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WhatsNew2Day > US > Fed under fire for missing red flags at Silicon Valley Bank
US

Fed under fire for missing red flags at Silicon Valley Bank

Last updated: 2023/03/14 at 6:34 PM
Jacky 5 days ago
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Jerome Powell, chairman of the Federal Reserve, faces questions about how his organization could have missed so many warning signs at SVB.
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The Federal Reserve is facing harsh criticism for overlooking what observers say were clear signs that Silicon Valley Bank was at high risk of collapsing and becoming the second-biggest bank failure in US history.

Critics point to many red flags surrounding the bank, including its rapid growth since the pandemic, its unusually high level of uninsured deposits, and its many investments in long-term government bonds and mortgage-backed securities, whose value has fallen as interest rates increased.

“It is inexplicable how Federal Reserve supervisors failed to see this clear threat to the safety and soundness of the banks and to financial stability,” said Dennis Kelleher, chief executive of Better Markets, an advocacy group.

Wall Street traders and industry analysts “have been yelling publicly about these same issues for many, many months since last fall,” Kelleher added.

Jerome Powell, chairman of the Federal Reserve, faces questions about how his organization could have missed so many warning signs at SVB.

People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara on Friday after financial regulators closed the bank.

People walk through the parking lot at the Silicon Valley Bank headquarters in Santa Clara on Friday after financial regulators closed the bank.

The Fed was the main federal overseer of the Santa Clara, California-based bank, which failed last week. The bank was also supervised by the California Department of Financial Protection and Innovation.

Now the fallout from the fall of Silicon Valley Bank, along with New York-based Signature Bank, which went bust over the weekend, is complicating the Fed’s upcoming decisions on how much to raise its benchmark interest rate in the future. fight chronically high inflation.

Many economists say the central bank would likely have raised rates by an aggressive half point next week at its meeting, a step forward in its fight against inflation, after the Fed implemented a quarter point hike. in February.

Its rate currently stands at around 4.6 percent, the highest level in 15 years.

Last week, many economists suggested that Fed policymakers would raise their forecast for future rates next week to 5.6 percent. Now, all of a sudden, it’s unclear how many additional rate hikes the Fed will forecast.

Michael Barr, vice president of supervision at the Federal Reserve, in November.  He has been tasked with investigating the collapse of SVB.

Michael Barr, vice president of supervision at the Federal Reserve, in November. He has been tasked with investigating the collapse of SVB.

With the collapse of the two big banks fueling anxiety about other regional banks, the Fed may focus more on boosting confidence in the financial system than on its long-term campaign to rein in inflation.

SVB’s ‘red flags’

* Management took excessive risks buying billions of dollars in mortgage-backed securities and Treasuries when interest rates were low. They did not offset that risk with another investment.

* The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th largest bank in the country.

* Approximately 94 percent of their deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation’s $250,000 insurance limit. That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P.

The latest government report on inflation, released on Tuesday, shows that price increases remain much higher than the Fed prefers, putting Chairman Jerome Powell in a more difficult situation.

Core prices, which exclude volatile food and energy costs and are seen as a better indicator of long-term inflation, rose 0.5 percent from January to February, the most since September.

That’s much higher than is consistent with the Fed’s 2 percent annual target.

“In the absence of the fallout from the bank failure, it may have been close, but I think it would have tipped them towards a half point (rate hike) at this meeting,” said Kathy Bostjancic, chief economist at Nationwide.

On Monday, Powell announced that the Fed would review its supervision of Silicon Valley to understand how it could have better managed to regulate the bank.

The review will be led by Michael Barr, the Fed vice chair who oversees banking supervision, and will be made public on May 1.

By all accounts, Silicon Valley was an unusual bank.

His management took excessive risks by buying billions of dollars in mortgage-backed securities and Treasuries when interest rates were low. As the Federal Reserve continually raised interest rates to combat inflation, leading to higher rates on Treasuries, the value of Silicon Valley bonds steadily lost value.

Most banks would have looked to make other investments to offset that risk. The Fed could also have forced the bank to raise additional capital.

Silicon Valley Bank New York office is empty in New York on Friday

Silicon Valley Bank New York office is empty in New York on Friday

A worker (center) tells people that Silicon Valley Bank headquarters is closed Friday after regulators shut down the bank and the FDIC seized its assets.

A worker (center) tells people that Silicon Valley Bank headquarters is closed Friday after regulators shut down the bank and the FDIC seized its assets.

The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th largest bank in the country.

And about 94 percent of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation’s $250,000 insurance limit.

That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P. Signature had the fourth highest percentage of uninsured deposits.

Such an unusually high ratio made Silicon Valley Bank highly susceptible to the risk that depositors would quickly withdraw their money at the first sign of trouble, a classic bank run, which is exactly what happened.

“I’m at a loss for the words how regulators found this business model acceptable,” said Aaron Klein, a congressional aide, now at the Brookings Institution, who worked on the Dodd-Frank banking regulation bill that passed. after the 2008 financial crisis.

Bank failures are likely to influence an upcoming review of the Fed’s rules that set how much money big banks must keep in reserve.

Barr said last year he wanted a “holistic” review of those requirements, raising concerns in the banking industry that the review would lead to rules that would force banks to hold more reserves, limiting their ability to lend.

Silicon Valley Bank customers wait outside a branch in Wellesley, Massachusetts, Monday after the FDIC seized control of the bank's assets following the second most recent collapse. big in US history

Silicon Valley Bank customers wait outside a branch in Wellesley, Massachusetts, Monday after the FDIC seized control of the bank’s assets following the second most recent collapse. big in US history

Greg Becker was removed by federal authorities as CEO on Friday

Greg Becker was removed by federal authorities as CEO on Friday

Many critics also point out that a 2018 law eased banking regulations in ways that contributed to the failure of Silicon Valley.

Pushed by the Trump administration with bipartisan support in Congress, the law exempted banks with $100 billion to $250 billion in assets, the size of Silicon Valley, from requirements that included regular reviews of how they would fare in tough economic times, known as “stress tests”. ‘

Silicon Valley CEO Greg Becker had lobbied Congress to roll back the regulations and served on the board of the Federal Reserve Bank of San Francisco until the day of the collapse.

Sen. Elizabeth Warren, D-Massachusetts, asked him about his lobbying in a letter released Tuesday.

“These rules were designed to safeguard our banking system and our economy from the negligence of bank executives like you, and their reversal, along with the egregious risk management policies at your bank, have been implicated as the main causes of your bankruptcy. Warren’s letter read.

The 2018 law also gave the Fed more discretion in its banking supervision. The central bank later voted to further reduce regulation for banks the size of Silicon Valley.

In October 2019, the Fed voted to effectively reduce the capital those banks were required to hold in reserve.

Kelleher said the Fed could still have pressured Silicon Valley Bank to take steps to protect itself.

“Nothing in that law in any way prevented the Federal Reserve supervisors from doing their job,” Kelleher said.

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TAGGED: bank, dailymail, Fed, Federal Reserve, Fire, Flags, missing, news, Red, Silicon, Valley
Jacky March 14, 2023
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