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To prevent another SVB, the Fed must enforce rules already in place

May 08, 2023

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Michael Barr, the Vice Chair for Supervision at the Federal Reserve, recently released a report on why Silicon Valley Bank failed. The report places blame for the collapse on both bank management and federal regulators, which includes the Federal Reserve.

Straight Arrow News contributor Larry Lindsey believes regulators clearly missed signs the bank was in trouble. He contends that instead of more regulation to prevent future bank failures, the Fed must simply do its job.

How about the regulators? Where were they? Well, there were 31 separate criticisms of the bank by the regulators yet somehow between 2017 and 2021, the bank received a “satisfactory” rating from the Federal Reserve. They look at six major areas, so that’s called “camels” — stands for capitalization, asset quality, management capability, earnings, “L” is liquidity and “S” is sensitivity to macroeconomic changes. Well, they failed at least three of them: Management was incompetent, they didn’t have enough liquidity, and they had no sensitivity to market risks. Yet nothing was enforced. Many things that the Fed and other regulators could have done, just weren’t done.

Now, in his report, Barr says, Well, you know, we might demand that they hold more capital, or issue more liquidity, and we could punish them by banning the distribution of capital to shareholders, and by ending incentive compensation for management.” All of that sounds quite sensible and all of it is currently within the Fed’s purview. When you look at the report, there’s absolutely no need for new rules and regulations.

What happened was the bank failed the ones [rules] that we now have in place, and the regulators failed to enforce them.

So you’ll hear a lot of screams for “regulate the banks,” etc. which means more power over the good ones. Well, again, that’s simply going to slow the economy and weaken the banks; the smarter thing to do is for the Federal Reserve and the other regulators to do their jobs.

Michael Barr, the Federal Reserve’s Vice Chairman, for supervision, recently released a report on why the Silicon Valley Bank failed. Now, he spread the blame around pretty broadly, there was widespread managerial weakness, there was a highly concentrated business model. There was extreme reliance on uninsured depositors. Now, let me just give you some examples of just how bad management was. They didn’t even have a vice president for risk management for March of 2022. Until January of 2023. This was the period during which the Fed was hiking rates and risk was being built in to anyone who was holding long term bonds, which Silicon Valley Bank was holding a lot of yet no vice president for risk their business model. Well, it’s called Silicon Valley Bank for a reason. Their function was largely to cater to new or startup, high tech businesses in Silicon Valley. Now, think about a startup business, IT issues an initial public offering for its stock, get several 100 million dollars in which it then is going to draw down over 18 months or two years to fund it’s getting up to speed as an ongoing business. Now, that means that a they’re too reliant on one industry, and B, the deposits come in, but they’re going to flow out pretty quickly because they’re to be used up. And because of that, they also were generally uninsured, the cap for deposit insurance $250,000. So if there’s a problem, people stand to lose their deposits and will pull the money out quickly. Amazingly, they really didn’t hold much liquidity. In fact, they failed their own liquidity tests their own liquidity test. Yet, what did they do? They simply changed the definition of liquidity. Now liquidity means you have the money sitting there in the bank ready to pay out in case anyone withdraws your money. So it’s very important that they have have done that. Worse, as I mentioned, they were exposed to interest rate hikes. Yet rather than take that into account, they actually removed interest rate hedges that they had on doing not just nothing, but 180 degrees, the wrong thing. How about the regulator’s where were they? Well, there were 31 separate criticisms of the bank by the regulators. Yet somehow between 2017 and 2021, the bank received a satisfactory rating from the Federal Reserve. And they look at you know, six major areas, so that’s called camels stands for capitalization, asset quality, management, capability, earnings, L is liquidity. And S is sensitivity to macro economic changes. Well, they failed at least three of them, management was incompetent, they didn’t have enough liquidity, and they had no sensitivity to market risks. Yet nothing was enforced. Many things that the Fed and other regulators could have done, just weren’t done. Now, in his report, Barr says, Well, you know, we might demand that they hold more capital, or issue more liquidity. And we could punish them by banning the distribution of capital to shareholders. And by ending incentive compensation for management, all of that sounds quite sensible. And all of it is currently within the Feds purview. When you look at the report, there’s absolutely no need for new rules and regulations. What happened was the bank failed, the ones that we now have in place, and the regulator’s failed to enforce them. So you’ll hear a lot of screams for regulate the banks etc. which means more power over the good ones. Well, again, that’s simply going to slow the economy and weaken the banks the smarter thing to do is for the Federal Reserve and the other regulators to do their jobs 

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