The lack of regulation and oversight is largely responsible for the recent banking crisis. This is the conclusion of a recent report by a senior Federal Reserve official. Another report, from the Congressional Research Service, emphasizes the role of encryption. The lack of consensus is striking.
The recent banking crisis is due, in part, to lax regulation and oversight, according to A a report Written by Michael S. Barr, vice president of oversight at the Federal Reserve. The report reviews the regulation and supervision of Silicon Valley Bank (SVB). According to Barr, the SVB failed largely due to mismanagement by the senior leadership and a lack of oversight by the board.
We must strengthen supervision and regulation at the Federal Reserve based on what we have learned. This report represents the first step in that process.”
The Barr Report briefly mentions cryptocurrencies as a risk to banks. But the word “cryptography” appears only three times in the 118-page report. The report largely blames supervisory failures. And she’s upfront about who bears the lion’s share of responsibility here.
Trump freed from the banks
President Trump has heavily liberalized the banking sector during his four years in office. Including rolling back parts of the Dodd-Frank Act, relaxing the Volcker rule, and weakening the Consumer Financial Protection Bureau.
The report notes that the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2019 resulted in a “lower regulatory requirement” for Silicon Valley Bank. These also included lower capital and liquidity requirements.
Furthermore, the report acknowledges that “although higher supervisory and regulatory requirements may not have prevented the company from failing, it is likely that they have enhanced Silicon Valley’s resilience.”
On Friday, March 10, 2023, state regulators shut down the Silicon Valley Bank (SVB) after the bank was put into operation. The crash became the second largest bank failure in US history and the largest since the 2007-2008 financial crisis.
In addition, two other US banks, Signature and Silvergate, failed in March 2023.
The report highlighted weaknesses in regulation and oversight, including the need to strengthen supervisory and regulatory frameworks. It stresses the importance of a strong bank capital and the need for continuous assessment of the supervisory and regulatory framework to detect new and emerging risks.
In Barr’s view, a stronger supervisory framework can enhance the speed, strength, and agility of supervision. Especially for companies with rapid growth, focused business models, or other high-risk factors.
President Joe Biden has previously urged Congress to introduce stricter regulations. In order to “reduce the possibility of this type of bank failure happening again”.
Banks slipped by requesting withdrawals
In contrast to Barr’s analysis, another recent report by the Congressional Research Service resident The role of cryptocurrency in the banking crisis. The document considered Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank.
The April 25 report indicated that the three banks had exposure to the cryptocurrency industry, holding deposits, providing loans, and providing payment networks to crypto firms.
Silvergate had the highest concentration in the cryptocurrency industry. More than 90% of its total deposits came from cryptocurrency customer deposits. SVB and Signature Bank’s exposure was relatively modest.
The report found that there are links between banking failures and those of a particular crypto company. Cryptocurrency volatility contributed to the depletion of deposits. In some cases, banks have sold ostensibly safe securities for losses to meet the withdrawal demand.
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