US Federal Reserve Chairman Jerome Powell has admitted his regulator was caught off guard by the sudden collapse of Silicon Valley Bank (SVB), despite being under their watch.
At a press conference held Right after the March 22 Federal Open Market Committee meeting, Powell said he immediately knew an internal investigation was needed when the bank closed on March 10, saying:
“I realized right away that there was going to be a need for an overhaul. I mean the question we all asked ourselves during that first weekend was “how did this happen?”
The Federal Reserve announced the launch of an internal investigation on March 13, which is being led by Vice Chairman Michael Barr to examine the events surrounding SVB’s failure and how it “supervised and regulated” the company. .
Powell confirmed that Barr will testify next week.
“We are doing the oversight and regulatory review,” Powell said. “My only interest is that we identify what went wrong here,” he added.
SVB’s collapse was linked to successive Federal Reserve interest rate hikes aimed at controlling inflation. This would have eroded SVB’s long-term bonds which it had purchased at near-zero rates.
When SVB announced it had suffered an after-tax loss of $1.8 billion and was looking to raise $2.25 billion. The market panicked, causing its market capitalization to drop $160 billion in 24 hours.
At the time, despite SVB CEO Greg Becker urging investors to “stay calm” and not “panic”, depositors began requesting withdrawals from SVB en masse, sparking a bank run.
On March 10, the US Federal Deposit Insurance Commission (FDIC) stepped in, taking possession of SVB to help depositors access their money. Emergency measures were put in place by the government soon after to guarantee all deposits at the SVB.
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Powell’s latest comments on SVB come as the Federal Reserve announced it would raise interest rates by 25 basis points.
The news left US Senator Elizabeth Warren frustrated with Powell, who has now raised interest rates nine times in a row to 5%.
“I think he’s a dangerous man to have in this job,” she said on March 22. interview on CNN.
“We’ve never seen increases at this rate in the modern economy,” she said, adding that it risked “throwing our economy into a recession.”
Warren believes that the effects of Powell’s “weak” regulatory approach to major US banks over the past five years is another factor to blame for the recent banking crisis:
“I predicted five years ago that the consequence of this type of weakening would be that we would see these banks taking risks, increasing their short-term profits, giving themselves ginormous bonuses and big salaries, and then some of these banks would explode.”
“That’s exactly what happened under Jerome Powell’s watch,” Warren added.
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