Lessons Learned: Understanding the Impact of 'Fighting the Last War' in the Fed's Oversight of the SVB Crisis
The Need for Tighter Oversight: Powell Acknowledges Lessons from Recent Bank Failures
In light of recent bank failures, Federal Reserve Chair Jerome Powell has emphasized the need for tighter oversight of the American financial system. Speaking at a banking conference in Madrid, Powell acknowledged that while regulations implemented after the 2007-2008 financial crisis have made large multinational banks more resilient to loan defaults, the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank revealed different vulnerabilities that need to be addressed. While Powell did not provide specific details, other Fed officials have suggested that banks should hold more capital reserves to safeguard against loan losses.
However, these proposals may encounter resistance from the banking industry and some congressional Republicans, who argue that the Federal Reserve already had the necessary tools to prevent the bank collapses but failed to use them. One of the reasons identified by Powell for regulators missing these threats is "the natural human tendency to fight the last war." While the 2008 financial crisis was caused by widespread defaults resulting from the bursting of the housing bubble, Silicon Valley Bank failed due to a rapid increase in interest rates that significantly decreased the value of its bond holdings.
To strengthen supervision and regulation of banks like Silicon Valley Bank, Powell expressed his eagerness to evaluate and implement proposals for necessary changes. He also highlighted the importance of updating rules to account for the speed at which a bank run can occur,
Addressing New Threats: Enhancing Oversight and Regulation in the Face of Changing Risks
Summing it upIn conclusion, Federal Reserve Chair Jerome Powell's remarks at the banking conference in Madrid highlight the need for tighter oversight and regulation in the American financial system. While regulations implemented after the 2007-2008 financial crisis have made large multinational banks more resilient, recent bank failures, such as Silicon Valley Bank, Signature Bank, and First Republic Bank, have exposed different vulnerabilities that require attention. Powell emphasized the importance of evaluating proposals to address these vulnerabilities, including the possibility of requiring banks to hold more capital reserves to mitigate loan losses. However, there may be resistance from the banking industry and congressional Republicans who argue that the Federal Reserve already had the necessary tools to prevent these bank collapses but failed to utilize them. Powell acknowledged the challenge of "fighting the last war," referring to the natural tendency to focus on previously encountered threats rather than adapting to new ones. To ensure the financial system's resilience, Powell stressed the need to update regulations to account for the speed at which a bank run can occur, considering advancements in technology that enable instant financial transactions. Overall, Powell's acknowledgment of the lessons learned from recent bank failures indicates a commitment to strengthening supervision and regulation, although implementing these changes may face obstacles in the future.
Originally Published at: https://fortune.com/2023/06/29/jerome-powell-federal-reserve-svb-human-tendency-fight-last-war/ Business Topic: Business