Less than two years before Federal Reserve Chairman Jerome Powell mentioned systemic risk as a justification for bailing out Silicon Valley Bank depositors, Powell endorsed the same bank’s merger request, insisting that the new, larger institution would pose no significant danger to the broader financial system, according to documents reviewed by The lever.
“SVB Group management has the experience and resources necessary to ensure that the combined organization would operate in a safe and healthy manner,” Federal Reserve officials wrote in June 2021, as they approved the acquisition of Boston Private Bank and Trust by the company for $900 million. “The organization would not be a provider of essential services or so interconnected with other businesses or markets that it would pose a significant risk to the financial system in the event of financial difficulties.”
All six members of the Federal Reserve board voted to approve the merger.
Yet when financial distress hit 20 months later, the Federal Reserve board voted unanimously, alongside the Federal Deposit Insurance Corporation, to invoke the rare Systemic Risk Exemption, giving the government the power to guarantee Silicon Valley Bank’s uninsured deposits. The FDIC only insures up to $250,000 on each customer’s deposits, and more than 90% of SVB’s deposits would have been uninsured by the end of 2022.
On Monday, the Federal Reserve announced it would review its oversight of the bank ahead of its collapse.
“Events surrounding Silicon Valley Bank demand a thorough, transparent and prompt review by the Federal Reserve,” Powell said in a statement.
Fed Vice Chairman Michael Barr added, “We need to be humble and take a careful and thorough look at how we have overseen and regulated this business, and what we should learn from it. this experience.”
Powell’s record deregulates SVB
Powell backed SVB’s request for merger approval despite a major shareholder’s warning against the deal, arguing that SVB was grossly overvalued and facing headwinds.
The Fed’s support for the SVB merger — and assertion that the bank would pose no systemic risk — followed Powell leading or endorsing other deregulatory moves that could have enabled SVB’s rapid collapse.
Under Powell, the Fed in 2019 sided with bank lobbyists and implemented an “adjustment rule,” which eased oversight of banks the size of SVB, including lifting liquidity requirements, reducing the scope and frequency of stress testing and allowing these banks to withdraw. to report expected losses.
The following year, Powell moved to exempt banks’ venture capital investments from the Volcker Rule, which aims to prevent federally insured banks from using deposits to invest in risky assets.
SVB, which has made significant venture capital investments, had pushed for this exemption before the Volcker Rule took effect in 2015. The Federal Reserve had separately approved a five-year extension for SVB to comply with the Volcker rule in 2017.
Beyond deregulation, the Federal Reserve was also the primary entity tasked with overseeing banking and spotting warning signs.
“The Fed has a lot more knowledge, information, expertise and access to banks than short sellers, rating agencies and the media, but they all seem to have done a much better job of identifying risks. very serious at SVB than the Fed,” the nonprofit organization Better Markets said in a statement calling for an independent investigation into the central bank’s conduct in the run-up to SVB’s collapse.
The Federal Reserve Bank of San Francisco was SVB’s primary supervisor. Gregory Becker, CEO of SVB, was elected to the San Francisco Fed Board of Directors in 2019, as one of the banking representatives. He left the board last Friday.
Sen. Elizabeth Warren (D-Mass.) said Powell should not be involved in the Fed’s review of its oversight of SVB, given his role in creating the conditions for the bank’s collapse.
“Fed Chairman Powell’s actions to allow big banks like Silicon Valley Bank to increase profits by increasing risk directly contributed to these bank failures,” Warren said in a statement Tuesday.