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SVB Bank: What the San Fransisco Fed worried about vs Snitz would worry about

If I were in charge of regulating a bank, I'd worry about inconsequential stuff like whether the bank was loaning money to folks who wouldn't pay it back or investing in stuff that had massive amounts of interest rate risk. Ergo, like long-term treasuries that would become practically worthless if interest rates tripled. You know, like what just happened.


The San Fransisco Fed was worried about the important stuff. IMP? Like whether the bank supported combating climate change (not kidding) and diversity.


Silly me, if I'm regulating a bank, I don't give a crap about that stuff. I simply want the bank to remain solvent, so its depositors don't lose their money &/or I don't need to bail the bank out.


Maybe I should have tried being a bank robber. That would do less harm than the San Fransisco Fed. Haha/



A Climate for Failed Bank Regulation

Did the San Francisco Fed put political causes above financial risks?

By The Editorial Board, WSJ

March 26, 2023 3:38 pm ET


Congress will hold hearings this week on the role of regulators in recent bank failures, and let’s hope they’re instructive. One question that deserves probing is whether misplaced priorities at the San Francisco Federal Reserve Bank caused it to overlook financial risks hiding in plain sight.


The Fed’s mandates include promoting price stability and full employment on monetary policy and a safe and sound banking system as a regulator. The San Francisco Fed is responsible for regulating banks in the Western U.S., and one of those was Silicon Valley Bank (SVB) that failed two weeks ago.


Judging by her public presentations, San Francisco Fed President Mary Daly has been focused more on the progressive priorities of climate change and equity. In June 2021, she touted the regional Fed’s work cataloguing climate risks, including “formal surveys, listening sessions, and targeted meetings with CEOs to better understand how climate risk affects decision making and resiliency planning.” She added: “Consistent with our history, we have assembled a team to study how these issues are likely to impact the Federal Reserve’s mandates in the future.”


Climate change “including the frequency and magnitude of severe weather events—affects each of our three core roles,” the bank’s website says. For instance, climate change may “challenge the resiliency” of banks and “low-and moderate-income communities and communities of color.” What about the resiliency of banks to runs on deposits or rising interest rates?


A San Francisco Fed memo last October noted that its “Supervision + Credit (S+C) group” has been working with Federal Reserve Board Vice Chair for Supervision Michael Barr to “inform his agenda and priorities”—namely, financial risks to banks from climate change, cryptocurrency, financial fairness and the Community Reinvestment Act. None of these contributed to SVB’s failure.


SVB was required under the Dodd-Frank Act to conduct quarterly stress tests to ensure it could withstand financial shocks and other adverse events. It’s not clear if the bank evaluated a scenario in which rapidly rising interest rates led to an outflow of deposits and losses on sales of fixed-income assets, but it should have.


The San Francisco Fed’s job is to ensure that banks model economic and financial scenarios that could materially impact its balance sheet. News reports say examiners flagged problems at SVB as early as 2019 in its risk controls and uncovered more last summer. But why didn’t they take corrective actions—for instance, by limiting the bank’s ability to grow?


Perhaps because SVB was fulfilling the SF Fed’s social and climate agenda. SVB noted in its 2022 annual investor report that it received its first “outstanding” rating from examiners on its Community Reinvestment Act plan, which included billions of dollars for low-income housing and initiatives to promote “a green economy and green communities that build wealth in communities of color.”


These investments didn’t cause SVB to fail, but it’s fair to ask if they caused examiners to be more permissive of its balance-sheet risks. Recall how regulators before the 2008 housing meltdown overlooked the underwriting lapses at subprime lenders and Fannie Mae because they promoted affordable housing.


Democrats blame former Fed vice chair for supervision Randal Quarles, whose term ended in October 2021, for the regulatory lapses at SVB. But there’s no evidence that his regulatory changes contributed to the risk-management failures at SVB or other banks that have lately run into problems.


***

Mr. Barr has been appointed to lead the Fed’s review of the supervision lapses at SVB, and he’s the wrong choice. Like Ms. Daly, he has elevated climate and equity as part of the Fed’s mandate and said in a speech in September that “fairness is fundamental to financial oversight.” No, safety and soundness are fundamental to financial oversight.


Part of the blame may also lie with the Biden Financial Stability Oversight Council, which is supposed to monitor systemic financial risks. In October 2021 the FSOC identified climate change as an “emerging threat” to financial stability and a key priority, yet it didn’t mention the risk from imminent monetary tightening on bank deposit flows and asset values.


Regulators have a hard enough job monitoring financial risks. When they muddle their mandate by adding political causes, the risk of mistakes rises. If failed bankers deserve to lose their jobs, failed bank regulators also deserve to lose theirs.

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