Federal Reserve Chairman Jerome Powell has admitted that the Federal Reserve was taken by surprise by the sudden collapse of Silicon Valley Bank (SVB), despite the bank being under its supervision.
SVB’s failure has caused concerns about other banks facing a similar fate in the face of record-high inflation and lending rates.
The bank had a $21-billion bond portfolio consisting mostly of U.S. Treasuries that fell in value due to successive interest rate hikes aimed at taming inflation.
The market panicked when SVB announced that it had suffered a $1.8 billion after-tax loss and was looking to raise $2.25 billion, leading to a $160 billion wipeout in its market cap in 24 hours.
The mass withdrawals caused a bank run, prompting the United States Federal Deposit Insurance Commission to step in and take possession of SVB to help depositors get access to their money.
Powell has ordered an internal investigation into the events surrounding the failure of SVB and how the Fed supervised and regulated the bank. Vice Chairman Michael Barr is leading the investigation, and he is expected to testify next week.
Federal Reserve admits need for review
Powell, at a press conference after the Federal Open Markets Committee meeting, stated that he immediately knew there was a need for an internal investigation when the bank shut down on March 10. Powell promised that his only interest is to identify what went wrong.
Powell’s latest comments on SVB come as the Federal Reserve Board announced that it will increase interest rates by 25 basis points. The move has left U.S. Senator Elizabeth Warren frustrated with Powell, who has now raised interest rates nine consecutive times to 5%.
In a March 22 interview on CNN, Warren stated, “I think he’s a dangerous man to have in this job. We’ve never seen hikes at this rate in the modern economy.” She added that the rate hikes risk “pushing our economy into a recession.”
Powell assures depositors
Powell has emphasized that the United States banking system is strong and resilient. However, Powell acknowledged that the recent failure of some regional banks could cause ripple effects that slow down the economy.
At the press conference, Powell described the banking system as “sound and resilient” but said the central bank was monitoring a change in the availability of credit for consumers and businesses.
Powell noted that deposit flows have stabilized over the past week, and Americans should feel confident that their money is safe, although he stopped short of explicitly saying that all deposits are now guaranteed.
What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe.
Jesse Powell
The collapse of SVB has led to more scrutiny of the Federal Reserve’s supervisory role over banks, especially from Sen. Warren. The internal investigation launched by Powell will hopefully shed more light on the events leading up to SVB’s failure and help prevent similar incidents in the future.
