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Why regulators did not anticipate the fall and what alarms did not sound

Why regulators did not anticipate the fall and what alarms did not sound

US regulators failed to spot red flags to allow them to act before bankruptcy from Silicon Valley Bank (SVB)in a environment of too lax lawssay several analysts. Was it a new black swan or was it simply an expected drop due to the crisis of technology companies?

The truth is that the central bank of the United States (Fed) announced on Monday that will carry out “an in-depth, transparent and rapid analysis” of the circumstances surrounding the fall of BLS. The results of the report will be published on May 1.

How could the 16th largest US bank in asset volume, shut down by the authorities on Friday, collapse so quickly, dragging down the SignatureBank on Sunday?

The bankruptcy “evidences the shortcomings of the regulatory reforms madeafter the financial crisis of 2007-2009, esteem arthur wilmarthfrom George Washington University.

alerts failed

Several elements should have concerned regulatorsstarting from the fact that the bank was highly focused on some high-risk clients -start-ups and venture capital investors-, just like other firms did it wrongly in the past with the real estate sector or with loans to emerging countries, he says.

Other alerts should have been the very rapid growth of SVB between 2020 and 2022, its exposure to long-term bonds at low rates at a time when rates are rising rapidly, and the fact that most of his accounts had balances in excess of $250,000 guaranteed by the authorities.

“It’s a surefire combination if the economy goes bad,” Wilmarth says. “Regulators couldn’t ignore it.”

regulations failed

Several observers point to the easing of the US Dodd-Frank law adopted after the 2007-2009 crisis, and that required all companies with more than $50 billion in assets to regularly submit a liquidation scenario.

In 2018, during the tenure of donald trumpthis threshold raised to $250 billionin fact making the rule more flexible.

“When regulatory requirements are relaxed, this puts a lot more pressure on regulators, since they don’t have access to the alarm signals” detectable in automatic controls,” he notes. Anna Gelpern, from Georgetown University.

But “That does not excuse them from what appears to be a supervisory failure” by those who must ensure “safe and reliable” management of all banks.

The regulation was also inadequate in the particular case of SVB, estimates michael ohlroggefrom New York University.

The fact that investments in government-backed bonds are considered “almost free of risk when it comes to calculating capitalization requirements,” meant that the SVB “was able to make big bets on (these products) without any cushion of support,” he says.

When it comes to assessing the resilience of banks, regulators start from the principle that clients of a firm with more than $250,000 in deposits will not suddenly flee “If they do business with the bank,” Ohlrogge says.

But as SVB clients tried to withdraw tens of billions of dollars as soon as the first signs of trouble appeared, “no doubt This hypothesis will have to be revisited.held.

For henry hufrom the University of Texas, the authorities found themselves with “a dilemma” this weekend to respond to the crisis.

If the Fed had not guaranteed the refund of all deposits from SVB and Signature Bank, numerous companies would have withdrawn their money from regional banks to deposit them in banks considered “too big to fail”.

But “if we think that regulators cover all uninsured deposits, moral hazard arises. Some companies may neglect to supervise the banks they deal with, convinced that their deposits are safe no matter what,” he concludes.

Source: Ambito

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