WASHINGTON/SAN FRANCISCO, April 27 (Reuters) – Unanswered warning letters from regulators, ignored interest rate risk and unusually high levels of bankruptcy were among all the facts that emerged about last month’s two U.S. bank failures. One data point in particular, such as uninsured deposits, continues to stir deep-seated fears among financial officials: 36.
That’s about the same amount of time it took Silicon Valley Bank (SVB) to be seized by regulators from a functioning regional lender before the California-based bank closed its doors.
It took a very short time for Signature Bank to fail.
As regulators of the Federal Reserve and Federal Deposit Insurance Corporation prepare to release a pair of postmortems on Friday to explain what went wrong, the second and third-largest banks in the U.S. The staggering speed of bankruptcies remains a major focus. Moreover, the ongoing question of whether bank examiners could have had a sharper eye, and could have acted more quickly, remains a central concern. is.
“The number 36 has just been branded in my brain,” Atlanta Fed President Rafael Bostic told Reuters earlier this month. “Given that speed, how should we think about relationships? And given that speed, how should we think about protocols?”
In fact, even as officials were putting the finishing touches on two reports, the real next test was looming: First Republic Bank (FRC.N) this week hit $100 billion in first-quarter deposits. Sold its shares as it reported a decline of more than 200,000.
Bostic, for example, was already making further preparations. He said he had conversations with banks in his area about the need for communication and familiarization with the tools they might need in such situations, such as how to access the U.S. Central Bank’s emergency lending facilities. rice field.
“Ultimately, I think we basically have to act like we’re always on alert,” he said.
“Party Skunk”
The Federal Reserve’s report will focus on SVB, which took over after regulators failed to make an urgent effort to raise capital on March 10, triggering a deposit run.
Federal Reserve Vice Chairman for Oversight Michael Burr said the review would include policy recommendations and confidential supervisory information not normally made public.
“I think any bank failure like this is a clear failure of the bank’s management, a failure of the supervisor, a failure of the regulatory system,” Barr said at a hearing in March.
The FDIC’s report on the supervision of the New York-based signatory bank, which closed days after the SVB, is also due to be filed on Friday.
FDIC Chairman Martin Gruenberg is due to announce by Monday that another report on the deposit insurance system will include an overview of possible reforms.
Both regulatory oversight regimes are under scrutiny from lawmakers on both sides of the aisle questioning why bank inspectors were reluctant to pursue fixes for failed banks.
Former Fed President Sarah Bloom Ruskin said at an event held by the Peterson Institute for International Economics on Wednesday, “Supervisors tend to be party skunks. They’re the ones who point out what the flaws are. .
“There really seemed to be a lack of urgency in escalating this through the oversight channel…the lack of follow-through needs to be investigated,” she said.
‘Major Supervisory Failure’
Some policymakers are also responsible for rules that ease the most stringent scrutiny of companies with $100 billion to $250 billion in assets, including SVB and signatures.
“The lesson to be learned[from the report]is not how to identify the next SVB,” said Columbia Law School professor Kathryn Judge. “How can a bank whose failure threatens the financial system survive without more aggressive intervention?”
Daniel Tarullo, who served as the Fed’s head of supervision and regulation until 2017, said the right policy change would depend on how much liability for failure was attributed to a bank’s specificity. He held large amounts of long-term securities that lost value as short-term interest rates rose.
“What is certain is… this was a very serious supervisory failure,” Tarullo said Wednesday at an event at the Peterson Institute for International Economics.
If bank failures and their rate of occurrence are seen as a “canary in the coal mine” for problems that may occur more frequently in the future, major changes in the regulatory regime may be required, he said. said.
Reporting by Howard Schneider, Anne Saphir, and Hannah Lang.Editing by Dan Burns and Paul Simao
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