How big of a problem is greedflation?
What Happened to Silicon Valley Bank in March 2009: How the Fed and the Federal Reserve Fail to Manage Liquid and Interest Rate Risks
Panicked customers attempted to withdraw a staggering $100 billion from Silicon Valley Bank on the day the tech lender was shut down by regulators, Barr revealed on Tuesday.
Now, lawmakers are set to begin their investigation into what led to the second-largest bank collapse in US history — and how to prevent something similar from happening again.
On Tuesday morning, members of the Senate Banking Committee will probe federal regulators: Martin Gruenberg, chairman of the board of directors of the Federal Deposit Insurance Corporation; Nellie Liang, under secretary for domestic finance at the US Treasury; and Michael Barr, vice chair for supervision at the Federal Reserve, about the tumultuous events that sent financial systems into a frenzy.
Both Greg Becker and Joseph DePaolo, the former CEOs of Signature Bank, have been asked to testify.
What to expect: Elected officials will grill panelists about the details of the bank failures earlier this month and ask them about what needs to be done to prevent a similar crisis. They will want to know why no one was able to stop the meltdown.
“Executives at SVB and Signature [Bank] took wild risks and must be held accountable for exploding their banks,” Warren said. The collapses also represent a failure in supervision of our nation’s banks.
In prepared testimony released on Monday, Barr, the Fed’s vice chair for supervision, detailed how SVB leadership failed to effectively manage interest rate and liquidity risk.
“The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure,” said Barr, adding that there was “inadequate” risk management and internal controls.
On March 9, depositors withdrew $42 billion from the bank in a run on deposits, which appeared to be caused by venture capitalists urging tech startup funds to pull their money.
“Our banking system is sound and resilient, with strong capital and liquidity,” Barr said. “We are committed to ensuring that all deposits are safe. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.”
In the current environment in which money can flow out of an institution with incredible speed in response to news amplified through social media, reliance on uninsured deposits is a lesson learned from the collapses.
The collapse of the bank was said to be the first of its kind on social media.
The Federal Reserve responded by raising interest rates and this could lead to a recession. But corporate profits are surging. US profit margins have never been this high since World War II.
In a note last week, Albert Edwards wrote that companies were taking advantage of customers by charging them more to make more money.
This is not the cause of high inflation, central banks have decided instead to focus on rising nominal wages as a threat to higher inflation, referred to as the so-called wage/price spiral.
The companies pushed their margins higher. Even as their raw material costs fall, they still continue to do so.
In a January speech, Lael Brainard, former Fed vice chair and current director of the National Economic Council of the United States, expressed worry that a price-price spiral could ultimately tank the economy by turning consumers off from spending. “The compression of these markups as supply constraints ease, inventories rise and demand cools could contribute to disinflationary pressures,” she said.
Other analysts, including UBS Wealth Management’s chief economist Paul Donovan, have also taken issue with the current strategy. He claimed that Powell failed to explain the philosophy behind his policy of rate hikes and how they would curb profit margin expansion.
The First Three Years of Bank Supervision: The Effects of Climate Change on the Economy, Consumer Spending, and a Deeper Look at Wall Street Values
The first quarter of the year comes to a close this week, and soon corporations will begin to report their earnings. Those reports will provide key insights into the reliance of consumer spending, supply chain inefficiencies, inventory levels and perhaps more importantly: Profit margins.
But price-price spirals can’t last forever, said Annabel Rudebeck, head of non-US Credit at Western Asset. A recession will chip away at companies’ abilities to charge more. It will become more challenging to push price over volume at a certain point. It would probably happen if there is a big correction for higher-earning people.
The regulators that were summoned to testify agreed with Warren that the rules for banks need to be strengthened to help prevent future bank collapses.
Republican Senators repeatedly insinuated on Tuesday that the recent US banking turmoil came as a result of the Federal Reserve’s focus on climate change.
The Federal Reserve announced in September that the six largest banks in the United States would participate in a voluntary pilot program to test what effects disastrous climate change scenarios could have on their bottom lines.
The Fed should pay more attention to its mission than the climate arena. This is a waste of time, attention and manpower. “All things that could have gone into bank supervision.”
Senator Steve Daines of Montana stated that President Joe Biden’s plan contributed to Silicon Valley Bank’s downfall because it failed to prioritize the inflationary environment, rising interest rates and what they would do to bond values.
Daines spoke with Montana Public Radio in 2014 about the jury being out on whether climate change is real. The oil and gas industry has given more than $600,000 to his campaigns.
“Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates,” Powell said in January.
