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Blog: The butterfly effect: How the failure of a small US bank toppled a giant in Switzerland – Sydney Morning Herald
It was the losses Silicon Valley Bank realised when it was forced to sell almost its entire portfolio of available for sale securities that triggered the violent run on its deposits – $US42 billion in a day – that caused it to collapse.
The speed at which the bank failed, and the speed at which contagion from its failure spread – not just within the US banking system, where deposits flowed out of the regional banking sector and into the big banks and money market funds, but also across the Atlantic – is a major lesson from the episode.
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It underscored how exposed banking systems are in a digital age, where deposits can be withdrawn and transferred with a few clicks on a mobile phone, and how interconnected and vulnerable the global banking sector is while the traumas of 2008 linger in depositors’ memories.
While Lonsdale had a relatively easy time at the AFR’s summit, US regulators weren’t treated as gently when they appeared before a congressional banking committee in the US Senate in a hearing that again exposed how dysfunctional the US political system is, and how unlikely it is that the obvious responses to the bank failures will be implemented.
No one is arguing against the proposition that the root cause of Silicon Valley’s failure was, as the Federal Reserve Board’s vice-chair for supervision Michael Barr said, a “textbook case of mismanagement”.
The bank didn’t manage the risk of the concentration risk in its deposit base – dominated by tech companies – nor the interest rate risk in its liabilities even though the Fed’s staff had been discussing these risks with the bank since late 2021.
That also says something about the quality of the Fed’s regulation, but the rolling back of some Dodd-Frank banking reforms by the Trump administration in 2019 as part of its war on regulation – the capital and liquidity requirements for banks with less than $US250 billion of assets were lightened, as was their supervision – meant the bank wasn’t subject to the liquidity coverage ratio and net stable funding requirements larger banks have to observe, and it didn’t have to hold capital against any unrealised losses on the securities it held.
Had the deregulationists in the Republican Party and within the Fed – the then vice-chair for supervision Randal Quarles led the charge – got their way, even those US banks of global systemic importance would have seen their regulation weakened.
Barr’s immediate predecessor and Joe Biden’s recently appointed senior economic adviser Lael Brainard was a lone and lonely dissenting voice within the Fed. Her opposition is credited with having a major influence in the failed attempt to deregulate the major US banks.
Proponents of deregulation of banks (the Republicans at Tuesday’s hearing remain opposed to increased regulation) want to generate greater economic growth by encouraging the banks to lend more and accept more risk. In the US, the regional banks lobby and its hold on the conservatives in Congress is powerful.
The regional banks dominate commercial and residential property lending and account for about half non-property-related commercial and consumer lending in the US. The contagion that spread from the collapse of Silicon Valley in particular threatened to infect the core of the US financial system and economy, hence the unwillingness of the regulators to allow the failed banks to fail completely.
The US banks that fell over were, by most definitions, small enough to be allowed to fail, but the threat of contagion meant that even a bank below the cut-off point of $US250 billion of assets that the US used to separate the more intrusively regulated banks from the rest could, and did, cause a threat to systemic and economic stability.
In Switzerland, while Credit Suisse had solid capital and liquidity levels, they weren’t sufficient for the bank to withstand the run that developed as depositors (and hedge funds and short sellers) searched for the most vulnerable of the major banks. With assets equivalent to about 69 per cent of Switzerland’s GDP, it was too big to be allowed to fail.
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Now Switzerland will have one dominant bank, holding assets that are more than two-and-a-half times the size of its economy. If UBS were to fail, Switzerland would be devastated, with massive consequences elsewhere.
That’s a conundrum the Swiss regulators are now confronted with. They have to ensure that UBS is incapable of failing, which implies draconian regulation and supervision.
The Credit Suisse experience, moreover, will cause the global regulators and their domestic counterparts to re-think how they should deal with banks that are either of global or domestic systemic importance. The mechanisms for resolving the failure of a bank deemed too big to fail were, as the Swiss authorities have said, shown to be useless at their first real stress test.
Credit Suisse’s total failure and wind-up would have destroyed Switzerland and triggered another global financial crisis.
Regulators are now going to have to rethink their approach to dealing with banks that are so big and complicated that they can’t be allowed to fail. One obvious option, and one the Swiss might exercise in relation to UBS, would be to ensure that they aren’t so big and complicated.
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Blog: Members of U.S. Senate panel press financial regulators on massive … – Idaho Capital Sun
WASHINGTON — Financial regulators promised a full review of Silicon Valley Bank’s massive failure as members of a key U.S. Senate panel on Tuesday interrogated the officials about what led to the second-largest bank collapse in U.S. history.
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 clean-up 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.”
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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.
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Blog: Bank of England Issues Updated Assessment of Climate-Related … – JD Supra
The Bank of England released a report titled Climate-Related Risks and the Regulatory Capital Framework (Report) on March 13, 2023. The Report expands on the Bank’s 2021 Climate Change Adaptation Report (CCAR), in which it articulated initial views on existing regulatory capital frameworks for banks and insurers in relation to climate change. The CCAR concluded that the frameworks already in place, such as then-existing capital models and credit ratings, captured climate-related risks “to some extent.” The Bank’s updated assessment as set forth in the Report adopts a more cautious tone, concluding that the risk assessment “may be incomplete due to the difficulties in estimating climate risks (capability gaps) and there may be challenges in capturing risks in the existing capital regimes (regime gaps).”
According to the Report, these existing “capability and regime gaps” create uncertainty around whether banks and insurers are capitalized sufficiently for risks of climate-related losses in the future. The Bank observed that this uncertainty represents a “risk appetite challenge” for regulators, who “need to form judgements on whether quantified and unquantified risks are within acceptable risk levels.” The Bank also stated that effective risk-management controls can reduce “the quantum of capital required in the future for resilience” to climate change losses, but “the absence of controls might suggest a greater quantum of capital will be required.” In the short term, “the Bank is focused on ensuring firms make progress to address ‘capability gaps’ to improve their identification, measurement and management of climate risks.” The Bank will undertake further analysis to explore whether changes to regulatory capital frameworks will be required. In particular the Bank will: develop its capabilities and forward-looking tools to determine the resilience of the financial system to climate risks; support initiatives to enhance climate disclosures; promote high quality and consistent accounting for climate risks; and address material regime gaps in capital frameworks.
Taking The Temperature: The Bank is focused on ensuring that climate change risks and the opportunities that may arise from a transition to a net-zero economy are being identified and managed across the financial sector. Instead of proposing any specific policy changes, the Report paves the way for further work by the Bank to explore and determine what changes (if any) need to be made to existing regulatory capital frameworks. The Report recognized that the “unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than used for many other risks. Scenario analysis and stress testing will play a key role in this.” The emphasis on scenario analysis in conjunction with overall risk assessment mirrors the importance placed on such exercises by other financial regulators, including the Federal Reserve and the European Banking Authority. Financial institutions should also note the Bank’s conclusion that increased capital requirements may be needed to address any absence of controls: because the Bank, like the European Parliament and national bank regulators elsewhere, have highlighted the use of the Basel III regime to address material climate risks, the Bank or the Prudential Regulation Authority very well could take action to address any significant capital or supervisory weaknesses.
Blog: Daily Financial Regulation Update — Saturday, March 25, 2023 … – JD Supra
Major Developments
Congress
U.S. Senate
Committee on Banking, Housing, and Urban Affairs
Banking Committee Republicans Probe Federal Reserve Supervision of SVB
March 24, 2023
Members of the Senate Banking Committee Republicans are demanding answers and seeking records from the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Reserve Bank of San Francisco regarding their supervision of Silicon Valley Bank (SVB) in the leadup to its failure.
U.S. House of Representatives
Committee on Financial Services
Barr, Huizenga, Kim Demand Clarity on Federal Reserve Supervisory Activity Preceding Recent Bank Failures
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 Federal Reserve Michael Barr and President and CEO of the Federal Reserve Bank of San Francisco Mary Daly expressing concern about supervisory activity conducted prior to the collapse of SVB.
Barr, Huizenga Demand Information on Financial Stability Oversight Council Meeting Following Recent Bank Failures
March 24, 2023
The Chairman of the Subcommittee on Oversight and Investigations, Bill Huizenga (MI-04), and the Chairman of the Subcommittee on Financial Institutions and Monetary Policy, Andy Barr (KY-06), sent letters to Financial Stability Oversight Council (FSOC) Chair Janet Yellen and Chair of the Council of Inspectors General on Financial Oversight, Richard Delmar, demanding information on a March 12 meeting of FSOC regarding turbulence in the banking system.
Members of the House Financial Services Committee Demand California and New York Regulators Provide Information on Supervisory Efforts Surrounding Recent Bank Failures
March 24, 2023
House Financial Services Committee members are demanding the California and New York state-level regulators that supervised SVB and Signature Bank provide information regarding their supervisory efforts, coordination with Federal regulators, and decision making regarding the failed banks.
Federal Agencies
U.S. Department of the Treasury
Remarks by U.S. Treasurer Chief Lynn Malerba at a White House and U.S. Mint Event Honoring the American Women Quarters Program
March 24, 2023
U.S. Treasurer Chief Lynn Malerba gave remarks at a White House and U.S. Mint Event honoring the American Women Quarters Program.
Treasury Targets Belarusian State-Owned Enterprises, Government Officials, and Lukashenka’s Aircraft
March 24, 2023
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating three entities and nine individuals, and identifying one presidential aircraft, as blocked property.
Federal Reserve Board
Federal Reserve Board releases annual audited financial statements
March 24, 2023
The Federal Reserve on Friday released the 2022 combined annual audited financial statements for the Reserve Banks.
Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2022 and 2021, and Independent Auditors’ Reports
March 24, 2023
The Office of Inspector General for the Federal Reserve released the Federal Financial Institutions Examination Council financial statements as of and for the years ended December 31, 2022 and 2021, and independent auditors’ reports.
Federal Reserve publishes order denying application by Custodia Bank, Inc. to be supervised by the Federal Reserve
March 24, 2023
The Federal Reserve published its order denying the application by Custodia Bank, Inc. to be supervised by the Federal Reserve. The Federal Reserve previously announced its denial of the application, and its order is now available following a review for confidential information.
Federal Reserve Bank of New York
Underlying Inflation Gauge – March 2023
March 24, 2023
The Federal Reserve Bank of New York released the Underlying Inflation Gauge (UIG) for March 2023.
Blog: The New York Fed DSGE Model Forecast—March 2023
March 24, 2023
The Federal Reserve Bank of New York published a blog post entitled, “The New York Fed DSGE Model Forecast—March 2023.”
Office of the Comptroller of the Currency
OCC Appoints Six New Members to Mutual Savings Association Advisory Committee
March 24, 2023
The Office of the Comptroller of the Currency (OCC) appointed six new members to its Mutual Savings Association Advisory Committee.
Commodity Futures Trading Commission
Remarks of Commissioner Summer K. Mersinger at the International Women of Blockchain 2023 Web3 and Metaverse Conference
March 24, 2023
Commodity Futures Trading Commission (CFTC) Commissioner Summer K. Mersinger gave remarks at the International Women of Blockchain 2023 Web3 and Metaverse Conference.
Financial Stability Oversight Council
Financial Stability Oversight Council Meeting
March 24, 2023
U.S. Secretary of the Treasury Janet L. Yellen convened a meeting of the FSOC.
Financial Crimes Enforcement Network
FinCEN Issues Initial Beneficial Ownership Information Reporting Guidance
March 24, 2023
The Financial Crimes Enforcement Network published its first set of guidance materials to aid the public, and in particular the small business community, in understanding upcoming beneficial ownership information reporting requirements taking effect on January 1, 2024.
Fannie Mae
Commentary: Banking System Instability May Prove Catalyst for Recession
March 24, 2023
The Fannie Mae Economic and Strategic Research Group released its monthly commentary which projects a modest recession to begin in the second half of 2023, compared to the previously forecasted second quarter of 2023.
International
European Commission
EU-UK relations: Joint Committee adopts new Windsor Framework arrangements and Partnership Council looks to the future
March 24, 2023
The tenth meeting of the EU-UK Joint Committee and the second meeting of the EU-UK Partnership Council took place in London. The Joint Committee adopted a decision laying down the arrangements relating to the Windsor Framework.
European Banking Authority
EBA consults on standards for supervisors assessing the new market risk internal models under the Fundamental Review of the Trading Book
March 24, 2023
The European Banking Authority launched a public consultation on its draft Regulatory Technical Standards on the assessment methodology under which competent authorities verify institutions’ compliance with the requirements applicable to their internal models under the Fundamental Review of the Trading Book rules.
Bank of England
Market Participants Survey results – March 2023
March 24, 2023
The Bank of England released the results of the Market Participants Survey for March 2023.
Market Notice: Asset Purchase Facility: Gilt Sales
March 24, 2023
The Bank of England issued a market notice setting out the schedule for sales in Q2 2023 of gilts held in the Asset Purchase Facility for monetary policy purposes.
Bank of England Prudential Regulation Authority
UK Financial Conduct Authority
Joint HM Treasury and FCA statement on the Criminal Market Abuse Regime
March 24, 2023
HM Treasury and the Financial Conduct Authority have completed a review of the criminal market abuse regime, fulfilling the commitment made in the Economic Crime Plan 2019-22.
Administration Changes
Vacancies
Board of Governors of the Federal Reserve System
- Vice Chair – Vacant (Vice Chair Leal Brainard resigned effective on or around February 20, 2023)
Office of the Comptroller of the Currency
- Comptroller – Vacant (Michael Hsu serves as Acting Comptroller)
Financial Crimes Enforcement Network
- Director – Vacant (Himamauli Das serves as Acting Director)
Appointments/Confirmation Hearings
U.S. Department of the Treasury – Janet Yellen (effective January 26, 2021)
Federal Reserve Board – Jerome H. Powell (effective May 23, 2022)
Federal Reserve Bank of New York – John C. Williams (effective June 18, 2018)
Federal Reserve Bank of Boston – Susan M. Collins (effective July 1, 2022)
Federal Deposit Insurance Corporation – Martin Gruenberg (effective January 5, 2023)
Office of the Comptroller of the Currency – Michael Hsu (acting Comptroller, effective May 10, 2021)
Securities and Exchange Commission – Gary Gensler (effective April 17, 2021)
Commodity Futures Trade Commission – Rostin Behnam (effective December 17, 2021)
Consumer Financial Protection Bureau – Rohit Chopra (effective October 12, 2021)
National Credit Union Administration – Todd M. Harper (effective January 20, 2021)
Small Business Administration – Isabella Casillas Guzman (effective March 16, 2021)
U.S. Department of Housing and Urban Development – Marcia Fudge (effective March 10, 2021)
Federal Housing Finance Agency – Sandra L. Thompson (effective June 22, 2022)
U.S. Department of Education – Dr. Miguel Cardona (effective March 2, 2021)
PH Client Alerts
Click here to read more from our Coronavirus series.
Legislation/Legislative Updates
Click here to view the full text of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), Enacted March 27, 2020.
Click here to view the full text of the Paycheck Protection Program Increase Act of 2020, Enacted April 24, 2020.
Click here to view the full text of the Paycheck Protection Program Flexibility Act of 2020, Enacted June 5, 2020.
Click here to view the full text of the Consolidated Appropriations Act, 2021, Enacted December 27, 2020.
Click here to view the full text of the American Rescue Plan of 2021, Enacted March 11, 2021.
Click here to view the full text of the PPP Extension Act of 2021, Enacted March 30, 2021.
Click here to view a running list of proposed legislation from the Senate Committee on Banking, Housing, and Urban Affairs, Senate Committee on Small Business and Entrepreneurship, House Committee on Financial Services, and House Committee on Small Business.
Blog: Appeals court sides with consumer finance regulator in funding dispute – Yahoo Finance
By Jody Godoy
(Reuters) -The U.S. Consumer Financial Protection Bureau’s funding structure is constitutional, a Manhattan appeals court ruled on Thursday, as the U.S. Supreme Court prepares to consider the issue next term.
The 2nd U.S. Circuit Court of Appeals said that Congress’ decision to fund the CFPB independently through the Federal Reserve, instead of annual appropriations bills, does not conflict with the U.S. Constitution’s separation of executive and legislative powers.
The question of the CFPB’s funding is before the U.S. Supreme Court in a closly-watched case that the CFPB says could threaten twelve years of financial regulation.
Congress created the agency in 2010 through the passage of the Dodd-Frank Act in response to the 2008 financial crisis, giving it authority to regulate payday lending, debt collection and other consumer financial businesses.
The CFPB has faced several legal challenges to its authority; the 2nd Circuit is not the first court to uphold the agency’s funding structure.
However, the ruling comes as the agency is asking the U.S. Supreme Court to overturn a ruling by the New Orleans-based 5th U.S. Circuit Court of Appeals finding the CFPB’s funding unconstitutional.
In seeking Supreme Court review, the CFPB said the ruling “raises grave concerns” for the financial industry, and could undermine “virtually every action” the agency has taken since its creation.
The court accepted the case and will hear arguments during its next term, which begins in October.
Writing for the 2nd Circuit on Thursday, U.S. Circuit Court Judge Richard Sullivan said the constitution only requires that expenditures be authorized by an act of Congress.
Sullivan, who was appointed by then-President Donald Trump in 2018, wrote that U.S. Supreme Court decisions and historical principles of congressional spending support that conclusion, he wrote.
The ruling denied a request by the Law Offices of Crystal Moroney to end a CFPB inquiry into the law firm’s work as a debt collector.
Richard Samp, an attorney who represents Moroney, said she plans to ask the U.S. Supreme Court to review the decision.
The case is Consumer Financial Protection Bureau v. Law Offices Of Crystal Moroney PC, 2nd U.S. Circuit Court of Appeals, No. 20-3471.
(Reporting by Jody Godoy in New York;Editing by Noeleen Walder)
Blog: Powell and Yellen Suggest Need to Review Regulations After Bank … – The New York Times
Powell and Yellen Suggest Need to Review Regulations After Bank … The New York Times
Blog: APRA Stress Tests Reveal Banking System Strength – Regulation Asia
APRA chairman John Lonsdale shared findings from its latest banking stress test and reviews on cyber preparedness and resilience.
APRA chairman John Lonsdale shared findings from its latest banking stress test and reviews on cyber preparedness and resilience.
Blog: Bill seeks to establish regulatory clarity for blockchain ecosystem … – Financial Regulation News
Bill seeks to establish regulatory clarity for blockchain ecosystem … Financial Regulation News
Blog: 5 takeaways from the Senate hearing on Silicon Valley Bank’s failure – NPR
Federal Reserve Vice Chair for Supervision Michael S. Barr appears before the Senate Banking, Housing and Urban Affairs Committee in Washington, D.C., on March 28, 2023. The collapse of Silicon Valley Bank has sparked scrutiny from lawmakers who want to know what went wrong and whether regulators did enough to oversee the lender.
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Federal Reserve Vice Chair for Supervision Michael S. Barr appears before the Senate Banking, Housing and Urban Affairs Committee in Washington, D.C., on March 28, 2023. The collapse of Silicon Valley Bank has sparked scrutiny from lawmakers who want to know what went wrong and whether regulators did enough to oversee the lender.
Win McNamee/Getty Images
Days after one of the largest bank failures in U.S. history, the fallout continues.
Some of the country’s top banking and financial regulators appeared before the Senate Banking Committee on Tuesday to testify about what led to the downfall of Silicon Valley Bank – and how to prevent the same thing from happening elsewhere.
The collapse of the SVB, along with Signature Bank, has sparked scrutiny of the roles played by both bank managers and regulators. Policymakers will be debating whether new laws, rules or attitudes are needed to keep other banks from going under.
Here are five takeaways from Tuesday’s hearing:
Silicon Valley Bank’s management messed up
Regulators had some tough words about SVB’s management at the hearing.
Silicon Valley Bank more than tripled in size in the last three years, but its financial controls didn’t keep pace.
The government bonds it was buying with depositors’ money tumbled in value as interest rates rose, but the bank seemed unconcerned by that.
“The [bank’s] risk model was not at all aligned with reality,” said Michael Barr, the Federal Reserve’s vice chair for supervision. “This is a textbook case of bank mismanagement,”
The bank recognized the problem only belatedly and tried to raise cash by selling some of its bonds at a loss earlier this month. That merely alarmed depositors, sparking an unusually rapid run on the bank.
Regulators issued warnings, but the problems were not fixed
How much blame should be laid at regulators feet? That was a question that cropped up repeatedly during the hearing.
Barr stressed that federal regulators had repeatedly warned the bank’s managers about the risks it was facing, at least as far back as October 2021. The bank was served with formal notices documenting “matters requiring attention” and “matters requiring immediate attention.”
FDIC Chairman Martin J. Gruenberg said the regulator is investigating management conduct at both Silicon Valley Bank and Signature Bank during his appearance before the Senate Banking Committee in Washington, D.C., on March 28, 2023.
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FDIC Chairman Martin J. Gruenberg said the regulator is investigating management conduct at both Silicon Valley Bank and Signature Bank during his appearance before the Senate Banking Committee in Washington, D.C., on March 28, 2023.
Win McNamee/Getty Images
But the risks remained and the Fed stopped short of ordering changes, which frustrated some of the senators in the Senate Banking Committee from both sides of the aisle.
“It looks to me like the regulators knew the problem, but nobody dropped the hammer,” said Sen. Jon Tester, D-Mont.
The problems developed during a time when the Fed was generally pursuing a light touch in bank regulation. In 2021, for example, the Fed issued a rule — at the urging of bank lobbyists — noting that guidance from bank supervisors does not carry the force of law.
That led some senators to call out colleagues who pushed for lighter rules, only to turn around and blame a lack of regulatory muscle for the bank’s failure.
“We’ve got a lot of folks that had been saying for months and years, ‘let’s rein in the bank supervisors,’ and now all of a sudden, it’s like, ‘Where were the supervisors? Why weren’t they being more aggressive?,'” said Sen. Chris Van Hollen, D-Md.
Barr is leading a review of the way the Federal Reserve supervised both Silicon Valley Bank and Signature Bank. His report is expected by May 1.
Modern bank runs can happen really fast
In their testimony, regulators also stressed the speed at which the banks collapsed.
When big depositors got wind of the problems at Silicon Valley Bank, they raced to pull their money out, withdrawing $42 billion in a single day.
“That’s an extraordinary pace and scale,” Barr said.
The bank scrambled to borrow more money overnight, but it couldn’t keep up. By the following morning, depositors had signaled plans to withdraw another $100 billion — more than the bank could get its hands on, according to Barr.
“They were not able to actually meet their obligations to pay their depositors over the course of that day and they were shut down,” Barr said.
Senate Banking Committee Ranking Member Sen. Tim Scott, R-S.C., asks questions during the Senate Banking hearing about the recent bank failures. Lawmakers want to know if regulators did enough to prevent the collapse of Silicon Valley Bank and Signature Bank.
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Senate Banking Committee Ranking Member Sen. Tim Scott, R-S.C., asks questions during the Senate Banking hearing about the recent bank failures. Lawmakers want to know if regulators did enough to prevent the collapse of Silicon Valley Bank and Signature Bank.
Win McNamee/Getty Images
Other banks will pay for the failure, but maybe not all banks
Also under scrutiny throughout the testimony, was the federal regulators’ decision to backstop all deposits at SVB as well as Signature Bank.
Silicon Valley bank was taken over by the FDIC on March 10, but fears of a more widespread bank run led regulators to announce days later they would guarantee all the deposits at both SVB and Signature Bank, not just the $250,000 per account that’s typically insured.
Making customers whole is expected to cost the deposit insurance fund $20 billion for Silicon Valley Bank and $2.5 billion for Signature Bank.
By law, that money will come from a special assessment on other banks — and that’s left many senators unhappy.
“Wyoming’s community banks may end up paying for this,” complained Sen. Cynthia Lummis, R-Wyo.
FDIC Chairman Martin Gruenberg stressed that the agency has some discretion in how those insurance costs are divided up among different categories of banks. A recommended formula will be announced in early May.
Bank executives could pay
The role of SVB’s top executives came under scrutiny as well during the hearing.
Lawmakers expressed frustration at reports that executives at Silicon Valley Bank sold stock and received bonuses shortly before the bank’s collapse.
Although the government doesn’t have explicit authority to claw back compensation, it does have the power to levy fines, order restitution and prohibit those executives from working at other banks, if wrongdoing is found.
“Almost every American would agree it’s simply wrong for the CEO and top executives to profit from their own mismanagement and then leave FDIC holding the bag,” Van Hollen said.
President Biden this month urged Congress to pass legislation to increase the penalties on bank executives when mismanagement leads to bank failures, though it’s unclear whether lawmakers will act.