McKinsey scolded by regulators for weak consulting work at Silicon Valley Bank
The US Federal Reserve’s 102-page post-mortem report on Silicon Valley Bank (SVB) criticized McKinsey & Company for consulting work it performed for the now defunct bank in 2020 and 2021.
As SVB was approaching the $100-billion asset threshold, the firm in 2020 called in a raft of consultants to help it manage new regulations that would apply to it as a large financial institution (LFI). The enlisted consultancies included Curinos, EY, Accenture, Protiviti, and McKinsey.
McKinsey was tapped in August 2020 to complete an EPS assessment, which measures a bank’s ability to meet stricter prudential standards for capital reserves, liquidity, and risk management.
The Fed report said McKinsey failed to identify the bank’s shortcomings. SVB’s business model was extremely vulnerable to the risk of a sharp hike in interest rates, which arrived in 2021 and 2022 to combat persistent high inflation. SVB was toppled by a bank run in March, and then bailed out and sold to First Citizens Bank & Trust.
According to the report, McKinsey “failed to design an effective program” to assess SVB’s shortcomings and filed a report filled with “weaknesses.”
McKinsey told The Washington Post that it was hired for “a targeted assessment, geared specifically to the changes in criteria” as SVB crossed the $100-billion asset benchmark, but “not a comprehensive risk assessment.”
During the period that SVB was working with its retinue of consultants to try to meet new regulatory expectations, bank examiners from the Fed questioned the value of McKinsey’s work. A former SVB official told The Washington Post that one regulator asked if they thought they were getting their money’s worth from McKinsey.
After that, SVB tapped a different consultancy to advise on EPS gaps. “They helped stabilize the situation,” the former SVB official said.
Despite the criticism of McKinsey, the Fed’s in-depth report placed the bulk of the blame for SVB’s flameout on mismanagement by executives and a lack of oversight by regulators.
McKinsey remains one of SVB’s many unsecured creditors, with $2.4 million dollars owed for its advisory work.
