While the conventional wisdom is that banks simply need to be regulated harder, a report from the Fed’s Board of Governors suggests banks are already struggling to navigate a labyrinth of federal rules and regulations. This was particularly true of SVB, which had experienced rapid growth in recent years, causing it to “move across categories of the Federal Reserve’s regulatory framework.”
That framework, the Fed dryly notes, “is quite complicated” , and the report makes it clear that SVB was spending a lot of time and money on consultants trying to navigate this framework “to understand the rules and when they apply, including the implications of different evaluation criteria, historical and prospective transition periods, cliff effects, and complicated definitions.”“Silicon Valley Bank’s board of directors and management failed to manage their risks,” the report states.
“It’s clear SVB found it challenging to deal with an overly complicated regulatory framework being pushed by the Fed, which included a new focus on climate change risk assessment and cultural issues, such as fairness and equity,” Stephen Dewey, a retired federal financial regulator, tells me. “That is time and resources the bank could have spent analyzing interest rate risk and prudent management of its balance sheet.
Although the Fed owns up to some of its own regulatory impotence during the collapse, it mostly passes the buck on to SVB. Worse, the central bank cites SVB’s collapse as a reason to give regulatorscontrol over the financial system. This might sound ludicrous given the Fed’s recent failures, yet it’s precisely what we should expect.
“An iron law of the modern administrative state is that the solution to regulatory failure is always to give regulators more power,” the