Global Courant 2023-04-28 21:10:45
Silicon Valley Bank’s dramatic failure in early March was the product of mismanagement and supervisory missteps compounded by a dose of social media frenzy, the Federal Reserve concluded in a long-awaited report released Friday.
Michael S. Barr, the Fed’s vice chairman for oversight appointed by President Joe Biden, said in the March 10 comprehensive investigation into the collapse of the SVB that numerous factors converged to make what had been the nation’s 17th largest bank , to overthrow.
They included bank executives who commit “school errors” in managing interest rate risk, Fed regulators who misunderstood the magnitude of the SVB’s problems and then reacted too slowly, and a social media frenzy that may have fueled the institution’s demise. has accelerated.
Barr called for broad changes in how regulators approach the country’s complex and intertwined financial system.
“Following the bankruptcy of Silicon Valley Bank, we need to strengthen oversight and regulation of the Federal Reserve based on what we have learned,” he said.
“As risks continue to evolve in the financial system, we must continually review our oversight and regulatory framework and be humble about our ability to assess and identify new and emerging risks,” Barr added.
A senior Fed official said more capital and liquidity may have helped SVB to survive. Central bank officials are likely to turn their attention to cultural changes, noting that risks at SVB have not been thoroughly explored. Future changes may lead to standardized liquidity requirements for a wider range of banks and stricter remuneration controls for bank managers.
Bank shares were higher after the report was released, with the SPDR S&P Bank ETF up about 1.3%.
In a stunning move that continues to reverberate throughout the banking system and financial markets, regulators shut down SVB after a run on deposits caused by liquidity problems. To meet capital requirements, the bank was forced to sell long-dated Treasury bills at a loss incurred as rising interest rates increased the value of principal.
Barr noted that SVB’s deposit run was exacerbated by social media fears that the bank was in trouble, combined with the ease of taking deposits in the digital age. The phenomenon is something regulators should take note of going forward, he said.
“[T]he combination of social media, a highly networked and concentrated depository base and technology may have fundamentally changed the speed of bank runs,” Barr said in the report. “Social media enabled depositors to immediately spread concerns about a bank run, and technology enabled instant withdrawals of funding.”
He used a broad brush when discussing the Fed’s failures, without mentioning San Francisco Federal Reserve President Mary Daly, whose jurisdiction SVB was under. Speaking on the condition of anonymity to speak frankly, senior Fed officials said regional presidents are generally not responsible for direct oversight of the banks in their districts.
Fed Chairman Jerome Powell said he welcomed the Barr investigation and internal criticism of the Fed’s conduct during the crisis.
“I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system,” Powell said in a statement.
SVB was a darling of the technology industry as a place to go for high-flying companies in need of growth financing. In turn, the bank used billions in uninsured deposits as a basis for loans.
The collapse, which came in just a few days, sparked fears that depositors would lose their money as many of the bills exceeded the $250,000 threshold for Federal Deposit Insurance Corp. insurance policies. signature bankwhich used a similar business model also failed.
As the crisis unfolded, the Fed rolled out emergency loans, guaranteeing that savers would not lose their money. While the measures have largely allayed the panic, they have drawn comparisons to the 2008 financial crisis and prompted calls to reverse some of the deregulation measures of recent years.
Senior Fed officials said changes in the Dodd-Frank reforms fueled the crisis, though they also acknowledge that the SVB case was also a failure of oversight. An amendment approved in 2018 reduced the rigor of stress tests for banks by less than $250 billion, a category that SVB fell into.
“We must develop a culture that empowers supervisors to act in times of uncertainty,” Barr wrote. “In the case of SVB, regulators delayed taking action to gather more evidence, even as the weaknesses became apparent and deepened. This meant that regulators did not force SVB to fix the problems, even as those problems got worse.”
Areas the Fed is likely to focus on include the types of uninsured deposits that were a concern during the SVB drama, as well as an overall focus on capital requirements and the risk of unrealized losses the bank had on its balance sheet.
Barr noted that oversight and regulatory changes likely won’t take effect for years.
The General Accountability Office also released a report on the bank failures on Friday that pointed to “risky business strategies along with weak liquidity and risk management” that contributed to the collapse of SVB and Signature.
Correction: The General Accountability Office also issued a report on Friday. In an earlier version, the name of the agency was incorrectly stated.
