No more business as usual for the Fed
Technology that can cause banks to fail overnight could force the Federal Reserve to upgrade its infrastructure, while continuing basic regulation to prevent failures from occurring in the first place.
Federal Reserve Chair Jerome Powell was in Madrid on Thursday speaking at a banking conference. He talked about bank regulation and how the Fed might have to beef up its oversight. Powell specifically mentioned the speed at which Silicon Valley Bank failed, because depositors were able to jump online and yank their money out of the bank in seconds.
Let’s face it: What the Fed is dealing with today is not your grandfather’s bank runs, and it can be hard for regulators to keep up with changing technology.
Consumers can pretty much transfer money anytime online. But if a bank wants to use the Federal Reserve for a wire transfer, it generally has to be done during normal business hours, Monday through Friday.
“That’s been a running joke among people for a while,” said Kathryn Judge, who teaches law at Columbia University. “A lot of the Fed’s operations are used to operating on business hours, as opposed to being able to work in a 24/7 environment.”
There’s some speculation that the Fed would have been able to save Silicon Valley Bank if it could have wired the bank money right away. So yeah, Judge said that the Fed should update its infrastructure — but not at the expense of basic bank regulation.
That’s exactly what SVB needed, according to Itamar Drechsler, a finance professor at Wharton, who added that Silicon Valley Bank’s problems wouldn’t have been solved by an instant Fed bailout.
“Suppose SVB would have taken two weeks to fail rather than overnight. Would that have made this OK? I don’t think so,” he said.
The Fed released the results of its stress tests of the biggest 23 banks on Wednesday, and they’re doing fine. But there are as many as 190 midsize banks that could fail just as suddenly as SVB, cautioned Gregor Matvos, a finance professor at Northwestern.
“What technology is going to do is it won’t give the regulators much time once the bank is in the danger zone,” he said. “So you have to prevent the bank from ever entering into the danger zone in the first place.”
How do you do that? Good ol’ fashioned bank regulation: More audits and higher capital requirements — extra resources these banks could turn to in an emergency.