The Fed Passes the Buck on Bank Failures

Michael Barr’s excuses for regulatory blunders are simply unbelievable

WSJ editorial. Excerpts:

"No one disputes that bankers failed to hedge the risk posed by rising interest rates to asset prices and deposits. What Mr. Barr didn’t say is that the Fed’s historic monetary mistake created the incentives for the bank blunders. The Fed fueled the fantastic deposit growth at SVB and other banks with its prolonged quantitative easing and zero interest-rate policy that caused banks to pile into longer-term, higher-yielding assets."

"SVB’s balance sheet more than tripled in size between the end of 2019 and 2022"

"Silicon Valley investors cashed out shares at elevated prices and poured their windfall into startups with SVB accounts. SVB had more deposits than it could safely lend, so it loaded up on long-dated Treasurys and Fannie Mae securities that offered relatively high yields and were deemed low or no risk by regulators."

"The Fed had also assured the world until very late in 2021 that it had no plans to change its policies because inflation was transitory."

"startups burned cash and customers moved their money into money-market funds or Treasurys."

"He claims Fed supervisors flagged deficiencies in SVB’s liquidity risk management, stress testing and contingency funding in late 2021"

"In October 2022, he says, supervisors raised concerns with senior management over its interest rate risk profile."

"He blames bank managers for failing to heed those warnings."

"they had the power to raise a louder fuss with management or kick the matter up to more senior regulatory officials."

"SVB had higher capital than some bigger banks and likely would have met Dodd-Frank’s liquidity coverage ratio requirement, according to the Bank Policy Institute."

"the 2018 law gave the Fed “substantial discretion” to impose too-big-to-fail regulations on banks with more than $100 billion in assets to promote financial stability and soundness. Fed supervisors therefore could have demanded that SVB comply with too-big-to-fail regulation"

"regulators only did so after SVB’s collapse so they could guarantee its uninsured deposits."

"the Fed’s “severely adverse scenario” stress test in February 2022 forecast a hypothetical world in which the three-month Treasury rate stayed near zero while the 10-year Treasury yield declined to 0.75%."