There is a postmortem to be released by the Fed

What Happened at Silicon Valley Bank After The Wall Street Journal Collapse: The Fed’s Light Touch and the Impact on Small Business Banking

Changes adopted in the new year that were exempt from strict scrutiny and a cultural shift towards less asserted policing of banks allowed problems at the Silicon Valley Bank to get worse until it was too late.

The Federal Reserve believes its light-touch approach to bank regulation was partly to blame for the collapse of Silicon Valley Bank last month.

The federal government took emergency steps last month to prevent a bank run after the collapse of two big regional banks.

“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” said Barr, in announcing the Fed’s internal audit of what happened at Silicon Valley Bank.

Dennis Kelleher, who heads the watchdog group Better Markets, blames a deregulatory push in recent years that promoted a light touch on bank oversight.

A big headline in the Wall Street Journal last year was “Banks To Get Kinder, Gentler Treatment Under Trump Regulators.” “The entire story was about how the Fed people in Washington were beating up on the supervisors to go easy on the bankers.”

The report is also expected to address whether mid-sized banks should be subject to more frequent “stress tests,” to ensure they can weather financial challenges.

Currently, only the biggest banks — with at least $250 billion in assets — have to undergo a stress test every year. That threshold was raised in 2019, sparing institutions the size of Silicon Valley Bank from the additional scrutiny.

Changes to the deposit insurance system may be considered by policymakers. Some have argued the $250,000 cap on insured deposits is too low, especially for businesses with large payrolls. But insuring unlimited deposits would be costly. The ten largest accounts at Silicon Valley Bank held a total of $13.3 billion.

The banks’ failure resulted in a record outflow of deposits at other small banks. Most banks have stabilization of deposits, however, they are expected to be more cautious about extending credit.

The Fed’s Failures to Regulate Bank Rates and Bond Pricing: A Review of the Fed Regulation Practices During the SVB and Signature Failures

That caution, along with higher interest rates, creates an additional drag on economic growth, and it’s leading to a growing risk of 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’s going to be materially weaker than it likely would have been without the SVB and Signature failures.”

The leaders of the bank made a big bet on keeping interest rates low. It became a problem because of the aggressive rate increase campaign that the Fed carried out to control inflation. Longer-term bonds that were held by the bank fell in value as interest rates went up, because investors were more interested in newer debt at higher rates.

The review could answer some questions about what went wrong. 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? There is no clear answer on whether the Fed had an problem with its culture or whether the rules were not up-to-date.

Steven Kelly is a researcher at the Yale Program on Financial Stability and said that he had little expectation that the release would point fingers. They don’t want a head on a pike in this report, so they are not going to do that.

Barr took over as the Fed’s top bank regulator last July, replacing Randal Quarles, who oversaw the changes made in 2019. Senate Republicans have criticized Barr’s approach to bank regulation. But it has the backing of Fed chairman Jerome Powell.

The Fed is likely to rethink its approach to monetary policy because of the fast paced bank run at Silicon Valley, where customers attempted to withdraw an unprecedented 140 billion dollars in two days.