US Federal Reserve Chairman Jerome Powell has admitted that his regulator was surprised by the sudden collapse of Silicon Valley Bank, even though it was under his watch.
At a press conference held Right after the Federal Open Market Committee meeting on March 22, Powell said he immediately knew an internal investigation was necessary when the bank closed on March 10, stating:
“I knew right away that a review was going to be necessary. I mean, the question we all had that first weekend was, ‘How did this happen?’”
On March 13, the Federal Reserve announced the launch of an internal investigation led by Vice President Michael Barr to look into the events surrounding the bankruptcy of SVB and how the Fed “supervised and regulated” the bank.
Powell confirmed that Barr will testify next week.
“We are reviewing supervision and regulation,” Powell said. “My only interest is that we identify what went wrong here,” he added.
The collapse of SVB has been linked to successive interest rate hikes by the Federal Reserve that have been aimed at controlling inflation. This is understood to have eroded SVB’s long-term bonds it bought at near-zero rates.
When SVB announced that it suffered an after-tax loss of $1.8 billion and was looking to raise $2.25 billion, the market panicked, causing a loss of $160 billion in its market capitalization in 24 hours.
At that point, despite SVB CEO Greg Becker urging investors to “stay calm” and not “panic”, depositors began requesting withdrawals from SVB en masse, prompting a bank run.
On March 10, the US Federal Deposit Insurance Commission stepped in and took possession of SVB to help depositors access their money. The government implemented emergency measures soon after to guarantee all deposits at SVB.
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Powell’s latest comments on SVB come as the Federal Reserve Board announced that it will raise interest rates by 25 basis points.
The news has US Senator Elizabeth Warren frustrated with Powell, who has now raised interest rates nine times in a row to 5%.
“I think he is a dangerous man to have in this job,” she said in a March 22 statement. interview on CNN.
“We have never seen increases at this rate in the modern economy,” he said, adding that it risks “pushing our economy into a recession.”
Warren believes that the effects of Powell’s “weak” regulatory approach towards big banks in the US over the past five years is another culprit in the recent banking crisis:
“I predicted five years ago that the consequence of that kind of weakening would be that we see these banks load up on risk, build their short-term profits, give themselves huge bonuses and big salaries and then some of those banks would blow up.”
“That is exactly what happened during Jerome Powell’s tenure,” Warren added.
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