Is the US banking system a big game of Jenga?

According to a new report from Federal Reserve officials that’s one part Boiler Room, one part Andy Samberg self-burn, and one part finger-pointing, there were three main factors leading to the $209 billion implosion of Silicon Valley Bank, aka the third-largest bank collapse in US history.

📅 Some quick background: In early March, federal regulators shut down SVB when it became completely insolvent following the largest bank run in modern US history ($42 billion withdrawn in a single day). The panic was prompted by the devaluation of SVB’s long-term assets, which occurred because of the Fed’s interest-rate hikes over the past year (dive deeper).

📑 So, what’s in the Fed’s report?… The 114-page assessment blamed SVB’s historic collapse on three main culprits:

1. SVB’s board of directors, which the report said “put short-run profits above effective risk management.”
2. The Fed’s banking supervisors (oooh, self burn; those are rare), who identified many of SVB’s issues in the months or years leading up to its collapse… but never followed up on them. At the time of its demise, SVB had accumulated 3x the amount of supervisory warnings compared to its peers, many pointing out the exact things that ultimately led to its downfall.
3. A law passed by Congress in 2018 that exempted SVB and other similarly-sized banks from enhanced regulations.

The report concluded by recommending the Fed implement tougher rules – including stricter capital and liquidity requirements – on US banks with $100+ billion in assets, as well as mandatory stress tests for different hypothetical crises.

And the changes likely won’t stop there: regulators are expected to publish another report later today focusing on potential alterations to the $250,000-per-account threshold for FDIC insurance, plus a second round of congressional hearings with the Fed’s top banking regulators is scheduled for mid-May.

🏦 Zoom out: Watching the US banking system rn is a lot like a Detroit Lions fan glued to this year’s draft results; the bad news keeps on coming. Regulators seized the struggling First Republic Bank over the weekend – good for the second-largest bank collapse in US history – and sold most of its assets to JPMorgan, the country's largest bank.

• First Republic’s stock price plunged from $122 in early March to less than $4 on Friday, largely due to the same reason behind SVB’s collapse – a sharp devaluation in long-term assets following the Fed’s recent interest-rate hikes.

📊 Flash poll: Which of the following best describes your current level of confidence in the US banking system?

A great deal of confidence

Some confidence

Very little/no confidence

Unsure/other