Fed’s Powell says U.S. banking system is ‘sound and resilient’ after First Republic failure
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Federal Reserve Chairman Jerome Powell attempted to reassure Americans that the U.S. banking system remains stable following JPMorgan Chase’s takeover of First Republic Bank earlier this week, the fourth U.S. bank failure this year.
“Conditions in [the banking] sector have broadly improved since early March, and the U.S. banking system is sound and resilient,” Powell said following the Fed’s decision to raise interest rates by 0.25% Wednesday.
“We’re committed to learning the right lessons from this episode, and we’ll work to prevent events like these from happening again,” he added, pointing to a report released last week by the Fed examining the March failure of Silicon Valley Bank.
See also: Fed in part blames Trump-era bank deregulation for Silicon Valley Bank failure
The Fed was the primary federal regulator of SVB, and while the Fed report said the primary blame lays with bank management, it also admitted that supervisory failures played a part as well.
The report, compiled by the Fed’s Vice Chairman for Supervision Michael Barr, said that Fed bank supervisors failed to understand these heightened risks as the bank grew from what the regulator classifies as a regional bank with less than $100 billion in assets to a large banking organization with more than $100 billion.
The report noted that Fed staff presented to the central bank’s Board of Governor’s on rising interest rate risk in the banking sector and named SVB as an example of a large firm with “significant safety and soundness risks.”
Powell said that while the report was concerning, he believed at the time that bank supervisors were “on the case” and dealing with the problem through supervisory actions.
The Barr report criticized bipartisan 2018 law signed by President Trump that directed the Fed to ease regulations on banks with assets between $100 billion and $250 billion and a shift in supervisory practices that was instigated by Barr’s predecessor Randy Quarles.
Barr recommends in the report that the Fed should tighten its regulatory standards for a “broad range” of banks and to specifically reevaluate how it supervises banks with more than $100 billion in assets.
He said the Fed would explores making new rules for banks on how they manage interest-rate and liquidity risk, improved capital requirements and stress tests, as well as new guidelines on executive compensation.
Powell said he supported Barr’s recommendations and that federal law dictates that he defer in part to the vice chair for supervisions authority to set the supervisory agenda at the Fed.
“I’ve been chair of the board for 5-plus years now and I fully recognize that we made mistakes,” Powell said. “I think we’ve learned some new things as well, and we need to do better. I think the report was unflinching, and appropriately so, and I welcome it.”
Regional bank stocks rebounded Wednesday after posting sharp losses earlier in the week.