U.S Federal Reserve said it had failed to act with “sufficient strength and urgency” in overseeing Silicon Valley Bank, which collapsed last month in the biggest bank failure since 2008.
The conclusion is one of the key takeaways from the Federal Reserve’s episode investigation.
It has caused global concern about the current state of the banking industry.
Federal Reserve Vice Chairman Michael Barr, who led the review, said the Fed should strengthen its rules in response to what it has learned from the demise of the SVB.The review comes as another U.S. lender, First Republic, continues to struggle.
US regulators are reportedly working to bail out the company, which was the 14th largest bank in the US at the end of last year.
Federal Reserve Vice Chairman Michael Barr, who led the review, said the Fed should strengthen its rules in response to what it has learned from the demise of the SVB.
He said the Federal Reserve supervisors failed to take forceful enough action,” and said regulatory standards were “too low,” lack of urgency oversight and a broader system driven by medium-sized bank problems. mentioned the risk to Politics has failed.
“Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation,” he said.
Federal Reserve Chairman Jerome Powell said he welcomed the “thorough and self-critical report.”
“I agree with and support his suggestions for addressing our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.
The Fed’s report is one of three released by U.S. officials on Friday detailing the regulatory failures that led to the collapse of SVB and Signature Bank last month.
Both banks catered to corporate customers, but faced problems after the US Federal Reserve sharply raised interest rates last year when customers started withdrawing money.
Last month, he said he had to raise money, and SVB’s announcement sparked panic, withdrawing billions of dollars overnight and forcing regulatory intervention.
Fear has since spread to other companies, including Signature Bank and First Republic, which suffered a $100 billion outflow last month.
First Republic shares were worth more than $120 in early March, but on Friday they were down more than 40% and below $4.
The Government Accountability Office said banks were crushed by a combination of risky strategies and weak risk controls, and authorities were slow to respond even after discovering problems.
The Federal Insurance Depository Corporation, which investigated the Signature, concluded that “poor management” was the “root cause” of its failure, but acknowledged that its own oversight was often “untimely.”
A Federal Reserve review said the SVB was “particularly vulnerable” to trouble due to “extensive management weaknesses, a highly concentrated business model and reliance on uninsured deposits.” .
But regulators have also accused banks of failing to recognize the growing risks as they grow rapidly and acting too slowly when they discover problems.
The Fed’s decision to take a looser approach to oversight of small and medium-sized banks in response to Congress’s 2018 pass was a key part of the problem, according to the report. “In interviews for this report, the staff discussed expectations, including pressure to reduce the burden on companies, impose a higher burden of proof on regulatory conclusions, and demonstrate due process when considering regulatory action. and reiterated changes in practices,” the report said. . “While there was no official or specific policy requiring this, staff sensed a shift in culture and expectations from internal discussions and observed behavior that changed the way supervision was carried out.”
Barr was appointed to the position by President Joe Biden in 2022. Many of the changes discussed in the report occurred under his predecessor, appointed by Donald Trump.
The reaction in Washington was divided.
Senator Elizabeth Warren, a Democrat known for her critical views of banks, called the Fed’s report an “unflinching assessment” that should push Congress to revise its law and lead to the ouster of Fed chairman Jerome Powell.
Republican representative. Patrick McHenry, who chairs the House Financial Services Committee, said the internal reports from the Fed and FDIC were “selfish.”
“Politicizing bank failures does not serve our economy, financial system, or the American people well,” he said.