Federal Reserve Chair Jerome Powell faces growing calls from key lawmakers and regulatory experts for an independent investigation into the collapse of Silicon Valley Bank, not just an internal review by the Fed board.
(Bloomberg) — Federal Reserve Chair Jerome Powell faces growing calls from key lawmakers and regulatory experts for an independent investigation into the collapse of Silicon Valley Bank, not just an internal review by the Fed board.
“One hundred percent needs to be an outside look at it,” said Senator Jon Tester of Montana, a senior Democrat on the Banking Committee, which has Fed oversight authority. “Let the Fed look at it, but it needs to be somebody on the outside that looks at it.”
Powell announced March 13 that Michael Barr, the Fed’s vice chair for supervision, would lead an internal review of the supervision and regulation of SVB, which was overseen by the San Francisco Fed and California state regulators. Treasury and Fed officials raced last weekend to contain the fallout from the collapse of the nation’s 16th-largest lender, which has rocked markets and resulted in a temporary but massive expansion of the federal bank safety net.
The central bank’s decision to keep the probe in house has raised questions about potential conflicts, as lawmakers on both sides of the aisle seek more details about what went wrong.
“Their lack of transparency and the fact that their bank examination role missed, somehow failed to address, the issues with SVB indicates that an outside look is warranted,” said Senator Cynthia Lummis of Wyoming.
“Somebody was asleep at the switch,” Tester said.
Senator Chris Van Hollen, a Maryland Democrat, said “at the very least it should be the Justice Department and not only the Fed participating in the review.”
GOP Senator John Kennedy of Louisiana said he also thinks there should be an independent outside audit of regulators’ handling of the situation.
“Someone needs to go and ask why the regulators — the Fed, the FDIC, the Treasury — all of them allowed this to happen,” he said.
Asked if this should be an outside entity probing the Fed and not an internal examination, he said “yes, that would be best.”
Powell in the past has relied on internal investigators to review problems at the central bank.
When it became clear that officials actively traded stocks at a time when the Fed was intervening in financial markets, Powell referred the matter to the central bank’s inspector general, who is appointed by the chair. The IG cleared Powell and his vice chairman, Richard Clarida, of any wrongdoing, but never published a detailed account of the findings.
Powell’s assignment of Barr, who became vice chair of supervision in July, raises conflict-of-interest concerns, Fed watchers said. The Fed board in Washington participates in the oversight of large banks such as SVB, along with local regional bank supervisory teams, a process that Barr runs.
“The best way to ensure that the review is thorough and credible is for it to be led by someone further removed — ideally, very, very far removed — from the sequence of events that led to SVB’s demise,” said Kathryn Judge, a Columbia Law School professor who specializes in banking.
The integrity and conclusions that are derived from whatever review is done will have a major impact on any legislation Congress decides to pursue in the wake of the bank failures.
Senators Tim Kaine and Mark Warner said Congress should hold off on any bills until Barr’s report is in.
Van Hollen suggested Congress should reconsider the Fed’s structure, pointing to the role that Greg Becker, SVB’s former chief executive, played as a director on the San Francisco Fed’s board.
“I think we need to eliminate even the perception of conflict of interest, if you have a bank that’s part of the board whose job it is to supervise banks in a particular region,” Van Hollen said.
Senate Banking Democrats have had various views on the potential conflicts involved in the Fed investigating itself about bank failures.
Senator Elizabeth Warren of Massachusetts said she wants Powell to recuse himself from the probe, while the chair of the committee, Sherrod Brown of Ohio, said he is fine with Powell participating.
“I’m just going to make sure he does it right,” Brown said.
Senator Mike Crapo, a Republican, suggested a congressional probe could be warranted as well as a Fed review.
Other outside regulatory experts have also called for an independent review.
“The bank’s problems were obvious,” said Dennis Kelleher, the chief executive of Better Markets, a Washington financial regulation watchdog, which is also calling for an outside probe.
Jeff Hauser, founder of the Revolving Door Project, a corruption watchdog in Washington, said accountability for Fed leaders “is next to nonexistent.”
“Defenders of the Federal Reserve must understand that unless and until accountability for the Federal Reserve’s leadership increases greatly, the prospect for a severe diminution of the Fed’s powers will continue to grow much more likely,” he said.
–With assistance from Bill Allison.
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