The US central bank has admitted that it did not exercise “sufficient force and urgency” in its supervision of Silicon Valley Bank which failed last month in the country’s largest bank failure since 2008.
The conclusion is one of the most important findings of the Federal Reserve’s investigation into the incident.
It prompted global concerns about the banking industry’s health.
The evaluation comes as another US lender, First Republic, continues to experience difficulties.
According to reports, US regulators are working on a possible rescue plan for the struggling firm. Which was the fourteenth largest bank in the United States at the end of last year.
Michael Barr, vice chair for supervision at the Federal Reserve, who led the assessment, stated that the US central bank should tighten its regulations in light of the lessons learned from SVB’s demise.
“Federal Reserve supervisors did not act with sufficient vigor,” he said, citing regulatory standards that were “too low,” supervision that lacked urgency, and risks to the broader financial system presented by difficulties at a mid-sized bank that Fed policies had overlooked.
“Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation,” he stated.
Jerome Powell, the chairman of the Federal Reserve, praised the “thorough and self-critical report”
“I agree with and support his recommendations to address our rules and supervisory practices. And I am confident that they will lead to a stronger and more resilient banking system,” he stated.
Fed’s Friday report outlined regulatory breaches that caused SVB and Signature Bank’s collapses last month.
After the US central bank dramatically raised interest rates last year. Consumers started withdrawing funds from both banks, which served businesses.
Investors withdrew billions overnight when SVB announced last month that it needed financing, forcing regulators to intervene.
Signature Bank and First Republic, which lost $100 billion last month, were next.
Shares of First Republic, which were worth more than $120 each at the beginning of March, dropped by more than 40% on Friday to less than $4 as uncertainty surrounded the company’s future.
“Uniquely vulnerable”
According to the Government Accountability Office, the banks were brought down by a combination of risky strategies and inadequate risk management, and officials were sluggish to act after discovering problems.
The Federal Deposit Insurance Corporation, which examined Signature, concluded that “poor management” was the “root cause” of that bank’s failure while admitting that its oversight was frequently “not timely.”
Due to “widespread managerial weaknesses, a highly concentrated business model, and a reliance on uninsured deposits”, SVB was “uniquely vulnerable” to problems, according to the Fed’s assessment.
However, the report also faulted regulators for failing to recognize the increased risks. As the bank grew swiftly and for acting too slowly when problems were identified.
The report attributed the Fed’s relaxing of small and mid-sized bank surveillance in response to Congress’ 2018 law.
“In the interviews conducted for this report, staff repeatedly mentioned changes in expectations and practices. Including pressure to reduce the burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions,” the report stated.
“There was no formal or specific policy mandating this, but employees perceived a shift in culture and expectations based on internal discussions and observed behavior, which altered how supervision was carried out.”
In 2022, Mr. Barr was appointed to his position by President Joe Biden. The report describes the changes made by his predecessor, appointed by Donald Trump.
“Unflinching”
Washington was divided in its response.
Elizabeth Warren, a Democrat with a reputation for being critical of banks, referred to the Fed’s report as an “unflinching assessment” that should prompt Congress to revise its law and result in the removal of Fed chairman Jerome Powell.
The Republican chairman of the House Financial Services Committee, Representative Patrick McHenry, characterized Fed and FDIC internal reports as “self-serving.”
“While there are areas… on which we agree, the bulk of the report appears to be a justification of the Democrats’ long-held priorities,” he stated.
“Politicising bank failures does not serve our economy, our financial system, or the American people well,” he said.
