The recent bank runs and failures were “painful reminders” that there is no way to predict all of the stresses that come with time and chance, so regulators and policymakers must not grow complacent about the financial system’s resilience, Federal Reserve Chairman Jerome Powell said today. In a speech at an economic conference in Spain, Powell said regulators are committed to learning lessons from the failures, and he shared three broad observations.
First, Fed stress tests use scenarios that produce losses on banks’ books, including outsized credit losses, but that was what not sunk Silicon Valley Bank. “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,” Powell said.
Second, there is value in recognizing when a crisis is building and responding decisively, particularly after the unprecedently fast collapse of SVB. “Notably, bank runs were no longer a matter of days or weeks—they could now be nearly instantaneous,” Powell said. “Fortunately, in concert with other parts of the government, we were able to act decisively to meet the liquidity needs of the banking system, protect depositors, and limit contagion.”
Third, there is value in having the largest banks be very resilient, and the safeguards enacted after the 2008 financial crisis made the fallout from the recent failures easier to deal with. “[Global systemically important banks] are subject to capital surcharges, required to be highly liquid, and held to the highest supervisory standards,” he said. “The events of the past couple of months would have been much more difficult to manage had the largest banks been undercapitalized or illiquid.”