Federal Reserve Chair Jerome Powell made his first comments about the current banking crisis, saying that the management of Silicon Valley Bank "failed badly" but that the institution’s weaknesses don't threaten the U.S. banking system.
"This was a bank that was an outlier," he said in a press conference following a Fed decision to hike interest rates 0.25%, citing the institution's high percentage of uninsured deposits and its large investment in bonds with longer durations. "These are not weaknesses that are there at all broadly through the banking system."
Silicon Valley Bank was seized by regulators on March 10 following a massive outflow of deposits that followed a disclosure of bond losses and an attempted capital raise. Banks across the country hold similar bonds that are now worth less as a result of the Fed’s aggressive campaign to bring down inflation by hiking rates. The amount of these unrealized losses reached $620 billion across all U.S. banks at the end of 2022, according to the FDIC.
Other regional banks came under pressure following Silicon Valley Bank's failure, with some also losing deposits to larger rivals. Powell said Wednesday in response to a question about withdrawals that the "deposit flows in the banking system have stabilized over the last week." He also called the banking system "sound and resilient."
He and Treasury Secretary Janet Yellen have pledged to cover all depositors at Silicon Valley Bank and another failed institution, Signature Bank. The two failures were the second- and third-largest in U.S. history, behind Washington Mutual in 2008.
On Wednesday he cited those steps and other moves to free up liquidity, saying that "all depositors' savings and the banking system are safe." Yellen said separately on Wednesday that her department is not currently considering a "blanket insurance" for all U.S. deposits.
Shares of some regional banks that came under pressure following Silicon Valley Bank's seizure fell again on Wednesday. San Francisco lender First Republic ended the day down nearly 16%, while Beverly Hills-based PacWest Bancorp was down 17%. PacWest announced Wednesday it had $1.4 billion in new cash from a firm backed by Apollo, its deposits were down 20% since the start of the year and it had abandoned an effort to raise capital.
At his press conference, Powell also provided more detail about how the Fed treated Silicon Valley Bank, saying that supervisors raised questions about its risks well before its collapse. "We were all asking ourselves over that first weekend…'why did this happen'? A new review of supervision and regulation led by the Fed's Michael Barr, he said, will attempt to answer that question.
"Supervisors did get in there. And they were, as you know, obviously, they were on this issue. But nonetheless, this still happened. And so that's the nature of the review is to discover that," he added.
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A credit crisis is when banks won't lend to each other. Federal Reserve Chair Jerome Powell said Wednesday Silicon Valley Bank's collapse and the banking system upheaval it triggered "are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes." In other words: a credit crunch is coming.
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