• Federal Reserve Vice Chair for Supervision, Michael Barr, is set to testify before lawmakers on Tuesday about the collapse of Silicon Valley Bank (SVB).
• SVB failed due to mismanagement and a sudden panic among depositors, with contagion from its collapse highlighting the need for banking system resilience.
• The FDIC approved systemic risk exceptions for the failures of SVB and Signature Bank due to a deposit run.
Contagion from SVB’s Collapse
The collapse of Silicon Valley Bank (SVB) has caused serious repercussions on the wider banking system, with the possibility of uninsured depositors being unable to access their funds causing concern among depositors about the safety and stability of US commercial banks. Federal Reserve Vice Chair for Supervision, Michael Barr, is set to testify before lawmakers on Tuesday in order to evaluate what happened and assess any contagion that may have occurred.
Mismanagement and Deposit Runs
According to Barr’s prepared testimony released on Monday, it was determined that SVB failed due to mismanagement and a sudden panic among depositors. Additionally, there were signs of distress at other financial institutions such as Signature Bank which also experienced a deposit run leading up to their failure. These events highlight the importance of maintaining strong and diverse banks in order to prevent similar situations from occurring again in future.
Fed Intervention Necessary
Due to the interconnectedness of the American financial system, it was ultimately necessary for the Fed to step in order approve systemic risk exceptions for both SVB and Signature Bank when they faced imminent failure. Furthermore, this incident has reiterated how important it is that Basel III endgame reforms are implemented in order enhance banking system resilience going forward.
Full Review Coming May 1st
A full review into what happened at SVB will not be available until May 1st which will include an assessment into any contagion caused by its collapse. This review should provide valuable insight into why these incidents occurred so that similar scenarios can be avoided going forward.
Conclusion: Enhancing Banking System Resilience Crucial
It is clear that FDIC guarantees all deposits but investors can still suffer losses if banks are not managed correctly or experience sudden runs like those seen with both SVB and Signature Banks recently. As such, enhancing banking system resilience through Basel III endgame reforms is crucial going forward if similar crises are going to be avoided in future.