Federal Reserve Chairman Jerome Powell has commented on the collapse of Silicon Valley Bank (SVB) by revealing that regulators were caught off guard by the speed of the bank run.
On Wednesday, Powell criticized the management of SVB for poor risk management.
He alleges that bank executives sought to grow the bank’s business quickly while inadequately hedging against liquidity and interest-rate risks.
Powell made the remarks at a press conference that followed the Federal Reserve’s controversial decision to raise its benchmark interest rate by 25 basis points to quash high inflation.
The move comes even as the banking sector faces stress, related in part, to high-interest rates.
“So, at a basic level, Silicon Valley Bank management failed badly,” Powell said at the press conference.
“They grew the bank very quickly.
“They exposed the bank to significant liquidity risk and interest-rate risk, didn’t hedge that risk.”
SVB’s collapse was triggered by depositors rushing to withdraw their savings after the bank suffered huge bond portfolio losses.
It took $1.8 billion in losses after liquidating much of its Treasury portfolio, which had dropped in value due to the Fed’s interest-rate hikes, sparking a rapid bank run.
“We now know that supervisors saw these risks and intervened,” Powell said, referring to the decision by California regulators to order SVB shut and appoint the Federal Deposit Insurance Corporation (FDIC) as receiver, which has been carrying out an orderly wind-down of SVB in a process known as resolution.
“SVB experienced an unprecedentedly rapid and massive bank run,” Powell continued.
“So, this is a very large group of connected depositors, concentrated group of connected depositors in a very, very fast run, faster than the historical record would suggest.”
An unusually high proportion of SVB deposits were above the FDIC’s usual deposit insurance cap of $250,000 per person per account category.
Around 94 percent of SVB’s deposits were uninsured, while the average figure for big banks is around half that.
The fact that such a high percentage of deposits were uninsured, and thus subject to losses in case of a failure, made SVB particularly vulnerable to a run.
When depositors got wind of a $1.8 billion loss after SVB had to sell low-priced Treasurys that had fallen in value due to the Federal Reserve’s rapid rate hikes, they headed for the exits.
A day before SVB’s collapse, its customers withdrew $42 billion in a single day, leaving it with a negative cash balance of around $1 billion.
SVB’s failure prompted the collapse of Signature Bank—which also had a very high proportion of uninsured deposits—and led to broader turmoil in the banking sector as smaller and regional banks saw uninsured deposit outflows.
This has led to calls for the FDIC to temporarily waive its usual $250,000 deposit guarantee limit and provide blanket coverage to restore confidence and prevent bank runs.
There have been mixed reactions to this proposal, with critics warning of moral hazard.
Treasury Secretary Janet Yellen said earlier this week that the situation in the U.S. banking sector was “stabilizing” and the banking system “remains sound.”
“The Fed facility and discount window lending are working as intended to provide liquidity to the banking system,” Yellen said, referring to the Fed’s provision of an emergency liquidity facility to give banks access to cash in response to demand from depositors.
“Aggregate deposit outflows from regional banks have stabilized.”
But while the Treasury secretary said that the moves restored confidence and prevented further bank runs, she said U.S. financial authorities were prepared to do more if the situation deteriorates.
“Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said.
At Wednesday’s press conference, Powell was asked whether he’s confident that the kind of vulnerabilities that were found in SVB don’t exist in other parts of the U.S. banking system.
“These are not weaknesses that are—that are at all broadly through the banking system,” Powell replied.
“This was a bank that was an outlier in terms of both its percentage of uninsured deposits and in terms of its holdings of duration risk.”
Powell said supervisors were aware of SVB’s risk-management shortcomings and were “on this issue,” but were caught off guard by the unprecedented speed of the bank run.
Some have blamed social media for the speed of the run on deposits at SVB.
It was “a bank sprint, not a bank run, and social media played a central role in that,” Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine, told The Guardian.
The collapse of SVB was the second-biggest bank failure in U.S. history.
In an environment of high interest rates, in which longer-dated securities have dropped in value, many U.S. banks have unrealized losses on their bond holdings.
FDIC chair Martin Gruenberg warned recently that U.S. banks are sitting on unrealized losses on their bond holdings of about $620 billion.
“Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” he said.
When banks have unrealized losses, it weakens their ability to meet unexpected liquidity needs because they generate less cash when sold and because their sale often reduces the amount of regulatory capital.
However, Gruenberg noted that banks in the country are “generally in a strong financial condition and have not been forced to realize losses by selling depreciated securities.”
At Wednesday’s press conference, Powell insisted that the overall U.S. banking system is “sound and resilient” as it maintains strong capital and liquidity conditions.
Powell noted that the central bank took decisive actions along with Treasury and the FDIC and that U.S. financial authorities are ready to take further action if the need arises.
“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound,” Powell said.
“In addition, we are committed to learning the lessons from this episode and to work to prevent events like this from happening again.”
The Fed’s decision to hike rates brings the federal funds rate to a range of 4.75–5.00 percent.
Looking ahead to the central bank’s next policy meeting in May, the futures market is predicting another quarter-point jump.
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