Barr, Huizenga, Kim Demand Clarity on Federal Reserve Supervisory Activity Preceding Recent Bank Failures
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March 24, 2023 –
The Chairman of the Subcommittee on Oversight and Investigations, Bill Huizenga (MI-04), the Chairman of the Subcommittee on Financial Institutions and Monetary Policy, Andy Barr (KY-06), and Congresswoman Young Kim (CA-40) sent a letter to Vice Chair for Supervision of the Board of Governors of the Federal Reserve System (FRB) Michael Barr and President and CEO of the Federal Reserve Bank of San Francisco (FRBSF) Mary Daly expressing concern about supervisory activity conducted prior to the collapse of Silicon Valley Bank (SVB). In the letters, the lawmakers specifically demand all communications between the FRB and FRBSF, along with the regulators’ communications with SVB and SVB Financial Group regarding supervisory determinations and regulatory red flags, among other requests.
Read the full letter here.
Read key excerpts from the letter below:
“At the time of failure, Silicon Valley Bank was the 16th largest bank in the U.S. Its failure is the second largest by nominal value in U.S. history. According to the Financial Times, ‘at the peak of the tech investing boom in 2021, customer deposits surged from $102 billion to $189 billion,’ a red-flag signal of rapid growth. Total assets had tripled since 2020. By the end of 2022, Silicon Valley Bank held $212 billion of assets, $175 billion in customer deposits, $26.0 billion of fair value in ‘available for sale assets,’ such as Treasuries and agency-backed securities, and $91.3 billion in the amortized cost of ‘held to maturity’ assets with fair market value of only $76.2 billion. In addition, Silicon Valley Bank had $15 billion of outstanding loans from the Federal Home Loan Bank of San Francisco (FHLB SF) and was its top borrower with 20 percent of total outstanding advances.
“In addition to the decreased value of its assets, approximately 87 percent of deposits by value were, reportedly, uninsured at Silicon Valley Bank. This too should have been a regulatory red flag. This high concentration of uninsured deposit value represented an outlier relative to financial institutions of similar size. By contrast, regional banks have told our offices that they typically have closer to 50 percent of deposits by value insured.
“It is our understanding that because SVB Financial had more than $100 billion of total consolidated assets it was designated a Large Banking Organization, and subject to enhanced supervisory and prudential standards. These enhanced prudential standards included the Federal Reserve’s Regulation YY and Large Financial Institution (LFI) rating system, which impose heightened capital, liquidity, and risk management standards on the firm.
“According to reports, Federal Reserve staff had clear indications that Silicon Valley Bank was deficient in both their interest rate risk management and balance sheet management that could have been mitigated before its failure. If these reports are accurate, it is concerning that Federal Reserve staff did not intervene in a timely manner and use the powerful supervisory and enforcement tools available to prevent the firm’s failure and subsequent market uncertainty. As policymakers, Congress needs to understand how FRB staff and FRBSF examiners seemingly missed numerous red flags and failed to use their supervisory and enforcement tools to correct the firm’s numerous financial and management deficiencies.”