Thursday, May 30, 2024

Kennedy: Fed knew Silicon Valley Bank had a problem

by BIZ Magazine

WASHINGTON – Sen. John Kennedy (R-La.) today questioned Michael Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, during a Senate Banking Committee hearing. Kennedy pressed Barr on the Federal Reserve’s failure to stress test Silicon Valley Bank (SVB) prior to its recent collapse.

Key comments from the exchange include:

Kennedy: “You didn’t test for Silicon Valley Bank’s problem. I’ve read your report. Your stress test—you stress tested these 34 banks for falling GDP, spike in unemployment, and defaults on commercial real estate. Isn’t that correct?”

Barr: “Yes, in a typical adverse scenario for banks, we’re testing falling interest rate . . . ”

Kennedy: “But that wasn’t our problem in 2022 . . . ”

Barr: “I completely agree with you . . . ”

Kennedy: “ . . . and it’s not our problem today. The problem is inflation, high interest rate and loss of value in government bonds, isn’t it?”

Barr: “I completely agree with you.”

Kennedy: “So, you stress tested in 2022 for the wrong thing.”

Barr: “The stress test is not the primary way that the Federal Reserve or other regulators test for interest rate risk.”

Kennedy: “But you stress tested for the wrong thing.”

Barr: “As I said, Senator, I agree with you that it would be useful to test for higher rising interest rates. . . . These decisions were made before I arrived, but I agree with you that it was better to do that.”

. . .

Kennedy: “So, all this business about, ‘Well, the amendment to Dodd Frank kept them from stress testing’—the way I see it, you chose not to stress test, and, if you had stress tested Silicon Valley Bank, you wouldn’t have caught the problem.”

Barr: “As I said, Senator, I agree with you that the statute requires periodic stress testing. The Federal Reserve made a decision about how to implement that in 2019 that resulted in SVB not being tested . . . ”

Kennedy: “ . . . But you knew, the Federal Reserve knew well in advance, that Silicon Valley Bank had a problem with holding too much of its money in interest-rate-sensitive long government bonds, didn’t you?”

Barr: “I think the investing public and the Federal Reserve, which cited it for interest rate risk problems, knew that it had interest rate risk.”

Kennedy has previously spoken on the Senate floor twice, explaining how SVB’s collapse could have been prevented and how Biden regulators failed to oversee risk at SVB.

View Kennedy’s full exchange with Barr here.

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