The Fed Failed but Wants More Power

As expected, Michael Barr blames Congress and his predecessor for Silicon Valley Bank’s failure

WSJ editorial. Excerpts: 

"The report offers a token mea culpa for not having responded fast enough to troubles at the bank."

"The report offers a token mea culpa for not having responded fast enough to troubles at the bank."

"bank examiners were slow to act on glaring problems, including SVB’s failure of its own internal liquidity stress tests. Bank examiners had “31 open supervisory findings when it failed in March 2023, about triple the number observed at peer firms,” the report says."

"Yet SVB’s liquidity was rated “satisfactory” last August, and bank examiners dallied in escalating their warnings. Why? The report says that “the root cause of these delays around supervisory actions is difficult to ascertain.”"

"the report blames the emphasis by Mr. Barr’s predecessor Randal Quarles on easing compliance burdens."

"ensuring due process for banks and regulating them for safety and soundness needn’t conflict."

"Mr. Quarles stepped down in October 2021, and Mr. Barr took his job last July. In the subsequent eight months before SVB’s failure, bank examiners acted with no more dispatch even as deposit outflows surged and interest rates rose."

"The report claims the bank would have been in a stronger position to manage large deposit outflows and rising rates were it not for a bipartisan banking law in 2018 that eased capital and liquidity requirements for banks with less than $250 billion in assets.

Yet the report concedes that “higher supervisory and regulatory requirements may not have prevented the firm’s failure.” SVB had a higher capital ratio than big banks that are subject to more stringent regulation." 

"SVB and bank supervisors spent “considerable effort seeking to understand the rules and when they apply, including the implications of different evaluation criteria, historical and prospective transition periods, cliff effects, and complicated definitions,”"

"In other words, SVB seems to have been more focused on complying with financial regulation than prudently managing its balance-sheet risks."