Regulators acknowledge role in regional bank failures

UPGRADE DAY

Exercise of contrition: US banking regulators acknowledged in reports on Friday a role in the failures of several regional banks that rocked the financial system in March, and continue to have repercussions.< /p>

The Federal Reserve (Fed) and then the US Bank Deposit Agency (FDIC) published a report in quick succession on their approach to the bankruptcy of two institutions, Silicon Valley Bank (SVB) and Signature Bank.

The two institutions first of all underlined an essential point: the failure of the two banks is in the first place the consequence of errors of the respective managements, incapable of “managing their risks” for SVB, or of “developing and maintaining proper risk management practices” for Signature Bank.

But the reports quickly take the form of a mea culpa on the part of the two organizations, which admit to having their share of responsibility in the chain of bankruptcies which have shaken the American financial system and continue to have repercussions.

The long-awaited Fed report on SVB set the tone, first admitting that “supervisors did not fully appreciate the extent of the vulnerabilities” of the bank as it gained “in size and complexity”.

But even more, even though “the vulnerabilities were identified”, its oversight body did not “react sufficiently to ensure that SVB had quickly resolved the issues” raised.

“La Réserve federal was unable to take the strong enough decisions that were necessary,” admitted the vice-president of the Fed, in charge of supervision, Michael Barr, in a letter accompanying the report.

On the side of the FDIC, the agency that insures bank deposits up to a certain limit, she admits that “in retrospect” she “should have gone faster” and “had more effective communication with the management of Signature Bank”. /p>

At issue this time, “complications in terms of resources relating to the staff in charge of the examination” of the banks, which “affected the temporality and quality” of the supervision of the establishment.< /p>

Signature Bank “could have been more measured in its growth and put in place the necessary risk management practices, the FDIC for its part should have better anticipated and been more energetic in its supervision”, still recognizes the agency.

> “Strengthen supervision and regulation”

It now remains to prevent such a situation from happening again, while regional banks continue to be shaken, like the First Republic bank, whose action has lost more than 95% of its value in two months, and was still sinking on Wall Street on Friday.

The Fed report thus proposes a series of actions to be implemented by the American central bank, in particular by imposing a reinforcement of the reserves concerning the medium-sized banks.

So far the United States imposed the application of the so-called “Basel III” rules only to its largest establishments, about fifteen in total.

“Basel III”, a wide range of international banking sector reforms, was initiated after the financial crisis of 2008-2009 in order to strengthen the soundness of banks. Many measures have been taken, but some reforms still need to be finalized, particularly in the United States.

But the bankruptcy of several regional banks, in the wake of the fall of SVB, and the difficulties that also now runs through First Republic, urging it to “build the resilience of the financial system and not just focus on specific risks”.

“After the failure of Silicon Valley Bank, we need to strengthen the supervision and regulation of the Federal Reserve based on what we have learned”, underlined Michael Barr, adding that this report was “the first step in this process”.

Proposals in this direction are planned for a second time.

More broadly, the report nevertheless recalls that the American financial system remains “solid and resilient, with a high level of capital and liquidity”, adding that SVB was “an exception due to its highly concentrated business model”.