The US Federal Reserve has announced an internal review following mounting criticism in the wake of the biggest US bank collapse since the 2008 financial crisis. "The events surrounding Silicon Valley Bank call for a thorough, transparent and swift investigation," said Fed Chairman Jerome Powell on Monday after the close of the US stock market.
The central bank must carefully review how the financial institution, which specializes in financing start-ups in the tech industry, has been supervised and regulated, added Fed Vice President Michael Barr, who is tasked with leading the investigation. The Fed must show "humility" and find out "what we can learn from this experience." A report is to be published on 1 May.
In particular, the regional Fed branch in San Francisco is putting pressure on the collapse of Silicon Valley Bank based in Santa Clara, California, in the wake of immense cash withdrawals due to liquidity concerns. The financial supervisory authorities of the state also have to put up with critical questions after the money house collapsed within a few days last week.
Price slumps in the banking sector
On the stock market, the situation remained tense at the beginning of the week. Shares of several U.S. regional banks plunged despite the Biden administration stressing the safety of deposits. First Republic Bank's share price fell 62 percent on Monday. Other small and medium-sized financial institutions also suffered heavy losses. Large institutions such as JPMorgan Chase also fell into the red, albeit less dramatically. Overall, Wall Street stabilized somewhat.
The slump in the banking sector came even as President Joe Biden's administration repeatedly tried to reassure bank customers and avert possible panic reactions. "Americans can rest assured, the banking system is safe. Their deposits are safe," Biden said Monday. Customers would have access to their savings at any time, the president assured.
However, unlike the financial and banking crisis of 2008, this time taxpayers will not have to pay for deposit insurance, Biden said. This is done by a fund into which all banks contribute. The White House has repeatedly stressed that there are no parallels with the financial and banking crisis of 2008, when large financial institutions had to be bailed out with taxpayer money.
Biden wants new requirements for banks
Meanwhile, the discussion about how a bank collapse could occur again after 2008 is in full swing. Biden blamed his predecessor Donald Trump. Under President Barack Obama, whose vice president Biden was, strict conditions had been imposed so that the financial and banking crisis would not be repeated, Biden said. Under Trump, some of these requirements have been scaled back.
Background: In 2018, the US Congress cleared the way for a repeal of essential parts of the so-called Dodd-Frank Act, which was intended to prevent renewed bank failures at the expense of taxpayers. Trump had promised the financial lobby to roll back the rules passed in 2010. Trump described the Dodd-Frank law as a "disaster" that he would like to abolish altogether. This did not happen, but for small and regional banks – which are now struggling – the requirements were eased.
Biden announced that he wanted to tighten the requirements for banks again and called on Congress to act. Whether there will be stricter laws, however, is questionable. In the House of Representatives, the Republicans have had the majority since the beginning of the year. The majority of Democrats in the Senate is very narrow. However, a possible new law would have to be passed by both chambers of parliament.