Isolated issues or systemic risks? The Fed’s framing conundrum

By  Kyle Campbell

Federal Reserve Vice Chair for Supervision Michael Barr has two distinct, if not contradictory, messages to convey on Capitol Hill this week. Barr will appear in front of Senate and House committees this week alongside other bank regulators to discuss recent volatility in the banking sector. During those hearings, he will attempt to frame the failures that set off the crisis as the result of uniquely poor bank-level management. He will also use them as evidence that broader reforms are needed…Karen Petrou, managing partner at Federal Financial Analytics, said Barr’s credibility this week will rely, at least partly, on his acknowledgment of the role supervisors played in failing to address blatant issues within the two failed banks. “It is a dereliction of duty for the Fed to blame SVB or Signature’s problems solely on bad management,” Petrou said. “The M in CAMELS [supervisory ratings] stands for management, and supervisors are supposed to judge and discipline it. Indeed, poor management is usually the leading edge of problems in each of the other CAMELS factors, making this judgment the linchpin of supervisory responsibilities.”