Federal Reserve Chairman Jerome Powell urged stronger supervision and regulation of financial institutions the size of Silicon Valley Bank, in the wake of the spring banking crisis, as he also cautioned against complacency.
“The banking system remains sound and resilient, deposit flows have stabilized, and strains have eased,” he said, in prepared remarks ahead of the Bank of Spain’s conference on financial stability on Thursday.
Powell said the crisis taught officials some key lessons, firstly about risks that hadn’t previously been calculated. SVB’s failure caused by “excessive interest rate risk exposure and a business model that was vulnerable in ways its management did not fully appreciate, including a heavy reliance on uninsured deposits,” he said.
Another lesson, he said, was the importance of recognizing when a crisis is happening and responding decisively. “When SVB failed it was clear that a number of standard assumptions, even though they were informed by hard experience, were wrong,” he said. For example, he pointed out that bank runs can now happen instantly than over days and weeks.
Finally, he said officials have learned how important it is that the biggest banks remain resilient. “The events of the past couple of months would have been much more difficult to manage had the largest banks been undercapitalized or illiquid,” he said.
The Fed on Wednesday released the results of its stress tests, showing that major banks could withstand a theoretical $ 541 billion of losses.
“We cannot take the resilience of the financial system for granted, however. The
multiple shocks we have seen over the past year or so—including the extreme volatility in commodity markets following Russia’s invasion of Ukraine and, of course, surprisingly high and persistent inflation as well as the associated increase in interest rates—stressed a range of bank and nonbank financial institutions,” he said.
Powell sparked selling for U.S. stocks on Wednesday after he reiterated in a panel discussion on Wednesday in Sintra, Portugal that a “strong majority” of Fed policy makers were looking for two more quarter-percentage-point interest-rate hikes this year, potentially at the next policy meeting in July.
Speaking in Madrid, he repeated some of the central bank’s observations on the U.S. economy: growth expanding at a modest pace, thanks to consumer spending and the housing market, while the labor market remains tight, with “robust” gains in the past three months. He said there are signs of “better balance” for supply and demand in the labor market.
Inflation has moderated, but the process of getting it down to the Fed’s 2% target “has a long way to go,” he said. And the full effects of monetary tightening will take some time to show, notably on inflation. Tighter credit conditions also remain a headwind for the economy, and bank stresses from March may lead to more tightening on that front, the effects also of which will take time to see.