The Silicon Valley Bank (SVB) autopsy is underway, but forensics disagree. Federal Reserve Vice Chairman Michael Barr says it’s “a textbook case of mismanagement.” United States President Joe Biden said the problems stemmed from legislative reform passed by Congress in 2018 that softened the regulation. This Tuesday, numerous senators on the Senate Banking Commission pointed to the regulatory and oversight failures of the Federal Reserve, which are responsible for the largest bank failure since 2008.
You are all partly right. Authorities have issued a full report on the bank’s collapse on Capitol Hill. Federal Deposit Insurance Corporation (FDIC) President Martin Gruenberg has backtracked on the bankruptcy of FTX and the previous liquidation of Silvergate Bank in his testimony, in a session where he appeared alongside Barr and an undersecretary at the Treasury Department , Nellie Liang.
Michael Barr has acknowledged that the Federal Reserve recognized the problems in 2021 and that the bank had very poor marks on the regulator’s audit. But he has said the company’s managers have failed to take the corrective action the central bank has asked of them. And that, although the supervisory authority is working with the institution, “the bank’s vulnerability only became apparent with the unexpected massive withdrawal of funds on March 9.”
Commission President Democrat Sherrod Brown has pointed out that the bank has “got too big too fast” and has highlighted how the 2018 legislative reform, following pressure from stakeholders in the industry, has eased some regulatory requirements and oversight got from medium sized banks. “The crime scene doesn’t start with the regulators in front of us. Instead, we need to look inside the bank, at the Trump-era bank executives and regulators who have returned to their mission of giving Wall Street whatever it wanted.”
However, Republican senators have questioned Barr, who has acknowledged that the 2018 reformed law gave the Federal Reserve sufficient powers to scale down the requirement for its oversight. The Fed’s vice chairman has even admitted that he disagrees with the rules, which the Fed introduced in 2019 with the support of its chairman Jerome Powell, because they are too soft on mid-sized banks. He also concedes that a stress test conducted in 2022 is unlikely to have been of much help as his scenarios were recession rather than inflation and rate hikes. The central bank has launched an internal investigation to determine what went wrong, but Barr has admitted the law gave them wiggle room
Democratic Senator Elizabeth Warren raised the tone: “The executives of SVB and Signature took wild risks and must be held accountable for the explosion of their banks, but these failures also represent a massive failure in the oversight of our country’s banks.” , she said . “After the 2008 crisis, Congress instituted tough banking rules that the big banks hated, and their CEOs lobbied hard to weaken those rules. In the end, Congress gave in and things got ugly, very ugly. Regulators have destroyed dozens of safeguards designed to prevent banks from making risky bets.”
Warren asked those present if they think changes in regulation and supervision are needed. And while both disagree on where to put the emphasis when analyzing the causes of the downfall of SVB and Signature, the three agreed that regulation and oversight must be tightened to prevent banking crises like this one from happening again.
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