Federal Reserve Does Damage Control Over SVB

The magnitude of the failure of Silicon Valley Bank (SVP) can hardly be overstated. It was the largest bank failure since Washington Mutual during the global financial crisis in 2008.

Initially, over $100 billion in bank deposits were vaporized by the Federal Deposit Insurance Corporation (FDIC) on Friday, March 10, 2023, only to be reinstated 48 hours later on Sunday, March 12. This completely demolished the $250,000 limit on insured deposits that the FDIC is allowed by law to protect.

Never mind. The Federal Reserve, U.S. Treasury, FDIC, and the White House together declared a systemic emergency, which allowed the FDIC to protect the full amount of deposits. Some companies had over $3 billion on deposit with FDIC.

SVB depositors included major corporations such as Cisco, Roku, Vox, and many other giants of Silicon Valley. They were all protected even as citizens in East Palestine, Ohio, received little or no aid after a train crash that led to the creation of a mushroom cloud of toxic chemicals and dioxins in the water.

It didn’t hurt that the SVB depositors were mostly Democrats. It didn’t help that the residents of East Palestine were mostly Republicans. That’s just how the White House rolls.

In any case, the lead regulator of SVB is the Federal Reserve. In addition to the failures of risk management inside SVB, there were clearly massive failures of regulatory oversight by the Fed. In true Washington DC style, the Fed has done nothing to terminate or discipline the officials responsible for this failure, starting with Michael Barr who is the Fed’s Vice Chair for Supervision.

Why was Barr not removed from office immediately after this historic failure? Instead, the Fed has ginned up its PR machine by pretending it was on the case all along. As reported in this article, “Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year” prior to the “bank’s demise.”

Really? Those practices included “doing a bad job of ensuring that it would have enough easy-to-tap cash.” SVB was also rated by the Fed as “deficient for governance and controls.” So, what happened next? The answer is nothing.

The Fed sent a few warning letters, and that was it. Why was the bank not taken over when these cash and control defects were spotted? At a minimum, why was management not replaced and immediate remedial steps implemented?

The Fed is trying to spin these warning letters as showing they were on the case. In fact, they show the opposite.

The impression is one of bureaucrats going through the motions and doing nothing of substance. It’s time to replace Michael Barr. And let’s replace Jay Powell while we’re at it.

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