NEW YORK: There were warning signs ahead of last week’s spectacular collapse Silicon Valley BankNot only by investors but also by bank regulators.
Why the oversight failed remained a hot question among banking experts on Monday, with attention focused on the weakness of US regulations.
The Federal Reserve on Monday announced plans for a “thorough, transparent and swift” review of supervision svb It will be released publicly on May 1, effectively admitting that it could have done better.
President Joe Biden promised a “full accounting of what happened”, adding that he would ask regulators and banking regulators to tighten rules on the sector.
Banking experts are among those concerned about the rapid collapse of SVB, the country’s 16th largest bank by assets, and how its collapse was a precursor to the failure of another lender, Signature Bank, on Sunday.
The failures “highlight the inadequacy of regulatory reforms undertaken since the global financial crisis,” said Arthur Wilmarth, a law professor at George Washington University.
The bank’s one-time overtures may have pointed to clarifying potential red flags in SVB’s disproportionate exposure to tech startups, a riskier sector that can be compared to commercial real estate or emerging markets — sectors that have in the past has plagued the lenders.
Wilmarth said the SVB rose very sharply between 2020 and 2022 and that its exposure to long-term fixed-interest bonds made it particularly vulnerable to monetary policy changes by the Fed.
“It’s almost a surefire formula for failure. If the economy turns, you’re going to have trouble,” Wilmarth said.
“None of this would have been a secret to regulators.”
Experts point to the eventual easing of US laws enacted soon after the 2008 crisis.
The original Dodd–Frank law of 2010 imposed higher capital, liquidity, and other requirements on banks with at least $50 billion in assets.
In 2018, with the support of former President Donald Trump, this requirement was raised to $250 billion, affecting fewer banks.
But according to Anna Gelpern, a law professor at Georgetown University, the change in law does not excuse regulators for these failures.
“When the regulatory requirement is relaxed either on the grounds that those entities do not pose a risk to the system because of their size or are easier to supervise, that puts more pressure on old-fashioned supervision because you don’t have There’s an automatic alarm that goes off with the requirements,” he said.
“If it was clearly unsafe and unhealthy behavior,” the banks’ official designation in the law “does not excuse failure of supervision,” she said.
Michael Ohlaug, an associate professor of law at New York University, said regulators certainly assign “very little to zero-risk weighting” in terms of bank capital requirements for Treasury-linked securities because they are considered safe.
Also, regulators are lenient toward banks with respect to depositors in excess of $250,000—the limit for federally insured deposits—assuming the bank has a meaningful business relationship with such customers.
“This is probably going to warrant a rethink and to think more seriously about the floating risk of uninsured deposits,” Ohlrog said.
Why the oversight failed remained a hot question among banking experts on Monday, with attention focused on the weakness of US regulations.
The Federal Reserve on Monday announced plans for a “thorough, transparent and swift” review of supervision svb It will be released publicly on May 1, effectively admitting that it could have done better.
President Joe Biden promised a “full accounting of what happened”, adding that he would ask regulators and banking regulators to tighten rules on the sector.
Banking experts are among those concerned about the rapid collapse of SVB, the country’s 16th largest bank by assets, and how its collapse was a precursor to the failure of another lender, Signature Bank, on Sunday.
The failures “highlight the inadequacy of regulatory reforms undertaken since the global financial crisis,” said Arthur Wilmarth, a law professor at George Washington University.
The bank’s one-time overtures may have pointed to clarifying potential red flags in SVB’s disproportionate exposure to tech startups, a riskier sector that can be compared to commercial real estate or emerging markets — sectors that have in the past has plagued the lenders.
Wilmarth said the SVB rose very sharply between 2020 and 2022 and that its exposure to long-term fixed-interest bonds made it particularly vulnerable to monetary policy changes by the Fed.
“It’s almost a surefire formula for failure. If the economy turns, you’re going to have trouble,” Wilmarth said.
“None of this would have been a secret to regulators.”
Experts point to the eventual easing of US laws enacted soon after the 2008 crisis.
The original Dodd–Frank law of 2010 imposed higher capital, liquidity, and other requirements on banks with at least $50 billion in assets.
In 2018, with the support of former President Donald Trump, this requirement was raised to $250 billion, affecting fewer banks.
But according to Anna Gelpern, a law professor at Georgetown University, the change in law does not excuse regulators for these failures.
“When the regulatory requirement is relaxed either on the grounds that those entities do not pose a risk to the system because of their size or are easier to supervise, that puts more pressure on old-fashioned supervision because you don’t have There’s an automatic alarm that goes off with the requirements,” he said.
“If it was clearly unsafe and unhealthy behavior,” the banks’ official designation in the law “does not excuse failure of supervision,” she said.
Michael Ohlaug, an associate professor of law at New York University, said regulators certainly assign “very little to zero-risk weighting” in terms of bank capital requirements for Treasury-linked securities because they are considered safe.
Also, regulators are lenient toward banks with respect to depositors in excess of $250,000—the limit for federally insured deposits—assuming the bank has a meaningful business relationship with such customers.
“This is probably going to warrant a rethink and to think more seriously about the floating risk of uninsured deposits,” Ohlrog said.
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