(MENAFN) Federal Reserve Chair Jerome Powell criticized the leadership of Silicon Valley Bank (SVB) on Wednesday, characterizing the bank's collapse as an isolated incident caused by poor management. SVB, which was popular with technology startups and venture capitalists, suffered the second-largest bank failure in U.S. history earlier this month after announcing that it was trying to raise cash, raising concerns about its financial health and prompting panicked depositors to withdraw their funds.
According to Powell, SVB's management failed badly by growing the bank too quickly and exposing it to significant liquidity and interest rate risk. The bank had invested much of its holdings in long-term Treasury bonds and mortgage-backed securities, and as interest rates rose over the last year, the assets had fallen in value so much that SVB could not cover all the withdrawals. Powell noted that supervisors had seen these risks and intervened, but the bank still experienced an unprecedentedly rapid and massive bank run.
Despite the fact that more than 90 percent of deposits at both SVB and a smaller lender, New York's Signature Bank, were uninsured beyond the Federal Deposit Insurance Corp.'s USD250,000 insurance cap, the government opted to safeguard all the funds out of fear that a major loss of depositor money could trigger other bank runs, Powell said. The issue was not about those specific banks but about the risk of contagion to other banks and financial markets more broadly, he added.
Powell's comments underscore the importance of sound risk management and responsible decision-making in the banking industry. The collapse of SVB and other high-profile bank failures in recent years have raised concerns about the stability of the financial system and the need for greater oversight and regulation. As the Federal Reserve continues to monitor the health of the banking industry and adjust its policies accordingly, it will be critical for banks to maintain strong risk management practices and ensure that they are adequately prepared to weather any potential financial storms.
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