San Francisco Fed president: Silicon Valley Bank's failure wasn't our fault

Washington, DC CNN

Mary Daly, president of the San Francisco Federal Reserve Bank, said in her first lengthy remarks Monday about the collapse that Silicon Valley Bank was a failure because regulators took action too slowly.

SVB was active in Daly’s district prior to the bank's spectacular failure in March. However, she said she does not have a supervisory role. She said that other officials had waited too long to take action.

Daly stated Monday, during a moderated conversation hosted by the Brookings Institution, that there is a delay between when something is spotted and when enforcement or other actions are taken. We can raise this - and by "we" I mean the system and not me, because I do not play an active role as a supervisor - but we should raise issues, have discussions and then see.

Michael Barr, vice-chairman of supervision at the Fed, identified this slowness as a major issue in his postmortem report on the failures of SVB and Signature Bank. First Republic Bank followed.

Some politicians have been trying to find the person or group responsible for failures for many months. Most notably, Democratic Senator Elizabeth Warren.

Daly stated that'supervision is a systems-wide activity,' with the Fed vice chair for supervision in charge of policymaking and execution. This was similar to what Fed Chair Jerome Powell said last month, when Warren asked the same question.

Daly stated that the supervisors of the San Francisco Fed simply reported issues to the Fed Board of Governors. The Board of Governors is ultimately responsible for resolving any regulatory issues.

How do I support the supervision set by the vice-chair of supervision? How do regional Fed presidents accomplish this? We hire people who are capable of doing the job. She said that we ensure they are doing the best job in public service and what is required of them as supervisors.

Daly is the first to directly address the failure of SVB, but she did not mention any specifics about the bank. She has spoken about bank failures generally, but has not expressed her opinion on the role the San Francisco Fed played in specific bank collapses.

Barr, the Fed vice chair for supervision, spoke out publicly on Monday. He said he was proposing to impose stricter capital requirements upon banks with assets of at least $100 billion, similar in nature to those banks who have assets above or equal to $700 billion.

Daly's comments shed light on how she views the Fed's ongoing battle against inflation. This includes more hikes. She said that the Fed's decision-making is now more difficult because of the dual risks of raising interest rates too much and causing a recession. Or not enough to keep inflation above the central banks 2% target.

Officials still favor more rate increases

Daly stated that inflation was on the decline. "But it is still below 2%." This is not our goal.

She added that 'the risks of doing nothing outweigh the risks of not doing anything, but this gap is narrowing and getting smaller -- which is why decisions are becoming more difficult.

The Fed's decision to suspend its most aggressive campaign of rate-hiking in decades last month, and leave the federal funds rate ranged between 5-5.25% was a prudent move, reflecting concern that rate increases could weigh too heavily on the economy.

According to the minutes of that meeting, the concern was specifically over uncertainty about how bank stress might affect access to credit.

The Fed has made it clear that they expect more rate increases, including one this month, even though the most recent jobs report showed a slightly cooled labor market, which remained robust. According to the Fed's projections, officials are expecting up to two additional quarter-point rate hikes in this year. This is because inflation has been held back to some extent by a tight labor market.

Powell has said that he would not rule out consecutive rate increases, but it is unclear whether a hike will happen in September. Wednesday will see the release of the Consumer Price Index, an inflation indicator that is closely monitored. However, it's unlikely this index will influence the Fed in any way. The Fed examines data from a wide range of sources, not just government figures.

On Monday, other Fed officials also spoke at separate events.

Loretta Mester, President of the Cleveland Fed, said that despite stubbornly high inflation, progress in core inflation is stalling. She was speaking at a University of California San Diego event.

Mester stated that she believes "to ensure that inflation will be on a sustained and timely path to 2% my view is that funds rate needs to move up a little further from its present level and hold there for a bit as we gather more information about how the economy is developing."

Raphael Bostic, Atlanta Fed president, reiterated that inflation was still too high but in a more positive tone. He said that the Fed could afford to wait and see what the effects of rate increases are, as research shows interest rates can take time to trickle into the economy.

Bostic, in an address to the Cobb County Chamber of Commerce of Atlanta on Monday, said: 'I think we should be patient. Our policy is in the restrictive zone right now.' We continue to see signs of the economy slowing down which tells us that restrictiveness is working.