The Case of Silicon Valley Bank: The Fed Takes Better, Less? The Story of Two Banks That Stopped Supervised, Protected Under Trump Regulators
The experience also shows that any bank failure can have widespread ripple effects, even if the bank is not extremely large or well-connected. The collapse of Silicon Valley Bank and Signature Bank in New York two days later rattled confidence in the nation’s overall banking system and required the federal government to take emergency steps to prevent a wider bank run.
The Federal Reserve plans to release a report Friday on whether there were lapses in its oversight of Silicon Valley Bank that may have contributed 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.
“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, head of the Better Markets watchdog group, blames a deregulatory push in recent years for promoted a light touch on bank oversight.
“The Wall Street Journal had a big headline in 2018 that said, ‘Banks To Get Kinder, Gentler Treatment Under Trump Regulators,’” Kelleher said. The story centered on the Fed people in Washington going easy on the bankers, and how they were beating up the supervisors.
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.
Both banks had a large share of deposits that exceeded the usual FDIC insurance limit of $250,000 — putting them at high risk of rapid withdrawals if customers got spooked.
In the days following the banks’ failure, other small banks saw a record outflow of deposits totaling $119 billion. Although deposits have since stabilized at most banks, lenders are expected to be more cautious about extending credit.
Fed Supervision: What went wrong with the FRB and the Bank of San Francisco, and why it was a failure of the Federal Reserve Board
It’s led to a growing risk of a recession this year, due to the drag that caution and higher interest rates have on economic growth.
“Borrowers of all sizes are going to find it much more difficult and 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 bet that interest rates wouldn’t go up. The problem became a problem as the Fed carried out its most aggressive rate increase campaign since the 1980s. The bank held longer-term bonds that dropped in value as interest rates rose, because newer debt issued at the higher rates became more attractive for investors.
What went wrong is the crux of the review’s questions. Was it a problem at the Federal Reserve Bank of San Francisco, where they supervised the bank, or was it a fault of the Federal Reserve Board? It is also unclear whether there was an issue with the Fed’s culture around — and approach to — supervision, or whether the existing rules were lacking.
Steven Kelly, a researcher at the Yale Program on Financial Stability, said that he didn’t expect the report to point fingers, but that it was a mystery what it would hold. “In some sense, they really need a head on a pike — and they’re not going to do that in this report.”
Powell said he was happy with the report from Vice Chair Barr on Federal Reserve supervision. I am confident that the recommendations to address rules and practices will lead to a better banking system.
The speed of the bank run at Silicon Valley — where customers tried to withdraw an unprecedented $140 billion over the course of two days — will force the Fed to rethink its approach, in an age where rumors can spread rapidly on social media and money can be moved instantly with a tap on a smart phone.