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June 16 (UPI) — While concerns arose regarding stresses within the U.S. banking system earlier this year, Christopher Waller, a governor of the Federal Reserve, stated that the poor management of a few banks should not dictate monetary policy.
“Due to persistently high inflation, there was a rapid and significant increase in interest rates, which led to stresses in the banking system requiring our attention through financial stability tools,” Waller explained at a macroeconomic policy forum in Norway.
In March, smaller and mid-sized banks faced pressure, starting with Silvergate Bank, followed by Silicon Valley Bank. Silvergate’s collapse was likely caused by excessive reliance on volatile and relatively untested cryptocurrencies, while SVB became a victim of a fear-driven contagion.
Earlier this year, former SVB CEO Gregory Becker informed congressional leaders that fears concerning the stability of the banking sector quickly spread online, triggering a deposit run. He noted that on March 9 alone, approximately $1 million was being withdrawn from SVB every second.
On the following day, around 80% ($142 billion) of the bank’s total deposits were withdrawn.
Michael Clements, the director of the financial market team at the Government Accountability Office, testified that prior to the bank’s failure, both the Federal Reserve Bank of San Francisco and FDIC acknowledged the financial risks at SVB but failed to take preventive measures to avert the collapse.
The Federal Reserve, through dynamic markets, is responsible for identifying and rectifying unsafe and unsound practices before they lead to the failure of a bank, as noted by Jeremy Newell, a senior fellow at the Bank Policy Institute.
Last month, members of Congress argued that federal regulators, along with bank executives, should be held accountable for the failures of SVB and other banks.
However, Waller disagrees and asserts that it is currently the responsibility of policymakers to combat inflation through higher lending rates.
“Managing interest rate risks falls within the purview of bank leaders, and almost all of them have successfully done so,” he stated. “I do not support altering the stance of monetary policy due to concerns over ineffective management at a few banks.”
In April, a review conducted by the Federal Reserve Board concluded that SVB failed due to “textbook case of mismanagement” by its leadership.
