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No Confidence in the Fed

While Federal Reserve officials have sought to assure markets that the US banking system is sound in the wake of Silicon Valley Bank’s collapse, investors and depositors have no reason to believe them. Only meaningful reforms of deposit insurance, regulation, and governance can restore the Fed’s credibility.

NEW YORK – The aftershocks of the collapse of Silicon Valley Bank (SVB), while seemingly fading, are still reverberating around the world. Although Federal Reserve officials have taken pains to assure the public that the US banking system is sound, it is unclear why anyone should believe them. After all, Fed Chair Jerome Powell told Congress the same thing just days before SVB’s collapse in March.

In the weeks since then, it was reported that the vaunted stress tests established by the 2010 Dodd-Frank financial reforms did not foresee the drop in value of government bonds caused by the Fed’s aggressive interest-rate hikes. A recent study by Erica Jiang and her co-authors found that “marked-to-market bank assets have declined by an average of 10% across all the banks” following the Fed’s rate increases, “with the bottom 5th percentile experiencing a decline of 20%.”

While US President Joe Biden has promised to hold accountable those responsible for SVB’s collapse, such promises, too, should be greeted with a healthy dose of skepticism. After all, the Obama administration, in which Biden served as vice president, never held any bankers responsible for the 2008 financial crisis.

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