Regulators have taken a lot of heat from both sides of the political aisle after the rapid failure of three U.S. banks—Silicon Valley Bank, Signature Bank and Silvergate Bank—this month. Massachusetts Sen. Elizabeth Warren, a democrat, argued regulators “clearly fell down on the job” at Silicon Valley Bank (SVB) in a Sunday CBS News interview and called for “accountability.” And South Carolina Sen. Tim Scott, a republican, echoed those comments at a Senate Banking Committee hearing Tuesday, saying that “by all accounts, our regulators appear to have been asleep at the wheel.”
On the other hand, Michael Barr, the Federal Reserve’s top banking regulator, told Congress Tuesday that SVB’s failure was the result of a “textbook case of mismanagement.” But Barr also admitted that “the events of the last few weeks raise questions about evolving risks and what more can and should be done” by regulators, adding that it’s critical “we fully address what went wrong.” He added that he’s considering strengthening banking regulations.
Now, two former Fed officials who spent decades with the central bank are making the case that regulators’ supervision of U.S. lenders has been eroding for years amid a culture shift.
“In the mid-2000s, one of the visiting scholars in macroeconomics at the Cleveland Fed told us that macroeconomics today is like SciFi movies: It is mostly special effects. Sadly, the same can be said for the model-based financial supervision of today that is abstracted from institutional details and fundamental financial structures,” James Thomson, associate dean at the University of Akron’s College of Business, who previously served as vice president of the research department at the Federal Reserve Bank of Cleveland, wrote in an Institute for New Economic Thinking article Monday.
Thomson and his co-author, Walker Todd, a retired Middle Tennessee State University finance lecturer and former legal officer at the Federal Reserve Bank of New York, detailed regulators’ shift away from an “audit/compliance model” that involved stringent “on-site field checks” and regulator-led financial audits over the past few decades. They say that, now, regulators use a more “consultative approach” which relies on banks’ own theoretical risk models to supervise them.
Source: Yahoo Finance
