Lawmakers grilled federal banking regulators on Tuesday over their “massive failure in supervision” during the first congressional hearing on the collapse of Silicon Valley Bank (SVB) and Signature Bank.
The Senate’s banking committee is the first to question officials on federal oversight of SVB, which was taken over by the federal government earlier this month after a severe bank run depleted its reserve. The collapse of the bank – the biggest bank failure since the 2008 financial crisis – has sparked wider fears about the soundness of the banking sector.
Three financial regulators appeared in front of the committee: the Federal Reserve vice-chair for supervision, Michael Barr, the Federal Deposit Insurance Corporation (FDIC) chair, Martin Gruenberg, and the treasury’s undersecretary for domestic financing Nellie Liang.
Two different framings were offered by Democrats and Republicans. Democrats emphasized the failure of the bank’s management and deregulation, specifically pointing to the scaling-back of regulation of mid-sized banks under the Trump administration.
Sherrod Brown, the Democrat chair of the committee, pointed out that SVB execs were under pressure to grow the company, which led them to risky behavior.
“It’s all just a variation of the same theme, the same root cause of most of our economic problems: wealthy elites do anything to make a quick profit, to pocket the reward and when the risky behavior leads to catastrophic failures, they turn to the government asking for help,” he said.
Elizabeth Warren, who was a key creator of financial regulations after the 2008 recession, asked the officials one by one if they agree that there should be a strengthening of banking rules.
“These collapses represent a massive failure in supervision over our nation’s banks,” she said. “Regulators burned down dozens of safeguards that were meant to stop banks from making risky bets.”
Warren noted that the FDIC, under the Trump administration cut back on rules across the board, something that Gruenberg noted he voted against when he was on the FDIC’s board at the time.
“I certainly think it’s appropriate for us to go back and review those actions in light of the recent episode,” Gruenberg said.
Republicans, meanwhile, say the regulators failed to act despite warning signs. Republican members tried to carefully balance criticizing regulators without promoting stronger regulation, which would typically go against the party’s stance.
“The Federal Reserve should have been keenly aware of the impact interest rate hikes would have on the value of securities, and it should have been actively working to ensure the bank and supervisors were hedging their bets and covering their risk accordingly,” said Tim Scott, the Republican ranking member of the committee.
Meanwhile, the regulators said they were well aware of the bank’s problems and had delivered warnings starting in 2021 that SVB managers failed to act on.
Barr – who is heading the Fed’s investigation in the SVB collapse that will be published by 1 May – took on a bulk of lawmakers’ questions. Barr said the bank’s rating was a three on the Camels rating system, which measures the strength of a bank on various measures like liquidity and assets on a scale of one to five, with one being the strongest and five being weak.
“The risks the bank faced, interest rate risk and liquidity risks, those are the bread and butter of banking issues. The firm was quite aware of those issues. They had been told by regulators, investors were talking about problems with interest rates and liquidity risks publicly, and they didn’t take the necessary actions,” Barr said.
Barr said the Fed did not stress-test SVB in 2022, saying that a stress test is not the primary way regulators test for interest rates. He noted that stress testing for rising interest rates would be useful in the future.
The Fed’s investigation will “consider whether the supervisory warnings were sufficient and whether supervisors had sufficient tools”, Barr said.
“We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure,” Barr said. “Recent events have shown that we must evolve our understanding of banks, in light of changing technology and emerging risks.”