(Washington) Exercise in contrition: US banking regulators acknowledged Friday a role in the failures of several regional banks that shook the financial system in March, and continue to have repercussions.
The Federal Reserve (Fed) and then the US Bank Deposit Agency (FDIC) published a report in quick succession on their approach to the bankruptcy of two establishments, Silicon Valley Bank (SVB) and Signature Bank.
Above all, the two institutions underlined an essential point: the failure of the two banks was primarily the consequence of errors by the respective managements, which were incapable of “managing their risks” for SVB, or of “developing and maintaining risk management practices”. adequate risks” for Signature Bank.
But the reports quickly take the form of a mea culpa on the part of the two organizations, which admit to having their share of responsibility in the chain of bankruptcies which have shaken the American financial system and continue to have repercussions.
The highly anticipated Fed report on SVB set the tone, first admitting that “supervisors have not fully appreciated the extent of the bank’s vulnerabilities” as the bank grew “in size and complexity”.
But even more, even though “the vulnerabilities have been identified”, its supervisory body has not “reacted sufficiently to ensure that SVB had quickly resolved the issues” raised.
“The Federal Reserve failed to take the strong enough decisions that were needed,” acknowledged Fed Vice President, in charge of supervision, Michael Barr, in a letter accompanying the report.
On the side of the FDIC, the agency which insures bank deposits within a certain limit, she admits that “in retrospect”, she “should have gone faster” and “have more effective communication with the management of Signature Bank”.
In question this time, “complications in terms of resources relating to the personnel in charge of the examination” of the banks, which “affected the temporality and the quality” of the supervision of the establishment.
Signature Bank “could have been more measured in its growth and put in place the necessary risk management practices, the FDIC for its part should have better anticipated and been more energetic in its supervision”, still recognizes the agency.
“Strengthen supervision and regulation”
It now remains to prevent such a situation from happening again, while the regional banks continue to be shaken, like the First Republic bank, whose action has lost more than 95% of its value in two months, and was still flowing Friday on Wall Street.
The Fed’s report thus proposes a series of actions to be implemented by the American central bank, in particular by imposing a reinforcement of the reserves concerning medium-sized banks.
Until now, the United States imposed the application of so-called “Basel III” rules only on its largest establishments, about fifteen in total.
“Basel III”, a wide range of international banking sector reforms, was launched after the financial crisis of 2008-2009 in order to strengthen the soundness of banks. Many measures have been taken but some reforms still need to be finalized, especially in the United States.
But the bankruptcy of several regional banks, in the wake of the fall of SVB, and the difficulties that First Republic is also now going through, encourage it to “strengthen the resilience of the financial system and not to focus only on specific risks” .
“After the failure of Silicon Valley Bank, we must strengthen the supervision and regulation of the Federal Reserve based on what we have learned”, underlined Michael Barr, adding that this report was “the first step in this process”. .
Proposals to this effect are planned for a later stage.
More broadly, the report nevertheless recalls that the American financial system remains “solid and resilient, with a high level of capital and liquidity”, adding that SVB was “an exception due to its highly concentrated business model”.