Powell reiterates need for stronger supervision, regulation of banks of SVB’s size

The need to strengthen supervision and regulation of banks of the size of the failed Silicon Valley Bank (SVB) was reiterated by the chief of the nation’s central bank in recent remarks before a financial stability conference in Madrid, Spain.

“In our stress tests, we have considered severe stress scenarios that produced losses on banks’ books, including outsized credit losses,” Federal Reserve Board Chair Jerome Powell said in remarks prepared for last Thursday’s Banco de Espana Fourth Conference on Financial Stability. “But, of course, SVB’s vulnerability came not from credit risk, but from excessive interest rate risk exposure and a business model that was vulnerable in ways its management did not fully appreciate, including a heavy reliance on uninsured deposits.

“These events suggest a need to strengthen our supervision and regulation of institutions of the size of SVB,” Powell said. “I look forward to evaluating proposals for such changes and implementing them where appropriate. Much will depend on getting the specifics right, and we should bear in mind that there are always tradeoffs in any financial regulation. In addition, the U.S. has benefited from its rich, multi-tiered banking ecosystem, and that diversity should be preserved.”

In a footnote, his added that any rule change “will go through the standard rulemaking process, including public notice and comment, and have appropriate phase-in and transition periods.”

Powell offered three key observations overall regarding challenges faced by the financial system in recent and past years. Besides noting the factors contributing to SVB’s downfall, Powell underscored the importance of regulators’ ability to take decisive action to limit the impact of the failures of SVB and two other institutions this spring; and the value of having the very largest banks be highly resilient.

“Our regulatory system is much stronger for the substantial additional safeguards we have built around the G-SIBs (global systemically important banks) since the Great Recession,” Powell said. “They are subject to capital surcharges, required to be highly liquid, and held to the highest supervisory standards. The events of the past couple of months would have been much more difficult to manage had the largest banks been undercapitalized or illiquid.”

Financial Stability and Economic Developments, remarks by Fed Chair Jerome Powell before the June 29 Banco de Espana Fourth Conference on Financial Stability, Madrid, Spain