Silicon Valley Bank The Fed’s review
How, despite all the regulatory reforms since the 2008 financial crisis, did officials yet again find themselves scrambling to avert a systemwide disaster?
The Fed’s review of SVB’s demise elaborates on a now-familiar story. The bank’s management sacrificed soundness for profit, relying too heavily on large, uninsured deposits from its tech-industry customers and investing too much in long-term bonds that lost value as interest rates rose.
Supervisors saw the problems, but didn’t recognize their full significance or press hard enough to fix them.
Yet one observation from Michael Barr, the Fed’s head of banking supervision, deserves special attention: “While the proximate cause of SVB’s failure was a liquidity run, the underlying issue was concern about its solvency.”
https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
One great advantage of equity capital is its versatility. Supervisors will never be able to anticipate everything that could possibly go wrong. The next shock will be different. Managers will take ill-advised risks. But as long as banks have ample capacity to bear the inevitable losses, the financial system and the broader economy will be much more resilient.
The Editors Bloomberg 1 maj 2023
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