Is the failure of the Silicon Valley bank due to a failure of the US Federal Reserve? Yesterday, the Fed’s Vice Chair for Supervision, Michael Barr, had in a written statement Silicon Valley Bank management blamed for the bankruptcy:
“The SVB failed, because the bank’s management has not effectively managed its interest rate and liquidity risk and subsequently, in less than 24 hours, the bank experienced a devastating and unexpected run on its uninsured depositors” (translation and emphasis by finanzmarktwelt.de).
Spicy: the head of Silicon Valley Bank Greg Becker was on the board the San Francisco Fed – so a Supervisor sits on the Board of Supervisors. It goes without saying that effective supervision is not really likely. In addition, as early as 2019 there were warnings from high-ranking ex-central bankers such as former Fed boss Volcker about rapid outflows of uninsured deposits at regional banks. But the Fed ignored the warnings and instead focused on the large, systemically important US banks.
Now US senators want clarification from the Fed in a letter to Fed Chairman Powell: what went wrong?
US senators with letter to Fed chair Powell: what went wrong with the Silicon Valley bank?
A bipartisan group of senators has sent a letter to Fed Chair Jerome Powell questioning whether the central bank has actually exercised its full legal authority to oversee Silicon Valley Bank and other mid-sized financial institutions. That’s what Boomberg reports.
The five lawmakers, including Bob Menendez, a Democrat from New Jersey, and Mike Rounds, a Republican from South Dakota, are members of the Senate Banking Committee.
In them Writea copy of which Bloomberg has obtained, asks whether the Fed has used its powers under federal law to apply an “enhanced standard of supervision and oversight” to Silicon Valley Bank or any other bank with assets between $100 billion and $250 billion .
The law allows the Fed to do this to prevent or mitigate “risks to US financial stability” and “promote the safety and soundness of the bank.”
In the letter, sent Monday, the senators called for responses by April 10.
Such an assessment would have subjected Silicon Valley Bank to stricter standards that apply to the largest banks, including higher capital and liquidity requirements and annual stress tests. Silicon Valley Bank reported total assets of $211.79 billion before its collapse earlier this month, well below the legal limit.
The question points to a key issue in the reform legislation passed in 2018, which guides supervisors to scale their supervision to the size of banks.
The law raised the asset threshold, which is subject to tightened prudential standards, from $50 billion to $250 billion, but gave regulators discretion when a bank breaks the $100 billion mark. The law gave regulators the power to increase oversight of smaller but risky banks.
The Banking Committee holds its first hearing since the collapse of Silicon Valley Bank and Signature Bank on Tuesday. Fed Deputy Chairman for Banking Supervision Michael Barr will testify along with Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Treasury Department Undersecretary for Domestic Finance Nellie Liang.
In their letter, lawmakers wanted to know whether the central bank has ever exercised its power to apply stricter supervisory standards to Silicon Valley Bank or any other medium-sized bank. The answer is an important part of the puzzle of what went wrong at Silicon Valley Bank. While some Democrats have attributed the recent turmoil to the 2018 legislative changes under then-US President Trump, others have primarily portrayed it as a blatant failure of banking regulators.
The other three senators who signed the letter are Democrat Catherine Cortez Masto of Nevada and Republicans Thom Tillis of North Carolina and Cynthia Lummis of Wyoming.
FMW/Bloomberg
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