Top financial regulators faced tough questions and even fielded blame from senators Tuesday, March 28 over the collapses of Silicon Valley Bank and Signature Bank. In a Senate banking committee hearing, representatives from the Federal Reserve, Treasury and Federal Deposit Insurance Corporation defended regulator actions that allowed the banks to fail while issuing a government-backed rescue of depositors.
At the heart of questioning Tuesday was where to place blame for the second- and third-largest bank failures in U.S. history.
“First, the bank was rife with mismanagement. Second, there was a clear supervisory failure. Our regulators are simply asleep at the wheel,” Sen. Tim Scott (R-S.C.) said.
Federal Reserve Vice Chair of Supervision Michael Barr, along with FDIC Chair Martin Gruenberg and Treasury Under Secretary for Domestic Finance Nellie Liang, detailed what led to the bank failures earlier in March and what regulators knew ahead of the collapse, particularly at SVB. All three officials will also testify in front of a House committee Wednesday, March 29.
Barr called SVB’s failure “a textbook case of mismanagement” in prepared remarks.
“SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours,” Barr testified.
On Thursday, March 9, uninsured depositors at Silicon Valley Bank attempted to withdraw $42 billion in funds, around 20% of the bank’s total deposits. The following day, federal regulators took over the bank.
“It’s worth noting that these two institutions were allowed to fail,” Gruenberg said. “Shareholders lost their investment. Unsecured creditors took losses to the boards and the most senior executives were removed.”
Republican senators in particular questioned when regulators became aware that SVB had fundamental liquidity and risk issues. Regulators will release a public report on the investigation on May 1. They said the report will include confidential supervisory information on the banks and a more detailed timeline.
“Of all our supervisors, the Federal Reserve should have been keenly aware of the impact interest rate hikes would have on the value of the securities and it should have been actively working to ensure the bank and supervisors are hedging their bets and covering their risk accordingly,” Scott said.
Barr testified that supervisors did meet with bank management in the fall of 2021 to cite problems identified at SVB and said bank management failed to act on those recommendations.
During Sen. Elizabeth Warren’s (D-Mass.) testimony, she asked all three officials to affirm that they believe financial rules going forward, which they did.
“I anticipate the need to strengthen capital and liquidity standards for firms over $100 billion,” Barr added.
