By Hussain Al-Qemzi
The US Senate held a hearing on “Recent Bank Failures and Federal Regulatory Response.”
I have previously written about the reasons behind the failure of Silicon Valley Bank (SVB). The reasons are that a large number of depositors requested to withdraw their money one Thursday, and the SVB did not have enough money to meet the demand. On that day, the bank ended with a negative balance, and was subsequently closed by regulators.
This is somewhat strange to occur in a modern banking system in a country like the United States! The Silicon Valley Bank had a lot of valuable, safe and liquid assets. As a bank, it had access to the Federal Reserve and could replace assets with cash. It would have been very easy for SVB to pledge these assets to the Federal Reserve to borrow enough money to meet deposit outflows.
When bank regulators and inspectors do their job well, you won’t hear about it because the bank is in good health. However, when they fail to pay attention to risks considered among the basics of banking supervision, then it is not the Silicon Valley Bank or Signature Bank that has failed, but rather the regulator, which is the Central Bank.
Basel capital requirements require banks to maintain adequate capital against credit risks. However, Basel does not take into account the losses that banks may incur due to rising interest rates.
Bank auditors are supposed to pay attention to the bank’s interest rate risk profile, but it seems that they did not raise any red flags in the case of these two banks. Furthermore, the entity raising interest rates is the US Federal Reserve itself, which is also responsible for the stability of the banking system. Accordingly, has not the Federal Reserve assessed the situation of the banks that may be affected by its decisions?
The Federal Reserve’s narratives point the finger at the management of the two banks, even though the appointment of key positions in the bank, from the CEO to the risk manager and credit manager, requires approval from the Central Bank. Why did the Federal Reserve remain silent throughout this period? Did they know about the problem? If they didn’t, that’s a disaster, and if they did and didn’t do anything about it, that’s even worse.
There are axioms when it comes to the management of bank supervision to ensure the existence of basic safety rules first, instead of the US Federal Reserve being preoccupied with creating stress tests related to climate change and evaluating the bank’s commitment to the agendas of the management of racial diversity, gender equity and inclusivity.
Finally, despite all of this evidence for the presence of excessive risk-taking for years, the big question is: Why did all of this remain confined to confidential reports among bank supervisors and their bosses who must have been asleep?