The Fed is expected to release a postmortem report on Silicon Valley Bank
Do Banks Really Need Stress Tests? An Analysis of Silicon Valley Bank’s Implosion After the Wall Street Journal Beats Wall Street and FDIC
Risk management practices at Silicon Valley Bank were not corrected despite warnings from the Federal Reserve.
The Federal Reserve will release a report about its oversight of Silicon Valley Bank that is related to the bank’s failure.
The sudden implosion of two big regional banks rattled nerves throughout the financial system last month, forcing the federal government to take emergency steps to prevent a nationwide bank run.
Barr said that the Fed needs to conduct a careful and thorough review of how they supervised and regulated Silicon Valley Bank.
Dennis says that the deregulatory push promoted a light touch on bank oversight.
The Wall Street Journal had a headline in the summer of 2018, that said “Banks to Get Kinder, Gentler Treatment Under Trump Regulators.” The story was about how the Fed people in Washington were going to be easy on the bankers.
The report is expected to address whether banks should be subject to more frequent “stress tests,” in order to ensure they are able to weather challenges.
Only banks with $250 billion or more in assets must undergo a stress test every year. That threshold was raised in 2019, sparing institutions the size of Silicon Valley Bank from the additional scrutiny.
The Treasury Secretary and the Fed approved the move by the Federal Deposit Insurance Corporation to cover all deposits regardless of the limit. That helped to discourage a wider bank run, but backstopping the uninsured deposits will cost the FDIC’s insurance fund an estimated $19.6 billion. The money will be recovered from other banks.
In the aftermath of the banks’ failure, other small banks saw a record outflow of deposits. Although deposits have since stabilized at most banks, lenders are expected to be more cautious about extending credit.
What Happened to the Federal Reserve Bank of San Francisco after the First Five-Year Low-Cost Inflationary Rate Increase Campaign?
It’s creating an additional drag on growth and will likely lead to a recession later this year.
“Every borrower across the country — small, medium and large — is going to find it much more difficult and much more expensive to get credit,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. The economy is going to be weaker than it is likely to be because of the Signature and SBB failures.
The bank’s leaders also made a big bet on interest rates staying low. That became a problem as the Fed, trying to control rapid inflation, carried out its most aggressive rate increase campaign since the 1980s. The bank held longer-term bonds that dropped in value as interest rates went up, because newer debt was more attractive to investors.
What went wrong is the main question that the review could answer. Was it a problem at the Federal Reserve Bank of San Francisco, which supervised the bank, or did the fault rest with the Federal Reserve Board, which has ultimate responsibility for bank oversight? It is unclear if there was an issue with the Fed’s culture, or if the rules were lacking.
Steven Kelly, a researcher at the Yale program on financial stability, said that he had no idea what the report would hold and did not expect it to point fingers. They need a head on a pike, but not in this report.
