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Evening Brief – 04.28.23

The Federal Reserve called for more vigorous banking oversight while admitting to its own failures in a widely anticipated report published Friday into the collapse of Silicon Valley Bank (SVB) last month. 

The report, authored by Fed staff and Michael Barr, the Fed’s vice chair for supervision, took a critical look at what the Fed missed at SVB. The report also pointed out underlying cultural issues at the Fed, where supervisors were unwilling to be hard on bank management when they saw growing problems. 

“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the firm’s governance, liquidity and interest rate risk management,” the report noted. 

The Fed also said, based on its own report, it planned to reexamine how it regulates banks the size of SVB, which had more than $200bn in assets when it failed. One criticism that has arisen from SVB’s failure is that the Fed and other regulators took a lighter approach to supervision for mid-size banks following the passage of a 2018 banking law that eased some of the tougher restrictions on the industry after the 2008 financial crisis. 

Barr was also particularly harsh toward SVB’s leadership, slamming it for what he called a “textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk.” 

The report looked at the role social media and technology played in the bank’s last days. While the bank’s management was poor and ultimately that was the reason the bank failed, the report noted that social media caused a bank run that happened in just hours, compared with days for earlier bank runs like those seen in 2008. 

The Fed’s report, which included the release of internal reports and Fed communications, is a rare look into how the central bank supervises individual banks as one of the nation’s bank regulators. Typically, these processes are confidential and rarely seen by the public, but the Fed chose to release the report to show how the bank was managed up to its failure. 

The bank chaos still hasn’t been resolved. First Republic could fail despite an earlier rescue effort in which the nation’s largest banks poured $30 billion into the institution. The bank is said to be on the verge of falling into FDIC receivership due to a prolonged stock slide and massive losses in market cap, and cascading outflows of deposits.

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About Joe Palmisano

Joe Palmisano is Editorial Director for Connect Money, where he brings nearly three decades experience of market insights as a financial journalist, analyst and senior portfolio manager for leading financial publications, advisory firms, and hedge funds. In his role as Editorial Director, Joe is responsible for the selection of content and creation of daily business news covering the financial markets, including Alternative Assets, Direct Investment and Financial Advisory services. Before joining Connect Money, Joe was a financial journalist for the Wall Street Journal, regularly publishing feature stories and trend pieces on the foreign exchange, global fixed income and equity markets. Joe parlayed his experience as a financial journalist into roles as a Senior Research Analyst and Portfolio Manager, writing daily and weekly market analysis and managing a FX and US equity portfolio. Joe was also a contributing writer for industry magazines and publications, including SFO Magazine and the CMT Association. Joe earned a B.S.B.A. in Finance from The American University. He holds the Chartered Market Technician (CMT) designation and is a member of the CFA Institute.