Federal Reserve to Review Supervision and Regulation After Collapse of Silicon Valley Bank
Federal Reserve Chairman Jerome Powell has publicly acknowledged that his regulator was caught off guard by the sudden collapse of Silicon Valley Bank (SVB), despite being responsible for its supervision.
Federal Reserve blindsided by SVB collapse
At a press conference after the Federal Open Market Committee meeting on March 22, Powell acknowledged the need for an internal investigation into the events surrounding SVB’s failure, stating that “we need to identify what went wrong here.”
The Federal Reserve launched an internal investigation by Vice Chairman Michael Barr on March 13 to examine how the Fed supervised and regulated SVB. Powell confirmed that Barr will be testifying next week, adding that the review of supervision and regulation is ongoing.
SVB’s collapse has been linked to the Federal Reserve’s successive interest rate hikes aimed at curbing inflation, which are believed to have eroded the value of the long-term bonds that SVB had purchased at near-zero rates.
When the bank announced a $1.8 billion after-tax loss and a plan to raise $2.25 billion, the market panicked, leading to a $160 billion wipeout in its market cap within 24 hours.
Despite SVB CEO Greg Becker urging investors to remain calm and avoid panic, depositors began to request withdrawals en masse, leading to a bank run. The Federal Deposit Insurance Commission stepped in on March 10, taking possession of SVB to help depositors access their funds. Emergency measures were put in place to guarantee all deposits at SVB.
Powell’s comments on SVB come as the Federal Reserve Board announced a 25 basis point increase in interest rates.
Elizabeth Warren frustrated with Powell’s interest rate hikes and regulatory approach
This move has frustrated U.S. Senator Elizabeth Warren, who has criticized Powell’s regulatory approach toward large banks in the U.S. over the last five years. She believes this has contributed to the recent banking crisis.
In a recent interview on CNN, U.S. Senator Elizabeth Warren expressed her frustration with Federal Reserve Chairman Jerome Powell for continuously raising interest rates, which has resulted in nine consecutive hikes and an interest rate of 5%.
Warren believes Powell’s actions are risky and could push the economy into a recession, stating that the modern economy has never seen hikes at this rate before.
Furthermore, she attributes the recent banking crisis to Powell’s “weak” regulatory approach toward large banks in the U.S. over the past five years. Warren argues that she predicted the consequences of such weakening, which would result in banks taking on excessive risk to build short-term profits, reward themselves with massive bonuses and salaries, and potentially lead to the explosion of some banks.
Warren believes her prediction has come true on Powell’s watch, and he is a “dangerous man to have in this job.”