(Reuters) - The Federal Reserve issued a detailed and scathing assessment on Friday of its failure to identify problems and push for fixes at Silicon Valley Bank before the lender's collapse, and promised tougher supervision and stricter rules for banks.
Meanwhile, U.S. officials are coordinating urgent talks to rescue First Republic Bank (NYSE:FRC) as private-sector efforts led by the San Francisco-based bank's advisers have yet to reach a deal, three sources familiar with the situation told Reuters.
Many commentators linked the lessons learned from the earlier crisis to the ongoing concerns about First Republic Bank.
Following are comments from market participants and analysts on the Fed's report:
BANK POLICY INSTITUTE PRESIDENT AND CEO GREG BAER
"Unfortunately, and in contrast to the accurate and objective review of the problems leading to the failure of SVB provided by the GAO's (Government Accountability Office) report, the Federal Reserve's report lays blame at changes to regulation and supervision made in recent years, when its own examination materials make plain the fundamental misjudgments made by its examination teams over that same period.
"For example, SVB consistently failed the internal liquidity stress tests it was required to perform, but Fed examiners did not require it to improve its liquidity situation, suggesting that the regulations were fit for purpose, but the examiner response was inadequate."
"Lastly, we are disappointed that the Fed's report has proceeded to make policy recommendations without input from the public or Congress and without the benefit of a broader and deeper investigation. Particularly remarkable is a reflexive and largely unexplained demand for higher capital requirements, which no independent observer has identified as playing any material role in SVB's failure."
For the full comment:
FINANCIAL SERVICES FORUM PRESIDENT AND CEO KEVIN FROMER
"One should not conflate a liquidity-driven event marked by management failures and supervisory shortcomings with capital adequacy at the largest U.S. banks. The assertion in the introduction that the Fed should focus on large bank capital requirements is disconnected from the report's conclusions.
"The resiliency of the nation's largest banks, which are subject to the most stringent regulation and supervision, is not at issue. These firms have demonstrated through the pandemic and during the most recent events that they are a source of strength and support."
AMERICAN BANK ASSOCIATION PRESIDENT AND CEO ROB NICOLS
"We take any bank failure seriously, and we will review the findings and proposed policy changes in these reports carefully, including where the conclusions may differ. At the same time, we urge policymakers to refrain from pushing forward new and unrelated regulatory requirements that could limit the availability of credit and the ability of banks of all sizes to meet the needs of their customers and communities when these reports suggest that existing rules were sufficient.
"Finally, we want to highlight what these reports also make clear: the failures of these individual institutions reflect the unique circumstances at these banks and do not reflect the overall health and vitality of the U.S. banking sector.
CONSUMER BANKERS ASSOCIATION PRESIDENT AND CEO LINDSEY JOHNSON
"Today's reports confirm there were a multitude of factors contributing to the collapse of these institutions, with each bank facing challenges that were unique to them. At the same time, the entire industry continues to navigate economic headwinds, including record-high inflation and unprecedented interest rate hikes. Our members are tackling these challenges head-on and are well-positioned to support America's families and small businesses through this next phase of the economy – just as they did through the COVID-19 pandemic."
JONATHAN MONDILLO, HEAD OF NORTH AMERICAN FIXED INCOME AT ABRDN
"We're likely to see higher capital requirements. What that means for the overall markets is that the devil is in the details: how stringent those capital requirements will be. The government would be probably best not to over-regulate or to make the liquidity and capital requirements too overly cumbersome for especially the smaller banks and the regional banks because, at the end of the day, you know, they're providing credit and providing loans to essential businesses, mom and pops. They provide a need in the overall economy. If they over-regulate, what we would find is that there would be a bit of credit dried up."
ERIC COMPTON, A BANKING ANALYST AT MORNINGSTAR
"Overall, I think this is a good indicator for the banks. I think a lot of the uncertainty for the banks after earnings was around how hard and how quickly the regulators would crack down on the industry in general. To me, the fact that the regulators specifically call out that this will be a several-year process with an appropriate phase-in period is key."
MATT FREUND, CO-CHIEF INVESTMENT OFFICER AT CALAMOS INVESTMENTS
"Regulators are going to make it harder for everyone to try to minimize the problems that we've seen with a few. It's always good if you make it harder for the folks that are causing problems, but it's less good when you make it harder on the good players who weren't causing problems. It's hard for me to say if it's good or not or uniformly good."
MICHAEL PIERSON, MANAGING PARTNER OF GLOBAL CORPORATE AT FISHERBROYLES
"It is an extremely prudent step by the Fed to acknowledge its supervisors' failure to appreciate SVB's vulnerabilities and inability to take sufficient steps to fix SVB's problems. Sharing in the responsibility should enable a more effective dialogue between banks and prudential regulators over the coming months as the Fed seeks to implement the stronger supervisory and regulatory framework outlined in the report. Humility in the face of failure shows strength."
MORRIS PEARL, A FORMER MANAGING DIRECTOR AT BLACKROCK AND THE CHAIR OF PATRIOTIC MILLIONAIRES
"The regulators knew about the problems at SVB months in advance. Despite that, the bank failed, which shows there is a need for better supervision.
Usually, regulators are trying to walk the tightrope where they do not want to be overly restrictive and limit growth. But recent events show we need to take a closer look at the existing rules and strengthen mechanisms to restore confidence in regional banks."
INSTITUTE OF INTERNATIONAL BANKERS CEO BETH ZORC
"The IIB commends the Federal Reserve's timeliness of producing its report on SVB. Consistent with our mission, IIB will work to ensure a continued level playing field for internationally headquartered financial institutions operating in the U.S. Preserving this principle will further the significant contributions of these institutions to the American economy."
JACOB S. FRENKEL, CHAIR OF LAW FIRM DICKINSON WRIGHT'S GOVERNMENT INVESTIGATIONS AND SECURITIES ENFORCEMENT PRACTICE GROUP
"Such transparency and candor is healthy to identify needed regulatory fixes to reduce the likelihood of further collapses. Nevertheless, regulatory oversight of bank practices also depends on the competencies and strengths of the individuals tasked with conducting the examinations and supervision.
Regardless, this assessment will not temper the aggressive federal civil and criminal investigations that are well underway and likely will lead to actual cases."
MAYRA RODRIGUEZ VALLADARES, A FINANCIAL RISK CONSULTANT WHO TRAINS BANKERS AND REGULATORS
"Reading the report, one can wonder how this bank did not fail before. I was not surprised the Fed had warned SVB about its poor interest rate risk management.
What is more of a surprise is the Fed had also warned SVB about IT, operational risk, internal audit and even problems with Current Expected Credit Loss measurements, considering the Fed and the California regulator knew SVB had poor compliance and internal controls with the Bank Secrecy Act and anti-money laundering back in 2016.
Clearly, bank examiners and off-site supervisors were not empowered to bring these issues to decision makers at the Fed to act. The former administration seemed eager to undo Dodd-Frank Act"
DAVID SMITH, A BANK ANALYST AT AUTONOMOUS RESEARCH
"The report confirms the theories that market observers had been suspecting and the need for improving capital and liquidity requirements for mid-sized banks will be addressed.
At this point, broader banking concerns around the health of the financial system have come down slightly. But it will help shore up relative weaker points in the regulatory and supervisory system which can make the banking system more resilient."
TIMOTHY COFFEY, AN ANALYST AT JANNEY MONTGOMERY SCOTT LLC
"The report doesn't tell us anything we didn't know about regulatory risks in the bank and the system which the regulators were also aware of. It does suggest some regulatory enhancement for certain banks - such as a limit on capital distribution or clamp-down on company executive pay for some banks - which would incentivize the management not to take risks and avoid getting into situations like we saw with SVB and First Republic."
WAYNE SCOTT, REGULATORY COMPLIANCE SOLUTIONS LEAD AT NCC GROUP SOFTWARE RESILIENCE
"Should the bank fail, it is hard to predict the impact it will have on other regional banks right now. But it is safe to say that any collapse usually has negative effects on the market and the wider economy."
"There are similarities between SVB's situation and what is happening with First Republic Bank: both are affected by the rapid movement of very large sums of money."
"SVB presented a risk to the short-term cash flow of the tech industry. A potential First Republic Bank failure could similarly present a risk to the long-term investment strategy of high net-worth individuals."
"There's potential for contagion to spread within financial services following such a failure. That contagion would become troubling."