Banking regulators defended their supervisory actions and pledged to find answers as to what went wrong when discussing the factors leading to the failures of Silicon Valley Bank (SVB) and Signature Bank before lawmakers Tuesday.
At a hearing before the Senate Committee on Banking, Housing, and Urban Affairs, Democrats like committee chairman Sherrod Brown (D-Ohio) said relaxed banking regulations played a significant role in the crisis.
“The officials sitting before us today know that their predecessors rolled back protections like capital and liquidity standards, stress tests, brokered deposit limits, and even basic supervision. They greenlighted these banks to grow too big, too fast,” Brown said in his statement.
Republican senators, including ranking member Tim Scott (S.C.), were critical of regulators’ oversight of the banks and their activities.
“By all accounts, our regulators appear to have been asleep at the wheel,” Scott said.
Meanwhile, regulators placed most of the blame for SVB’s collapse on its executives and boards.
“SVB’s failure is a textbook case of mismanagement,” said Michael Barr, vice chair for supervision at the Federal Reserve Board, in his opening statement. The bank grew too fast, had inadequate risk management and internal controls, was too concentrated in the technology industry, and had an unusually high amount of uninsured deposits over the $250,000 limit, he said.
When depositors withdrew more than $42 billion in deposits on March 9, the bank could not convert its long-term holdings into cash quickly enough to satisfy withdrawal requests. It failed the next day.
Barr, who is leading a review of the supervision and regulation of SVB and will report his findings May 1, outlined the steps the Fed had taken to try to rein in SVB’s risky business practices. The agency issued supervisory findings regarding SVB’s insufficient risk management practices multiple times since 2021, but the bank failed to adequately address the issues, he said.
Fed supervisors “told SVB they had deficiencies in governance and controls at the board and management level and an inability to manage risk,” Barr said. “They didn’t respond promptly enough or strongly enough.”
Barr added he did not learn about the problems at SVB until February, when Fed staff presented its findings to the Board of Governors. That it took so long to make the board aware is an issue the agency will review, he said.
During questioning from senators, Barr said he favors strengthening capital and liquidity requirements for mid-sized banks with $100 billion to $250 billion in assets, like SVB.
Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), said in his opening statement that SVB and Signature Bank were “allowed to fail.”
“Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed,” he said.
Gruenberg added while the FDIC does not have the authority to claw back bonuses and other incentives paid to bank executives, it can seek to impose civil monetary penalties, restitution, and banking profession bans on the leaders of the two banks. Barr said the Fed can pursue penalties for violations of banking law, unsound banking practices, and failure to uphold fiduciary duties.
Scott pressed Gruenberg for more information on the bids of two banks that tried to buy SVB on March 10, the day it failed. He said if the purchases had been approved, “The panic and the shock to the market and to market confidence we’ve seen over the past 2 1/2 weeks may have been avoided.”
Gruenberg confirmed there were two bids. One only offered to buy some of SVB’s assets and was deemed to be more costly to the FDIC than liquidating the bank; the other lacked approval from the purchasing bank’s board of directors and was thus disqualified, he said.
Aaron Nicodemus covers regulatory policy and compliance trends for Compliance Week. He previously worked as a reporter for Bloomberg Law and as business editor at the Telegram & Gazette in Worcester, Mass.
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