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Bank regulators eye tougher oversight after Silicon Valley Bank collapse

Congressional hearings this week are examining the collapse of SVB and Signature Bank, as well as the government’s response

Michael Barr, left, vice chairman of the Federal Reserve, and Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, appear Tuesday at a Senate hearing on recent bank failures. (Matt McClain/The Washington Post)
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Silicon Valley Bank’s failure was a “textbook case of mismanagement” that shows that banks with more than $100 billion in assets may need tougher oversight, and the government will review the federal insurance program that protects deposits, regulators told a Senate committee looking into the crisis.

But lawmakers squabbled Tuesday over the causes of the meltdowns at SVB and Signature Bank. In a hearing of the Senate Banking Committee, Republicans disputed the idea that tougher rules for midsize banks would have kept the institutions from failing and raised concerns that regulators’ decisions to insure all deposits at those two banks could set a dangerous precedent. Democrats, meanwhile, insisted that the recent meltdowns leave little ambiguity about the need for revamped rules.

Top officials from the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation said they would support strengthening banking regulations, including for firms with assets over $100 billion. Silicon Valley Bank had $211 billion in assets at the end of last year.

The FDIC will also embark on a “comprehensive” review of bank deposit insurance, with its chair saying the decision to cover all uninsured depositors at SVB and Signature Bank was a “highly consequential one that has implications for the system.” The cost of SVB’s failure to the government’s Deposit Insurance Fund — funded mainly through quarterly premiums on insured banks — is roughly $20 billion, according to FDIC estimates. FDIC Chair Martin Gruenberg said 88 percent of SVB’s deposits when it failed were over the usual $250,000 limit for insurance, and the 10 largest accounts had $13.3 billion.

Gruenberg; Michael Barr, the Fed’s vice chair for supervision; and Nellie Liang, undersecretary for domestic finance at Treasury, will testify again Wednesday before the House Financial Services Committee. But their testimony in the Senate left plenty of unanswered questions, in part because the Fed and FDIC are still investigating how SVB’s demise ricocheted through the financial system. Lawmakers have also called on SVB’s and Signature’s executives to testify, so far with no response.

“The scene of the crime does not start with the regulators before us,” said Sen. Sherrod Brown (D-Ohio), chair of the Banking Committee. “Instead, we must look inside the bank, at the bank CEOs and at the Trump-era banking regulators, who made it their mission to give Wall Street everything it wanted.”

Democrats argued that a 2018 move to weaken rules for banks contributed to the panic. Twelve senators — 10 Democrats and two independents — are urging the Fed to impose tougher rules on banks with assets totaling $100 billion to $250 billion, the tier on which Congress rolled back some restrictions during the Trump administration through a bipartisan 2018 vote. The Fed implemented those changes the next year.

But Republicans said regulators were “asleep at the wheel,” and they disputed the idea that the “tailoring” of rules established after the 2008 financial crisis (by a 2010 law known as Dodd-Frank) allowed SVB to slip through the cracks. Many GOP lawmakers also criticized the Fed, and in particular the San Francisco Fed, which oversaw SVB, for paying attention to climate change and inequality, saying that work distracted officials from bank oversight and the risks posed by rising interest rates.

“You are not using the tools in your toolbox,” said Sen. Katie Boyd Britt (R-Ala.). “That is what people hate about Washington.”

Piecing together a timeline of what went wrong has become a top priority in Washington. The Fed and the FDIC are investigating how the firms’ back-to-back failures triggered so much panic in the financial system that regulators had to scramble to launch emergency efforts to prevent even more damage. The Fed’s probe, led by Barr, will be made public by May 1.

Sen. Tim Scott (S.C.), the committee’s ranking Republican, said the Fed’s plan to investigate SVB’s failure was “an obvious inherent conflict of interest and a case of the fox guarding the henhouse.” He also urged Fed Chair Jerome H. Powell and Treasury Secretary Secretary Janet L. Yellen to testify.

“By all accounts, our regulators appear to have been asleep at the wheel,” Scott said.

Barr blamed mismanagement at the bank, since Fed supervisors repeatedly warned SVB that it had major issues. He also said that SVB was flagged in a presentation to the Federal Reserve Board on the risks created by rising interest rates weeks before its stunning March 10 collapse.

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“Staff relayed that they were actively engaged with SVB, but, as it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9,” Barr said. “SVB’s failure is a textbook case of mismanagement.”

The failures of SVB — which was sold Sunday to First Citizens bank — and Signature Bank have ignited fresh political scrutiny of the Fed and other bank regulators, with lawmakers expected to investigate. Both parties are pushing for tougher oversight of the central bank itself. Sens. Rick Scott (R-Fla.) and Elizabeth Warren (D-Mass.) — two lawmakers who rarely agree on much — unveiled legislation that would replace the Fed’s watchdog with an inspector general appointed by the president and confirmed by the Senate.

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Many members of Congress are pinning this month’s episode on the Fed, despite the bipartisan vote in 2018 to ease regulations on midsize institutions like SVB. That push was championed as a way to pare back parts of Dodd-Frank, the historic legislation passed in the wake of the Great Recession in 2007 and 2008.

Barr was extremely critical of those moves before President Biden nominated him to the Fed board last year. As a former top Treasury staffer and an expert on financial regulation, he was instrumental in crafting Dodd-Frank and routinely warned regulators against getting too complacent and reversing the steps deemed necessary to prevent another financial crisis.

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Responding to a question Warren posed, Barr, Gruenberg and Liang all said the banking system needed stronger rules. (Those regulators were put in those roles by the Biden administration, and all had been involved in crafting Dodd-Frank.)

Banking regulators feared this month that SVB’s and Signature Bank’s collapses could lead to more bank runs and other problems. The FDIC used a special emergency authority to protect all depositors at those two banks, even those with accounts well over the usual limit of $250,000. And the Fed created a temporary lending facility and coordinated with other major central banks to ease financial strains.

Gruenberg said the banking system “remains sound” despite this month’s shock. But it is too soon to tell how much the broader economy will be affected.

“The financial system continues to face significant downside risks from the effects of inflation, rising market interest rates, and continuing geopolitical uncertainties,” Gruenberg said. “Credit quality and profitability may weaken due to these risks, potentially resulting in tighter loan underwriting, slower loan growth, higher provision expenses, and liquidity constraints.”

(Last week, after the Fed raised interest rates for the ninth time in a year, Powell also said bank turmoil should slow the economy down and effectively do the work of a rate hike.)

Based on what’s known so far, bad bank management, unheeded warnings and the unintended consequences of rising interest rates all contributed to SVB’s implosion.

SVB held an unusually high percentage of its assets in Treasury bonds. As the Fed hoisted rates, the value of those bonds, which are normally a safe investment, went down. The bank couldn’t sell the bonds and make good on customers’ deposits as anxiety spread.

SVB and Signature Bank also relied heavily on uninsured deposits: By the end of 2022, 90 percent of Signature’s deposits were uninsured, Gruenberg said. That figure was 88 percent for SVB. That included not only small and medium-size customers, but also those with massive balances.

SVB’s internal controls couldn’t keep up with the bank’s gangbuster growth. Supervisors cited the bank repeatedly from the end of 2021 until shortly before its demise. But SVB never did enough to prevent its failure.

That collapse threatened to be the first of many more. In a matter of hours after SVB shut down on March 10, Signature lost 20 percent of its deposits, Gruenberg said. It then held a negative balance at the Fed, and the bank’s managers couldn’t provide accurate data on the size of that deficit.

Liang said that on the evening of Sunday, March 12, it was clear to regulators that they needed to step in to calm the financial system before business began the next day. That spurred the announcement of a slew of actions from Treasury, the Fed and the FDIC to stem runs on uninsured deposits and “prevent significant disruptions to households and businesses.”

“We have used important tools to act quickly to prevent contagion,” Liang told lawmakers. “And they are tools we would use again if warranted to ensure that Americans’ deposits are safe.”

Lawmakers and regulators probably will also take a closer look at social media’s ability to amplify financial stress. In SVB’s case, uninsured depositors began looking at the bank’s weak balance sheet and turned to social media to start talking about a bank run. Depositors fled, pulling more than $40 billion in deposits on March 9, Barr said. The next day, when $100 billion was scheduled to go out the door, the bank failed.

Rep. Patrick T. McHenry (R-N.C.), who chairs the House Financial Services Committee, told The Washington Post recently that SVB’s failure marked the “first Twitter-fueled bank run.”

“This debate is not new,” McHenry said. “It is just different today because of the speed and ability of a Twitter mob to exacerbate and fan the flames of a bank run.”

Tony Romm contributed to this report.