Archegos Collapse Revealed ‘Weaknesses’ in Global Banks, Fed Says

(Bloomberg) -- The collapse of Archegos Capital Management revealed vulnerabilities at the banks supervised by the Federal Reserve, the U.S. central bank said in a report released Wednesday. 

“The event has so far revealed weaknesses in margin practices and counterparty risk management at some firms,” the Fed said in its twice-yearly supervision report, also noting the importance of coordinating with other global regulators in activities that cross borders. The Fed’s Archegos review isn’t yet finished, and the agency said it will be notifying individual firms on “areas of weak practices.”

Archegos, trader Bill Hwang’s family office, blew up in March after making massive, wrong way bets. The failure contributed to billions of dollars in losses for banks including Credit Suisse Group AG, Nomura Holdings Inc. and Morgan Stanley that financed Archegos’s wagers through their prime brokerage units, which lend money to hedge funds and other private investment firms.

The acting head of the Office of the Comptroller of the Currency, Michael Hsu, expressed similar concerns in May, saying the Archegos damage was a “flag” for risk-taking that the banking regulators need to be more vigilant about. 

Cyber Risks

The Fed’s report also said banking supervision is returning to normal after the central bank lifted its Covid-19 interventions, and the U.S. banking system is healthy and profitable. However, the regulator is worried about increasing attacks from hackers.

“Cybersecurity is a critical component of operational resilience and remains the top risk identified at supervised firms,” the report said, citing ransomware attacks as a particular concern in the financial sector. 

The report additionally noted sluggish loan growth and interest margins that slipped to record lows earlier this year. Net interest margins had been steadily declining for some time alongside extremely low interest rates. When lenders had to deploy the rush of pandemic-era deposits into safe, low-yielding assets, their margins continued to suffer, according to the report. But increases in other types of revenue -- such as fees -- has made up for the lack of income from lending.   

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