United States Federal Reserve Chairman Jerome Powell revealed that he and his regulators were caught off guard and unable to explain the sudden collapse of Silicon Valley Bank(SVB) earlier this month, despite being under their oversight.
In a press conference, Powell stated that the question they were asking themselves over that weekend of the collapse was, “How did this happen?” As the bank’s failure triggered a panic about a potential banking crisis, which disrupted global financial markets.
“I realized right away that there was going to be a need for a review.”
According to a report, examiners from the Federal Reserve’s San Francisco branch raised concerns about SVB, claiming that it relied too much on uninsured deposits and Treasury assets that had declined in value over the preceding year.
It is still unclear whether Powell or the president of the San Francisco Fed was informed of the bank supervisors’ cautions and why SVB was not directed to address its difficulties. An investigation has been initiated by the Fed, headed by Vice Chairman Michael Barr, to examine the events leading to SVB’s failure and the Fed’s role in supervising and regulating the bank.
“We’re doing the review of supervision and regulation. My only interest is that we identify what went wrong here.”
SVB’s collapse was triggered by a rush on deposits after clients realized it had an excessive concentration of assets in Treasuries, and the assets’ value had declined due to the Federal Reserve’s swift interest rate hikes. These rate hikes had made it difficult for SVB to maintain its stability, and it was compelled to sell bonds at a loss to meet the increasing number of withdrawals.
The United States Federal Deposit Insurance Commission took control of SVB on March 10, 2023, to make it easier for depositors to access their funds. Subsequently, the government implemented emergency measures to ensure the safety of all deposits at SVB.
However, two more banks have failed since then, and the overall economy is on edge. Tighter lending conditions are anticipated to limit consumer spending and company investment for a considerable period of time.
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