U.S. banking must stop the cycle

A recent series of bank failures in the United States has highlighted problems with regulation and supervision by the U.S. financial authorities. Measures should be considered swiftly to prevent a resurgence of financial instability.

The U.S. Federal Reserve Board has released a report examining the March failure of Silicon Valley Bank (SVB), a regional bank in the state of California.

The report summarizes that the Fed's supervision of the bank failed to keep pace with the rapid expansion of SVB's assets in line with the growth of the tech companies to which it mainly lent.

At a news conference on May 3, Fed Chair Jerome Powell acknowledged the inadequacy of the response, saying that the Fed was well aware it had made mistakes.

The collapse of the U.S. banks was partly due to the Fed's interest rate hikes, which have caused the prices of U.S. Treasury bonds and other securities held by banks to fall. California-based First Republic Bank, the 14th-largest U.S. bank, also failed, and financial instability has not subsided. Based on the results of the examination, it is important for the central bank to take effective measures to stop the negative cycle.

In its report, the Fed indicated its intention to strengthen regulation and supervision of banks. It said it will tighten regulations on midsize banks with assets of U.S. $100 billion (about 13.5 trillion yen) or more.

Regulations on banks were eased during the previous administration led by former U.S. President Donald Trump. The scope of banks placed under strict monitoring was raised from those with $50 billion or more in total assets to those with $250 billion or more.

As a result, SVB and other midsize banks, which were excluded from the strict monitoring, failed one after another, so it is entirely natural for regulations to be tightened.

The report proposes requiring banks to set aside additional capital and easily redeemable assets if their capital plans and risk management are inadequate.

A review of the deposit insurance system also is an issue that needs consideration. In Japan, corporate checking accounts are fully protected in the event of a bank failure, whereas in the United States, in principle, both individuals and corporations are only protected up to $250, 000.

For that reason, in the case of SVB, which had many large corporate deposits, it is thought that depositors suddenly withdrew their deposits, as they did not believe they would receive adequate protection. The U.S. Federal Deposit Insurance Corporation has announced a proposal to raise the limit of protection for corporate accounts.

Nowadays, information spreads instantly via social media, and deposits can easily be withdrawn over the internet. It is hoped that discussions will be deepened on how to provide deposit protection, taking such risks into account.