by Ann Saphir, Hannah Lang and Chris Prentice
(Reuters) – The Federal Reserve (Fed) released a damning analysis on Friday of its failure to identify weaknesses at Silicon Valley Bank (SVB) before its bankruptcy and pledged to tighten the regulations facing U.S. banks.
In what Michael Barr, the Fed’s vice chairman for oversight, called a “hardcore” review of the central bank’s oversight of SVB, the central bank admitted that the California bank’s oversight s was found to be inadequate and the regulatory standards were not stringent enough.
“The bankruptcy of SVB demonstrates that there are weaknesses in regulation and supervision that need to be corrected,” Michael Barr said in a letter accompanying the 114-page report.
For the Fed, the mismanagement of fundamental risks by SVB led to its own loss, but the supervisory authorities did not take full measure of the problems encountered by this bank, delaying their reactions.
At the time of its bankruptcy, SVB had 31 unaddressed warnings about its safety and soundness, three times more than its competitors, according to the report.
Higher capital and liquidity requirements would have made SVB more resilient, the Fed added. Michael Barr said that following the bankruptcy, the central bank would review how it oversees and regulates liquidity risk, starting with risks related to unsecured deposits.
SVB was administratively closed on March 10 by California banking authorities after mass customer withdrawals.
New York-based Signature Bank went bankrupt two days later, and the Fed, along with other federal authorities, took action to avert an emerging crisis of confidence in the industry.
Before the March turmoil, the banking authorities had concentrated most of their means of control on the big Wall Street banks, considered crucial for financial stability.
The awareness of the fact that regional banks can not only cause dysfunctions in the financial system but also do it very quickly, has imposed a questioning.
“The contagion from the SVB bankruptcy has threatened the ability of a wide range of banks to provide financial services and access to credit for individuals, families and businesses,” said Michael Barr.
“We need to develop a culture that enables supervisors to act in the face of uncertainty,” he added.
(Ann Saphir, Hannah Lang and Chris Prentice, Laetitia Volga, edited by Bertrand Boucey)
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