The failure of Silicon Valley Bank has sent shock waves through the U.S. and international banking system. One of the reasons, of course, was the bank’s shockingly weak financial condition. But it’s also likely that the widespread panic reflects a loss of faith in the Fed’s supervision of U.S. and foreign banks.
It’s now clear that there is a serious conflict between the Fed’s role as a monetary authority and its bank supervisory function. The Biden administration’s effort to allay the banking panic by guaranteeing all deposits in SVB will fail to return the US and the world’s banking system to boring normalcy until Congress makes major changes in the U.S. deposit protection and supervisory structure.
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