Earlier this week, a congressional hearing was conducted to talk about the post-downfall of Silicon Valley Bank. The participants were Chair Elizabeth Warren, Ranking Member John Kennedy, and other Senate Banking, Housing and sub-committees attendees. Together, they also discussed the ways to strengthen accountability at the Federal Reserve.
So, this blog has summarized all the concerns and solutions to help global banks from meeting the same fate as Silicon Valley. That said, let’s get started.
Below, we have discussed a few initial concerns discussed in the conference;
Laws and regulations are important. They help create rules for banks to follow and ensure they operate properly. A law in 2018, the Economic Growth, Regulatory Relief & Consumer Protection Act (EGER CPA), had a big impact.
It made the charge of Federal Reserve, Randal Quarles, come up with Tailoring Rules. He further discussed the new strategies per that law and altered bank-related policies.
The EGER CPA didn’t take much time to leave an impression on everyone. So as a result, many banks, including regional banks, wanted a similar implementation. But as time passed, even regional banks discovered that escaping a faulty financial system was not easy.
Back in August 2018, banks ranging in the $100-250 billion had a mutual taxation problem. But no one paid attention.
Moving forward to 2020, the IMF examined the US financial sector, found issues with S.2155 law, and pointed out the Federal Reserve’s mistakes.
Thus, the Foundation suggested some solutions for managing risks and setting interest rates. And further talked about managing big banks.
Further, the Federal Reserve noticed some problems at the SVB. For example, they were not managing their money or paying attention to the risks. Additionally, there were money-laundering signs and edited computer receipts.
It’s been a while since SVB has faced the downfall. But there hasn’t been any investigation into what went wrong either. Which is an alarming situation.
Though the conference didn’t talk much about the current status of the world’s major banks. But with the sudden failure of Silicon Valley, it’s understandable that the market and sectors would do anything to recover the loss. Further, gaining loyal customers and investors back will be a challenge.
Anyway, we can’t beat around the bush. But there’s still hope, i.e., 7 ways to help other banks strengthen their accountability. So, let’s discuss them now.
The entire data on what went wrong with SVB is available along with the Barr report. But still, there hasn’t been any proper inquiry. So, before finding solutions for saving other international banks, we need to find the mistakes that earlier ones made.
There was progress when the CAMELS and Governors discussed investigation reports. And the Government Accountability Report was also a good start. But they need more time to conduct in-depth research and review other documents.
Hey, did you know that we need someone special to keep an eye on the Federal Reserve System, i.e., an Inspector General?
The President should select the person for the job and get approval from the Senate. They should have all the cool gadgets and help they need to do their job well.
And the same Inspector General should go to the House and Senate twice a year to share what they’ve found. That way, everyone can stay informed and ensure everything runs smoothly.
The current rules for big banks need improvement to protect our economy. We should bring back an important part of a Dodd-Frank law that designates banks with over $50 billion as important to our financial system. By doing this, we can make sure these banks are better regulated and supervised, which will reduce the chances of them causing a big problem if they fail.
Here are the rules for banks as suggested in the conference;
There is a discussion about who should have the power to oversee and examine banks. Right now, some board members meet with important people at the Federal Reserve banks. It’s important to consider whether this is fair and unbiased.
We should also consider changes to ensure people who oversee banks are independent and don’t have any conflicts.
People are suggesting different ways to change how bank executives are being paid. One idea is to take back their bonuses if their bank fails.
Currently, the government doesn’t have enough power to take back executive bonuses when banks fail. But this bill would give regulators the tools they need to investigate bank executives.
There was a proposal to change how bank executives get paid, but it wasn’t finalized yet. The idea was to set up a fund where a portion of executive bonuses should be discussed.
In case of misconduct or failure, the money can be useful to pay for the problems caused by the bank or to pay fines. This would make sure that bankers have the incentive to keep each other in check and not engage in bad behavior.
Further, another way to minimize such bank failures is transparency. Banks should come clean about inside information, extra charges, and funds-related risks.
Also, banks should tell people about their assets and debts often. And the other way is to adopt technology to avoid human errors.
According to Barr’s report, the Federal Reserve can take strict measures to make sure banks work properly. Further, they can help in implementing certain rules and strict guidelines.
We can still work on these suggested rules and work with the Financial Stability Oversight Council for better results.
Another way is letting the Regulators look closer at the banks’ models and rules. As per the latest SVB annual report, the bank used EVE to measure interest rate risks. But there were no comments on the discount rate they had used.
We could’ve saved SVB’s economic value if they had told everyone about it. Further, Regulators should investigate the certain discount rates banks are using now. Especially the rate risk measurements.
Bank regulators should conduct calculated LCR reports of banks in a range of $50 billion. We could have prevented SVB’s downfall if such reports had been conducted.
Further, per the LCR, banks should test the deposit effect on their liquidity. And banks ranging in $100 billion in assets must disclose their monthly ratios.
Also, bank regulators can use these reports to help other banks in need. And along with LCR, there should be an NSFR, which gives insight into the stability of a bank for 12 months.
Lastly, we need to protect and watch people who check banks by visiting in person or from a distance. If these supervisors detect any mishap or issue, they should report it to higher authorities right away.
So, that was all from the earlier held congressional. The main takeaway from the overall conference is strengthening banks’ accountability by involving Federal Reserve.
Further, we should acknowledge the raised concerns and work on solutions. By doing this, we can stop other banks from falling into the same trap.