Members Of Senate Panel Press Financial Regulators On Massive Bank Failures

Members of the Senate Committee on Banking, Housing, and Urban Affairs asked if the Federal Reserve could have done more to prevent the collapse and whether the government’s quick decision to insure all deposits – even above the $250,000 limit – was fair and could negatively impact smaller banks in the future.

Officials from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury Department defended their joint decision to prevent panic from spreading through the markets and pledged that a comprehensive review – that will include policy recommendations – is underway and will be available by May 1.

The failure of Silicon Valley Bank in early March, quickly followed by Signature Bank of New York’s collapse, roused Democrats who blamed regulation rollbacks and Republicans who pointed to a Fed that they accused of being preoccupied with “a social agenda,” as ranking member and Florida GOP Sen. Rick Scott characterized it.

In a matter of hours on March 9, SVB’s depositors pulled $42 billion out of the bank. By March 10, bank executives anticipated outflows would reach $100 billion – an amount that the bank could not meet after the Fed’s aggressive interest rate hikes began tanking SVB’s investments in the bond market.

Stress tests

Some Democrats are calling to restore regulations that were repealed in 2018, exempting midsize banks – like SVB at the time – from certain required financial stress tests.

But not all agree those rollbacks triggered the record-setting run on SVB.

“I’ve got real questions,” said Democratic Sen. Mark Warner of Virginia. “Was this a regulatory and bank management failure or was it, as some on my side of the aisle have indicated, a statutory failure? If it was a statutory failure and an additional test or activity was needed, I’m all for putting it in place.”

“But my operating premise at this point is if this had been not a $200 billion bank, but a $5 billion bank, that management’s mistakes – not having a chief risk officer or other items and failure of basic prudential regulations – (management) should have caught this,” Warner said.

The Fed’s Michael Barr, the Board of Governors’ vice chairman for supervision, told Warner that the rapid failure was a “textbook case of bank mismanagement.”

“The risk the bank faced, the interest rate risk and liquidity risk, those are bread-and-butter banking issues,” Barr said. “The firm was quite aware of those issues. They had been told by regulators. Investors were talking about problems with interest rates and liquidity risk publicly. And they didn’t take the action necessary.”

Democratic Sen. Jon Tester of Montana placed the blame on regulators, who witnessed SVB’s rapid growth and warned the bank as early as November 2021. The bank more than tripled its assets from $71 billion in 2019 to over $200 billion in 2022.

“For over a year regulators were saying to this bank ‘Straighten up and fly right’ and they never did a damn thing about it,” Tester said. “And the regulators didn’t make it so damn miserable – which my understanding is regulators are pretty good at that when they want to be – that these folks would adjust their business plan to take care of the risk that was in their bank.”

Sen. Mike Crapo, an Idaho Republican, argued that even with the 2018 amendment to the Dodd-Frank Act – a law put in place after the 2008 global financial crisis – the Fed still had the authority, at its discretion, to stress test SVB.

“Was there any statutory restriction faced by the (Fed) as it issued its regulations on tailoring that would have prohibited them from applying the strictest standards they could to address the prudential needs of our banking system?” Crapo asked.

“I agree with you, there was substantial discretion under that act for the Federal Reserve to put in place (rules) that were different from the tailoring rules it put in place in 2019,” Barr said. “… That’s one of the areas we’ll be looking at in our review.”

Fairness and clawbacks

Senators on both sides of the aisle questioned the fairness of the government quickly shelling out the money to protect uninsured deposits.

Costs to the FDIC for SVB’s collapse totaled $20 billion, and Signature’s cleanup totaled $2.5 billion, according to hearing remarks prepared by FDIC Chair Martin Gruenberg.

Any losses to FDIC’s deposit insurance fund will be repaid by a special assessment on banks, Gruenberg told the panel.

“I think it’s important that we use the term bailout, and I know that some of you don’t like that term, but I think it’s the only term that applies fairly here because we – using excess fees on community banks all across the country – effectively chose to bail out the uninsured depositors of Silicon Valley Bank,” said Ohio’s Republican Sen. J.D. Vance.

Barr defended the decision: “We were thinking about the risk to the broader financial system, not to the particular depositors at one or two institutions … We were hearing concerns from bankers and depositors around the country.”

But Vance pressed further.

“What I worry about is the fundamental unfairness here, that we’ve drawn a line – and I don’t know whether it stops at SVB, maybe it goes much further – where if you’re systemically important, which is a term impossible for anybody here to define with confidence, your uninsured deposits are effectively unlimited in their insurance,” Vance continued.

“Whereas if you’re not systemically important, if you’re a regional bank in Ohio, there’s a very good chance that your uninsured depositors will not receive that bailout, and I think that uncertainty is a really, really big problem with what you guys have done.”

Georgia Democrat Sen. Raphael Warnock recalled the bailed-out bankers of 2008’s crisis who “played games with our economy.”

“Not only did they not go to jail, they got to keep their jobs and their multi-million-dollar salaries. I feel that in a particular way as someone who pastors and moves in communities where poor and marginalized people have the weight of the law come down on them for the smallest of infractions,” he said.

Warnock pressed the officials to “claw back” any financial benefits SVB executives reaped just before the bank collapsed.

A current proposal from Democrats would recoup profits and bonuses from bank executives within a 60-day window of a bank’s failure.

“It was mentioned earlier, and I think it’s appropriate that we do not have explicit clawback authority in regard to compensation. We can get at that issue through our existing authorities,” including civil penalties, Gruenberg said.