Federal regulators faced more than two hours of intense questioning Tuesday from lawmakers about the causes of the Silicon Valley Bank and Signature Bank bankruptcies, the red flags that went unheeded and the steps that should be taken to prevent future collapses that could rock the United States. Finance system.
There was bipartisan concern about the state of the nation’s banks that in many cases blurred the usual party lines, with Democrats wanting stricter oversight and Republicans calling for looser regulations. But there was also a great deal of deception and finger pointing as officials at the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department tried to make sense of the second largest bank failure in US history.
The hearing, attended by Michael S. Barr, vice president of supervision at the Federal Reserve, Martin Gruenberg, president of the Federal Deposit Insurance Corporation, and Nellie Liang, assistant secretary for internal finance at the Treasury, marked the beginning of what will be an expanded investigation by Congress and the regulators themselves into what went wrong.
Regulators blamed the banks.
From the outset, regulators made it clear what they believed to be the main reason Silicon Valley Bank failed: It was poorly managed and allowed risks to build up to the point that the bank collapsed.
Mr Barr said in his testimony that “SVB’s failure is a textbook case of mismanagement.” He added that Fed officials flagged problems to the bank as early as November 2021, but the bank did not address them.
Punishment for executives is on the table.
Lawmakers remained determined to ensure that bank executives are punished if they did something inappropriate that led to bankruptcies. They also expressed particular concern about last-minute stock sales by Silicon Valley Bank officials.
The regulators said they had limited power to recover compensation but can impose financial and other penalties if their continued investigation finds wrongdoing.
The Fed could have done more.
The Federal Reserve is under particular scrutiny as to when it learned things were bad at SVB.
Despite Fed supervisors having pointed out weaknesses in SVB since 2021, Barr said he learned of SVB’s woes last month, suggesting it took a long time for concerns to be raised to the Fed board. and his vice president of supervision.
Mr Barr said Federal Reserve officials will discuss any potential missed red flags in their internal review and that “we hope we are held accountable.”
Regulators say they need more authority.
All three regulators said they believed financial regulations needed to be tightened following the recent stress in the banking sector.
Mr. Barr pointed to Federal Reserve regulations, which were enacted during the Trump administration in 2019, that exempted Silicon Valley Bank from the stress test and suggested they should be reviewed.
Some Democrats on the committee emphasized the notion that deregulation left agencies without the tools they needed to address problems at smaller banks.
Whats Next?
The House Financial Services Committee will hold its own hearing on Wednesday and will question the same officials.
The FDIC and Fed reviews are expected to be completed by May 1 and Senate committee members from both parties suggested they would be interested in hearing from regulators once those investigations are concluded.
There is also an ongoing debate about raising the cap on bank deposit insurance to $250,000 and imposing tougher penalties on bank executives that fail.
Lawmakers have also asked the Government Accountability Office to study the effectiveness of the banking supervision regime and make recommendations for changes. But it’s unclear whether the suggested changes would have enough bipartisan support to overcome a divided Congress.
