The recent collapse of Silicon Valley Bank (SVB) has caught the attention of US Federal Reserve Chairman Jerome Powell, who has conceded that his regulator was caught off guard despite it being under their watch. In a press conference held just after the Federal Open Market Committee meeting on March 22, Powell stated that he immediately knew there was a need for an internal investigation when the bank shut down on March 10. The Federal Reserve announced the launch of an internal investigation led by Vice Chairman Michael Barr to look into the events surrounding the failure of SVB and how the Fed “supervised and regulated” the bank.
SVB’s collapse has been linked to the Federal Reserve’s successive interest rate hikes that have been aimed at taming inflation. This is understood to have eroded SVB’s long-term bonds it purchased at near-zero rates. When SVB announced that it suffered a $1.8 billion after-tax loss and was looking to raise $2.25 billion, the market panicked, leading to a $160 billion wipeout in its market cap in just 24 hours.
At the time, despite SVB CEO Greg Becker urging investors to “stay calm” and not to “panic”, depositors began to request withdrawals from SVB en masse, causing a bank run. On March 10, the United States Federal Deposit Insurance Commission stepped in, taking possession of SVB to help depositors get access to their money. Emergency measures were put in place by the government soon after to guarantee all deposits at SVB.
Powell confirmed that Barr will be testifying next week, and he stated that his only interest is that they identify what went wrong at SVB. Powell’s latest comments on SVB come as the Federal Reserve Board announced that it will increase interest rates by 25 basis points. However, the news has U.S. Senator Elizabeth Warren frustrated with Powell, who has now raised interest rates nine consecutive times to 5%.
“I think he’s a dangerous man to have in this job,” she said in a March 22 interview with CNN. “We’ve never seen hikes at this rate in the modern economy,” she added, stating that it risks “pushing our economy into a recession.” Warren believes the effects of Powell’s “weak” regulatory approach toward large banks in the U.S. over the last five years is another factor to blame for the recent banking crisis.
“That is exactly what has happened on Jerome Powell’s watch,” Warren added. She predicted five years ago that the consequence of the weakening regulatory approach would be that banks would load up on risk, build their short-term profits, give themselves huge bonuses and salaries, and then some of those banks would explode.
The SVB collapse should act as a wakeup call to regulators to revise their supervisory approach to banks in the US. However, the situation highlights broader regulatory issues that are affecting the banking sector worldwide. Regulators globally are struggling to find the right balance between protecting consumers from the potential negative impacts of cryptocurrencies while enabling innovation to flourish. Banks are beginning to offer crypto-related services, and some regulatory bodies are struggling to keep up.
In Europe, regulators are dealing with the unchartered territory of stablecoins, which are digital currencies designed to provide price stability by being pegged to a stable asset, such as the US dollar. However, as pointed out in a recent report by law firm Hogan Lovells, ensuring that stablecoins maintain their price stability can result in various risks, such as bank runs, associated with maintaining fiat currency pegs.
The same report also highlighted how blockchain technology is hugely beneficial for banks in many areas. For example, it could help facilitate cross-border payments, where fees currently restrict access for many people. However, banks need to move fast in digitalizing their operations and products to avoid becoming irrelevant.
Regulators worldwide must take a proactive approach to monitor banks and ensure they have sufficient staff and resources to comply with emerging regulations. As pressures continue to mount on banks from regulators, compliance, and rapidly-changing technology, the supervision of banks must adapt accordingly to avoid future catastrophes such as the SVB collapse.
