So there's been a lot of back and forth about what happened, what didn't happen.
I must say Mr. Barnes thinks that this is a textbook
example of bank mismanagement at its Silicon Valley Bank.
I think everyone agrees with that every year.
Well, are there things that actually the regulators or the supervisors could have
done to make it better? So
it obviously was a textbook case of mismanagement, but I think that
explanations are usually most penetrating when they don't assume that
the people involved were either fools or crooks.
And so the question is, how could some of these decisions have been made both
by the bank management, by the Fed itself and supervising the bank?
And there I think you have to look at the behavior of the uninsured deposits
in Silicon Valley Bank and in the other banks that have failed over the course
of the last two months. Signature Bank, First Republic
and the uninsured deposits at these institutions moved away from the bank
with speed and at a volume that we had never seen before.
I mean, the the largest amounts that had ever run from a bank in the previously
largest bank failures in the country's history had been, I think, 18 billion
dollars over the course of almost a month.
And in Silicon Valley banks case. Forty two billion dollars left the bank
in a day. And the bank was getting ready to open
the next day with the expectation that another hundred billion dollars would
have left the bank and have one hundred and forty two billion dollars leaving
the bank in the course of 24 hours, which means that the liquidity
requirements facing banks are much different.
It was it was a mistake, but it was not a crazy mistake for both the bank
managements and for the Fed supervisors to look at a bank with the liabilities
of Silicon Valley Bank funded almost entirely by its core business depositors
and say we have an interest rate risk problem that's building in this bank.
But thank heavens that the bank is funded by its core depositors because
those people don't tend to run. They certainly don't run quickly.
And yet they did. And so the task for really figuring out
what ought to happen, definitely going forward, what can the Fed do going
forward? What ought banks to do going forward is
to determine why did those deposits behave differently?
And as I understand it, you know this better than I do.
As I understand it, it's not like the voters didn't see there was something
going on. There were some notices given to bank
managements saying you do have an issue here.
It appears that remedial efforts weren't taken fast enough.
They saw it coming because of the mismatch on the duration.
Is that at all because of a change in the climate, in supervision, where
people thought maybe we don't need to pay quite as much attention to division
as I understand when you came in. You did set your first goal was to
change the supervision advisory climate. Yes.
So, yes, the the what I think still needs to happen, the supervision infects
Silicon Valley Bank is a is an example of the fact that I didn't have the
effect that I would like to have had on the supervisory culture is that
supervisors it's not just at the Fed. It's across all the bank examiners.
And it's not just in the United States. It's really around the world.
There is a natural tendency for supervision to become a very
comprehensive compliance check the box type of operation.
And my message to the supervisor is it's very similar to the message that my
counterpart at the ECB, a man named Andre Andrea, has repeated very recently
in a speech that he gave in Frankfurt was that we really need to be focused on
the most important risk. We need to prioritize the risks as
opposed to give the banks a huge menu of tasks that they have to
undertake without prioritizing among them.
And then we really have to focus our attention on the banks attentions, on
the ones that are most important. And as I would often say, smite them hip
and thigh on the things that are most important.
And when you look at the bar report, it's the case that that just didn't
happen. At Silicon Valley Bank, there were 32
so-called matters requiring attention, matters requiring immediate attention at
the end of 2022. This was some time after I left the Fed.
There was clearly no inhibition on taking supervisory action against the
bank. You had 32 MRI is an MRI.
ISE. But they were across a whole range of
things that didn't matter for the bank and very few of them focused on what was
truly critical. And there was no prioritization among
them. So.
So I do think that that has to happen going forward.
And it's it's it's unfinished business at the Fed.
Let me turn, if I could, to the question of the structure of the Fed and how it
handles monetary policy as well as bank supervision, because sometimes it feels
like there's just total of two separate functions.
On the one hand, you had for monetary policy for good and sufficient reason, a
rapid increase in rates. Do we know why that was?
Because of inflation. At the same time, it felt like it was
entirely separate from if you're going to increase your rates that fast, that.
Far, wouldn't it make sense that there really is going to be interest rate risk
and will do we really communicate one side with the other that if we're going
to do that, we better take a hard look at interest rate risk at places like.
Yes, Silicon Valley Bank. Yes.
Well, I think interest rate risk and also about the need to provide liquidity
to institutions we know from history, I when I first came to Washington, it was
in the government response to the savings and loan crisis of the 1980s,
where again you had a inflationary episode and a robust Fed response to
that inflation that created significant
problems for institutions that had interest rate sensitive assets and very
mobile liabilities, in that case, the savings and loans.
So it was we have historical experience as to exactly what to expect when the
Fed is responding vigorously to a large inflationary episode.
And and one of the things that could have happened here was for the Fed to
provide liquidity, which is one of the reasons for the existence of the Fed, as
opposed to requiring Silicon Valley Bank to sell its assets into the market and
to crystallise the loss, which was the proximate trigger of the run
on on March the 9th and the closure on March 10.
But Silicon Valley Bank wasn't prepared to borrow from the Fed.
It hadn't it hadn't done sort of the necessary legal work to provide
collateral. And that's because the Fed has lost the
thread a little bit about its fundamental core purpose, which is to
provide liquidity to banks and to the financial sector generally in episodes
just like this when there's reason to see that coming.
They tell the banks you have to have all of your own liquidity.
You have to have enough liquid assets that you don't need any liquidity from
the Fed and there is no bank that can survive.
One hundred and forty two billion dollars going out the door in
in 24 hours. You have to rely on the central liquid
reserve at the Fed. It's why it's called the Federal Reserve
to provide that liquidity. And the Fed should certainly now be and
should have been leading up to this episode, ensuring that all banks are
prepared to be able to borrow from the Fed should they need to.
Had Silicon Valley Bank been able to, we would not be in this position.
They would have received liquidity from the Fed in order to continue to pay out
their depositors.