(Reuters) – The U.S. Federal Reserve issued a detailed and scathing assessment on Friday of its failure to identify problems and push for fixes at Silicon Valley Bank before the lender’s collapse, and promised tougher supervision and stricter rules for banks.
Meanwhile, U.S. officials are coordinating urgent talks to rescue First Republic Bank as private-sector efforts led by the bank’s advisers have yet to reach a deal, three sources familiar with the situation told Reuters.
Shares of the bank plunged to a record low on Friday, losing nearly half of their value after a CNBC report said the troubled lender was most likely headed for receivership under the U.S. Federal Deposit Insurance Corporation (FDIC).
Many commentators linked the lessons learned from the earlier crisis to the ongoing concerns about First Republic Bank.
Following are comments from market participants and analysts on the Fed’s report:
ERIC COMPTON, A BANKING ANALYST AT MORNINGSTAR
“Overall, I think this is a good indicator for the banks. I think a lot of the uncertainty for the banks after earnings was around how hard and how quickly the regulators would crack down on the industry in general. To me, the fact that the regulators specifically call out that this will be a several year process with an appropriate phase in period is key. We expected this would be the case, and was one reason we were not worried about imminent capital raises for the banks we cover. I think many investors were worried about the regulators dropping the hammer on the whole banking industry, quickly. This signals that will not happen. Banks will have time to adjust to the new rules.
Another thing that stood out to me was the regulators don’t seem to be considering counting losses on HTM (held to maturity) securities against capital ratios. This is good! Some of the most bearish investors were worried that this type of rule change would happen, while we were pretty skeptical of this, and it looks like it indeed will not happen.”
MORRIS PEARL, A FORMER MANAGING DIRECTOR AT BLACKROCK AND THE CHAIR OF PATRIOTIC MILLIONAIRES
“The regulators knew about the problems at SVB months in advance. Despite that, the bank failed which shows there is a need for better supervision.
Usually, regulators are trying to walk the tightrope where they do not want to be overly restrictive and limit growth. But recent events show we need to take a closer look at the existing rules and strengthen mechanism to restore confidence in regional banks.”
INSTITUTE OF INTERNATIONAL BANKERS CEO BETH ZORC
“The IIB commends the Federal Reserve’s timeliness of producing its report on SVB. Consistent with our mission, IIB will work to ensure a continued level playing field for internationally headquartered financial institutions operating in the U.S. Preserving this principle will further the significant contributions of these institutions to the American economy.”
JACOB S. FRENKEL, CHAIR OF LAW FIRM DICKINSON WRIGHT’S GOVERNMENT INVESTIGATIONS AND SECURITIES ENFORCEMENT PRACTICE GROUP
“Such transparency and candor is healthy to identify needed regulatory fixes to reduce the likelihood of further collapses. Nevertheless, regulatory oversight of bank practices also depends on the competencies and strengths of the individuals tasked with conducting the examinations and supervision.
Regardless, this assessment will not temper the aggressive federal civil and criminal investigations that are well underway and likely will lead to actual cases.”
MAYRA RODRIGUEZ VALLADARES, A FINANCIAL RISK CONSULTANT WHO TRAINS BANKERS AND REGULATORS
“Reading the report, one can wonder how this bank did not fail before. I was not surprised the Fed had warned SVB about its poor interest rate risk management.
What is more of a surprise is the Fed had also warned SVB about IT, operational risk, internal audit and even problems with Current Expected Credit Loss measurements, considering the Fed and the California regulator knew SVB had poor compliance and internal controls with the Bank Secrecy Act and anti money laundering back in 2016.
Clearly, bank examiners and off-site supervisors were not empowered to bring these issues to decision makers at the Fed to act. The former administration seemed eager to undo Dodd-Frank Act”
DAVID SMITH, A BANK ANALYST AT AUTONOMOUS RESEARCH
“The report confirms the theories that market observers had been suspecting and the need for improving capital and liquidity requirements for mid-sized banks will be addressed.
At this point, broader banking concerns around the health of the financial system have come down slightly. But it will help shore up relative weaker points in the regulatory and supervisory system which can make the banking system more resilient.”
TIMOTHY COFFEY, AN ANALYST AT JANNEY MONTGOMERY SCOTT LLC
“The report doesn’t tell us anything we didn’t know about regulatory risks in the bank and the system which the regulators were also aware of. It does suggest some regulatory enhancement for certain banks – such as a limit on capital distribution or clamp-down on company executive pay for some banks – which would incentivize the management not to take risks and avoid getting into situations like we saw with SVB and First Republic.”
Following are comments from market participants and analysts on the bank’s fast-evolving situation:
WAYNE SCOTT, REGULATORY COMPLIANCE SOLUTIONS LEAD AT NCC GROUP SOFTWARE RESILIENCE
“Should the bank fail, it is hard to predict the impact it will have on other regional banks right now. But it is safe to say that any collapse usually has negative effects on the market and the wider economy.”
“There are similarities between SVB’s situation and what is happening with First Republic Bank: both are affected by the rapid movement of very large sums of money.”
“SVB presented a risk to the short-term cash flow of the tech industry. A potential First Republic Bank failure could similarly present a risk to the long-term investment strategy of high net-worth individuals.”
“There’s potential for contagion to spread within financial services following such a failure. That contagion would become troubling.”
JOHN GUARNERA, SENIOR CORPORATE ANALYST AT RBC BLUEBAY ASSET MANAGEMENT
“With FRC, it’s an evolving situation, different approaches are being trying to resolve their current situation and so it’s hard to know definitively what the end game is here or not the end game. But I will say that you know the situation probably seems tenuous.”
“It feels isolated, than the rest of the regional bank system, feels like it’s in a different place than where FRC is.”
(Reporting by Nupur Anand, Chris Prentice, Niket Nishant, Jaiveer Shekhawat, Saeed Azhar, Tatiana Bautzer; Compiled by Manya Saini; Editing by Krishna Chandra Eluri and Maju Samuel)
