Collapse of SVB threatens to further tarnish Powell’s legacy

BLOOMBERG

The collapse of Silicon Valley Bank (SVB) threatens to further besmirch the reputation of Federal Reserve Chair Jerome Powell, on top of the blemish he’s suffered for being slow to recognise the risk of rampant inflation.
Friends and foes of the Fed alike have faulted the central bank for not heading off the troubles at the nation’s 16th-largest lender before they blew up into a crisis that shook the financial system and prompted extraordinary steps by policymakers over the weekend to contain it.
“There was a supervisory failure,” said former Fed Governor Daniel Tarullo, who oversaw the central bank’s regulatory portfolio in the wake of the 2007-09 financial crisis and is now a Harvard Law School professor.
A number of lawmakers and central bank watchers are criticising the Powell-led Fed board for wholeheartedly signing on to a Republican-driven agenda in 2018 to loosen regulation on banks smaller than behemoths such as JPMorgan Chase & Co and Bank of America Corp. They argue that Powell and his team at the time — some of whom have since left the Fed — are at least partly responsible for the problems at SVB.
Experts are divided, though, over how much, if any, blame to directly assign to Powell. Some — including frequent Fed critic Aaron Klein of the Brookings Institution — say Powell couldn’t have been expected to know the nitty gritty details of one of the hundreds of banks the central bank supervises.
If Powell succeeds in navigating the current financial ructions and brings inflation down without a painful recession, he’ll be lionised for managing a particularly tricky transition. But it’s a transition made all the more difficult by the delay in which the Fed reacted to inflation and the speed at which it subsequently moved to jack up interest rates.
In Washington, Democratic Senator Elizabeth Warren of Massachusetts, a long-time Powell foil, has been out front in slamming the Fed chief over the SVB affair.
“Powell’s actions to allow big banks like Silicon Valley Bank to boost their profits by loading up on risk directly contributed to these bank failures,” she said in a statement.
Other lawmakers have been more reticent in pinning blame on the Fed chair, with several Republicans pointing the finger at supervisors at the Federal Reserve Bank of San Francisco — which directly oversaw the operations of SVB.
Powell launched an internal review of the Fed’s supervision and regulation of SVB after its failure. The appraisal, which will be led by Vice Chair for Supervision Michael Barr, will be publicly released by May 1.
The Fed is considering changes to its oversight of midsized banks.