After the crash of the SVB
Fed is examining its own failures in banking supervision
3/14/2023 5:44 am
In connection with the collapse of the Silicon Valley Bank, the US Federal Reserve has to ask itself uncomfortable questions. She now wants to clarify whether the supervision and regulation of the institute were sufficient. Meanwhile, the Biden government is trying to calm the financial markets – with limited success.
The problems in the US banking sector remain the dominant theme in the financial markets. The debacle surrounding the Silicon Valley Bank (SVB) is also putting a lot of pressure on the US Federal Reserve. Now the Fed wants to clarify whether supervision and regulation of the institution were sufficient.
The US Federal Reserve has announced an internal review after growing criticism in the wake of the biggest US banking collapse since the 2008 financial crisis. “The events surrounding Silicon Valley Bank call for a thorough, transparent and timely investigation,” said Fed Chairman Jerome Powell after the US market closed.
The Fed Vice President Michael Barr, who was in charge of the investigation, added that the central bank must carefully examine how the finance house, which specializes in financing start-ups in the tech industry, was supervised and regulated. The Fed must show “humility” and see “what we can learn from this experience.” A report on this should be published on May 1st.
The regional Fed branch in San Francisco in particular has come under pressure after the Silicon Valley Bank, based in Santa Clara, California, collapsed due to huge withdrawals of funds. The state’s financial supervisory authorities also have to put up with critical questions after the financial institution collapsed within a few days last week.
US Government: No comparison to 2008
The situation on the stock exchange remained tense at the beginning of the week. Shares in several US regional banks tumbled despite the Biden administration’s emphasis on deposit safety. First Republic Bank fell 62 percent on Monday. Other small and medium-sized financial institutions also suffered heavy losses. Large institutions like JPMorgan Chase also fell, albeit less dramatically. Overall, Wall Street stabilized somewhat.
Prices in the banking sector collapsed despite President Joe Biden’s administration making repeated attempts to reassure bank customers and stave off possible panic reactions. “Americans can rest easy, the banking system is safe. Your deposits are safe,” Biden said Monday. Customers would have access to their savings at any time, the President assured. However, unlike in the financial and banking crisis of 2008, taxpayers should not have to pay for deposit insurance this time, explained Biden. A fund that all banks pay into will take care of that. The White House has repeatedly emphasized that there are no parallels with the financial and banking crisis of 2008, when large financial institutions had to be rescued with taxpayers’ money.
Biden blames Trump
Meanwhile, the discussion as to how a bank collapse could have happened again after 2008 is in full swing. Biden blamed his predecessor, Donald Trump. Under President Barack Obama, whose deputy was Biden, strict conditions were imposed so that the financial and banking crisis would not repeat itself, said Biden. Under Trump, some of these requirements were reduced.
The background: In 2018, the US Congress cleared the way for a repeal of essential parts of the so-called Dodd-Frank Act, which was intended to prevent renewed bank failures at the expense of taxpayers. Trump had promised the financial lobby to roll back the rules passed in 2010. Trump described the Dodd-Frank Act as a “disaster” that he would like to abolish altogether. That didn’t happen, but for small and regional banks – which are now struggling – the conditions have been eased.
Biden has now announced that he wants to tighten the requirements for banks again and called on Congress to act. Whether there will be stricter laws is questionable. The Republicans have held the majority in the House of Representatives since the beginning of the year, and the Democrats’ lead in the Senate is extremely narrow. A possible new law would have to be passed by both chambers of parliament.