European regulators have criticized US ‘incompetence’ over the collapse of Silicon Valley banks -Dlight News

European regulators have criticized US 'incompetence' over the collapse of Silicon Valley banks

Europe’s financial regulators are furious over the handling of the Silicon Valley bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they helped write.

While the disallowance has yet to be communicated in a formal setting, some of the region’s top policymakers are upset over the decision to cover all depositors at the SVB, fearing it will undermine the globally agreed regime.

A senior eurozone official described his shock at the “complete and utter incompetence” of US authorities, especially after a decade and a half of “long and tedious meetings” with the Americans advocating an end to the bailout.

Europe’s supervisors are particularly angry at the U.S. decision to break its own standard, which guarantees only the first $250,000 of deposits. “Systemic Risk Exception” – Despite claims the California-based lender was too young to face regulations aimed at preventing a repeat of the 2008 global financial crisis.

“This is the US version of the little Venetian banks,” said one French policy expert, referring to US criticism of Europe’s handling of the Monte dei Paschi debacle. “You’re always systemic to somebody.”

“From a financial stability perspective, they really killed a fly with a sledgehammer,” said Nicholas Veron, a regulation expert at the Peterson Institute, a Washington think-tank. Designating the SVB as systemic, Veron added, was a “very questionable” decision that set a dangerous precedent for further bailouts of uninsured deposits.

A former senior UK policymaker who helped negotiate global standards for bank resolution described the SVB handling as a “disaster”.

The 2008 crisis triggered a sea change in how to handle bank collapses, with policymakers meeting frequently at the Basel-based headquarters of the Bank for International Settlements to formulate the regime. Design for Minimize the wider consequences of failures.

Central to those regimes was the imposition of losses on owners, bondholders and other unsecured creditors, including depositors with funds in excess of their country’s guarantee limits.

According to those involved in the negotiations, the US was a major proponent of such policies. However – unlike EU and UK lenders of similar size – US banks with balance sheets below $250bn, including SVB, are considered too small to comply with global standards on capital, liquidity and resolution.

While the Federal Reserve is now considering tougher rules for mid-sized lenders, in 2019 it and the Federal Deposit Insurance Corporation were behind a relaxation of the resolution regime for banks with assets ranging from $50bn to $250bn.

The Systemic Risk Council, a body of former senior regulators, warned Fed Chairman Jay Powell and former FDIC chief Jelena McWilliams opposed the move, saying it was “unclear that all of the affected banking businesses could be resolved in an orderly manner”.

“If ever a major regional bank fails, that uncertainty creates the possibility of authorities resorting to taxpayer bailouts to cover disruptions to the regional and national economy and losses to deposit insurance funds,” the letter, written by the then SRC chairman, said. And Paul Tucker, former deputy governor of the Bank of England, emphasized.

The US has claimed that SVB’s failure would not affect taxpayers because other banks would cover the cost of bailing out uninsured depositors – more than what could be recovered from the lender’s assets.

However, the European regulator said the claim was a “joke” because US banks were likely to pass the costs on to their customers. “At the end of the day, it’s a bailout paid for by ordinary people and it’s a bailout of rich venture capitalists that’s really wrong,” he said.

Despite the lack of formal rejection, the Europeans’ fury is being felt on the other side of the Atlantic.

“The risk to global financial regulatory cooperation is that this episode reinforces lingering suspicions that the US will not follow through on globally agreed reforms when times get tough,” said Matt Swinhart, a former US Treasury official and managing director at Rock Creek Global. Advisors, a consultancy in Washington.

Others, however, are more sympathetic to Washington’s approach, arguing that not fully bailing out depositors would risk broader risk.

“If unsecured depositors are not protected it can erode overall confidence and you can easily infect other banks,” said the eurozone regulator’s head of resolution. “This case seems to be perfect proof of this.”

Additional reporting by Brooke Masters in New York and James Politi and Colby Smith in Washington

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