U.S. Federal Reserve Chairman Jerome Powell admitted his regulators were caught off guard by the sudden collapse of the Silicon Valley bank, even though it was under their watch.
In a news conference after the March 22 FOMC meeting, Powell said he knew immediately when the bank closed on March 10 that an internal investigation was necessary, saying: "I realized right away that there was a need for a review. I mean, the question we were all asking ourselves over the first weekend was, 'How did this happen?'"
The Fed announced on March 13 the launch of an internal probe, led by Vice Chairman Michael Barr, into the events surrounding SVB's collapse and how the Fed "supervised and regulated" the bank. Powell confirmed that Barr will testify next week.
"We're doing a review of regulation," Powell said. "I'm only interested in us figuring out what's going wrong here," he added. The collapse of the SVB is related to the continuous interest rate hikes by the Federal Reserve to curb inflation. This is understood to have eroded long-term bonds that SVB bought at near-zero interest rates.
When SVB announced it was taking a $1.8 billion after-tax loss and seeking to raise $2.25 billion, markets panicked, wiping $160 billion off its market value in 24 hours. At the time, depositors began en masse demanding withdrawals from SVB, leading to a bank run despite SVB chief executive Greg Becker urging investors to "remain calm" and not "panic".
On March 10, the FDIC stepped in, taking over SVB to help depositors withdraw their funds. The government quickly took emergency measures to guarantee all of SVB's deposits. Powell's latest comments to the SVB came as the Federal Reserve Board announced a 25 basis point rate hike.
The news left U.S. Senator Elizabeth Warren disappointed with Powell, who has now raised interest rates to 5% nine times in a row.
"I think he's a dangerous guy to have in this job," she said in a March 22 interview with CNN. "In the modern economy, we've never seen rate hikes at this rate," she said, adding that it risks "pushing our economy into a recession." Warren sees the impact of Powell's "weak" approach to regulation of large U.S. banks over the past five years as another contributing factor to the recent banking crisis:
"I predicted five years ago that the consequence of this weakness would be that we would see these banks take risks, build short-term profits, give themselves huge bonuses and high salaries, and then some of them would blow up." "That's exactly what happened under Jerome Powell," Warren added.
