailing narrative about the bank's failure. The firm sought to test the conclusions from three pre-existing government reviews of the episode to see what elements could and could not be substantiated. 

Most of the key issues flagged by those prior audits — spearheaded by former Fed Vice Chair for Supervision Michael Barr, the Fed's inspector general and the Government Accountability Office, respectively — were confirmed by the Starling report, albeit with two key exceptions. 

First, the Starling report refutes the claim that "social media" posts "fueled" the bank run that took down SVB on March 10, 2023. Citing analysis commissioned by an outside firm, the Boston-based consultancy Charles River Associates, the report concludes that most of online discussion about the bank's troubles came after its failure was imminent and there was no clear link between social media discourse and rapid withdrawal of funds from the bank.

Instead, the Starling concludes, depositors appear to have exchanged messages through private channels, such as text messages and emails, as visible signs of distress at the bank mounted — including a failed capital raise and the sale of securities that were designated to be held to maturity. 

"CRA's analysis therefore challenges an account in which social media or digital banking created the crisis," the report notes. "Those mechanisms may have accelerated the transmission of information and the movement of funds, but they did not create the financial condition to which depositors reacted."

This is not the first time the social media's impact has been questioned. Last year, researchers from Yale University and the Federal Reserve Bank of Chicago published a working paper challenging the narrative that social media accelerated the bank's demise. Instead, the researchers concluded that the run was caused by a collection of large, uninsured depositors who exited the bank at the same time, rather than droves of small retail depositors responding to Twitter posts.

Even so, the Starling report asserts that it is important to dispel the notion that supervisory practices should be adjusted to account for "social media" writ large, and should instead take a more focused look at the type of technological advancements that played an active role in accelerating the outflow of deposits — namely private communications channels and mobile banking platforms. 

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"Before 'social-media risk' can form a coherent object of supervision or regulation, policymakers must therefore specify which of these mechanisms they mean. They must distinguish the creation of concern from its communication; private coordination from public amplification; and the dissemination of information from the technological execution of withdrawals," the Starling report notes. "They must also identify what evidence would demonstrate that a particular channel triggered, accelerated, or enlarged a run. The Barr Report does none of this."

The other central finding challenged in the Starling preliminary report was the role that regulatory and supervisory policy changes played in the Fed's supervisory failings. 

The report issued by Barr cites regulatory changes called for by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 as a key element in the Fed's mishandling. That law allowed regulators to increase the threshold for banks being subject to enhanced supervision from $50 billion to $250 billion, a change that caused the issues at SVB to go underscrutinized, the Barr report found.

The Fed's initial report also pointed to changes in supervisory preferences, a conclusion widely understood to be a reference to top-down directives from former Fed Vice Chair for Supervision Randal Quarles, who served as the Fed's top regulator from October 2017 to October 2021.

The Starling report quotes several former Fed supervisory staffers — including some who worked directly on the report — who challenged those conclusions. One of those staffers said the Fed should not have included the references to the regulatory changes and supervisory posturing in its final report. 

"The bank screwed up, we missed it, end of story," the unnamed staffer said, according to the Starling report.

The report is one of three fact-finding reports Starling has promised to deliver. Its next report will contain responses from Barr and findings from a conversation with examiners at the Federal Reserve Bank of San Francisco, who had direct oversight of SVB ahead of its failure.