What the Silicon Valley Bank and Signature Bank failed to do last month: a federal regulator audit has to be brought to the attention of regulators
It has been six weeks since Silicon Valley Bank and Signature Bank threatened to cause a nationwide bank run. The postmortem reports are due from the U.S. regulators.
Separately, the Federal Deposit Insurance Corp. will also report Friday on how the regulator supervised New York-based Signature Bank, which failed days after the Silicon Valley lender.
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.
The Fed’s internal audit of what happened at Silicon Valley Bank needs to be conducted with humility and a careful and thorough review, according to Barr.
Dennis says that a deregulatory push promoted a light touch on bank oversight.
There was a big headline in the Wall Street Journal last year that said “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 expected to address whether the mid-sized banks should be subject to more frequent stress tests to ensure they can weather financial challenges.
The banks with at least $250 billion in assets have to take a stress test every year. That threshold was raised in 2019, sparing institutions the size of Silicon Valley Bank from the additional scrutiny.
The bank’s weaknesses have appeared in the years leading up to its downfall and as a result are the focus of most attention. The bank had a large share of deposits above the government’s $250,000 insurance limit. That is a potential risk, given that uninsured depositors are more likely to pull their money at the first sign of trouble to prevent losing their savings.
In the days following the banks’ failure, other small banks saw a record outflow of deposits totaling $119 billion. Most banks have seen deposits stabilizing, but they are expected to be more cautious about extending credit.
What Happened in the Fed’s Policy on Inflation, and Why Does It Work? A Review of the Financial Supervised Bank of the United States
A growing risk of a recession later in the year is caused by that caution, along with higher interest rates.
“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 will be weaker than it probably would have been without Signature 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. As interest rates went up, the bank held bonds that were longer-term and fell in value, because newer debt was more attractive for investors.
The questions that the review could answer center on what went wrong. The Federal Reserve Bank of San Francisco or the Federal Reserve Board had ultimate responsibility for the bank’s oversight. It is unclear whether there was an issue with the Fed’s culture around, and approach to, supervision, or if the existing rules were lacking.
“It’s a little bit of a mystery” what the report will hold, said Steven Kelly, a researcher at the Yale Program on Financial Stability, explaining that he had little expectation that the release would point fingers. “In some sense, they really need a head on a pike — and they’re not going to do that in this report.”