Silicon Valley Bank's issues were hiding in plain sight, and its collapse damages the Fed's reputation as a regulator, DataTrek says

• If SVB's collapse isn't a one-off, the Fed's reputation is going to take a hit, DataTrek said. 
• The Fed's "paradigm for assessing systematic risk needs a rethink," according to a Monday note.
• But Congress in 2018 exempted regional banks from tougher regulatory oversight.

Silicon Valley Bank's problem's shouldn't have come as a surprise to the Federal Reserve, which faces damage to its reputation as a regulator, according to DataTrek Research. 

SVB's stunning collapse last week, leading to a federal rescue of its depositors on Sunday, came after losses on the sale of a bond portfolio triggered a bank run.

In a Monday note, DataTrek cofounder Nicholas Colas pointed out that, despite the Fed's response, the road ahead remains unclear and the central bank still should have responded sooner. 

"The Fed's reputation as a US banking system regulator has been damaged and, as noted above, its paradigm for assessing systematic risk needs a rethink," Colas explained. 

The Fed's parameters for determining adverse scenarios remain so far from reality that SVB may not have even registered as a danger in the first place, DataTrek said.

But regional banks sought — and lawmakers provided — less stringent regulatory oversight by the Fed. in 2018, President Donald Trump signed a partial rollback of the 2010 Dodd-Frank laws enacted after the financial crisis. 

At the time, Trump said that Dodd-Frank regulations were "crushing community banks and credit unions nationwide." The policy adjustment raised the bar for "systematically important financial institutions" from $50 billion in assets to $250 billion. 

Silicon Valley Bank, for its part, ended 2022 with $209 billion in assets, which meant it didn't face the scrutiny of a larger lender. 

Despite changes to the Fed's regulatory mandate, DataTrek still sees SVB as a failure of its oversight.

"SVB's problems were hiding in plain sight, which puts the Fed's regulatory staff in a deeply unfavorable light," Colas said. "If this was a one-off situation, then the Fed's reputation can recover and incremental regulation will be unlikely. If more US financial institutions end up in the same situation, however, we may see further bank regulations."