'Asleep at the wheel': Lawmakers take aim at Feds for failing to prevent SVB bank collapse

WASHINGTON – The nation’s top financial regulator put the blame for the failure of Silicon Valley Bank in the lap of the bank’s managers during a Senate hearing Tuesday aimed at understanding what happened.

But both Democrats and Republicans also said federal regulators didn’t do their job.

Sen. Jon Tester, D-Mont., said regulators knew there was a problem but “nobody dropped the hammer.”

“What were the supervisors thinking?” asked South Carolina Sen. Tim Scott, the panel’s top Republican. “By all accounts, our regulators appear to have been asleep at the wheel.”

Michael Barr, the Federal Reserve’s vice chair for supervision, said an internal review is examining whether regulators acted appropriately. That review will be completed by May 1.

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“If the Federal Reserve supervisors didn't take enough action, we're going to be talking about that in our review and we expect to be held accountable for it,” he said.

But Barr disputed the characterization of Sen. John Kennedy, R-La., that the Fed knew there was a problem and “didn’t do anything about it.”

Regulators told bank managers they faced too high a risk from growing interest rates, he said, but the executives waited too long to act.

“This is a textbook case of bank mismanagement,” Barr said.

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What happened at SVB?

Silicon Valley Bank collapsed when concerns about its financial health led customers whose deposits were uninsured – because they topped the Federal Deposit Insurance Corp.'s $250,000 limit – to shift their money to bigger banks with more stable assets.

A similar meltdown triggered the demise of Signature Bank of New York, threatened First Republic Bank and prompted many depositors across the country to reshuffle their deposits. To contain the crisis and prevent other bank runs, federal regulators stepped in with aid to ensure that uninsured depositors can access their money.

Officials at the Federal Reserve Bank of San Francisco, which directly supervised Silicon Valley Bank, began flagging problems “in a serious way” in November of 2021, according to Barr. Last summer, the bank’s management rating was lowered to “fair” and its controls were labeled deficient.

At a February meeting of the Federal Reserve’s Board of Governors, SVB's high risks were highlighting during a discussion of the impact of rising interest rates.

“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 in his prepared remarks.

Tester complained that while regulators may have been telling the bank to “straighten up and fly right,” they didn’t “make it so damn miserable that these folks would adjust their business plan to take care of the risk that was in their bank.”

Barr said the Federal Reserve is evaluating whether regulators have the tools they need and if stricter regulations are warranted. The Fed is also working on strengthening requirements on how much cash a bank must have access to.

Scott said regulators need to do a better job enforcing existing laws before asking Congress for more authority.

But Ohio Sen. Sherrod Brown, the Democrat who chairs the committee, said many lawmakers who are the first to scold regulators for their failures will "offer ready ears whenever bank CEOs line up at their offices complaining about `out of control bank examiners.'"

Contributing: Paul Davidson.

More: In wake of SVB collapse, lawmakers float raising FDIC deposit insurance cap of $250,000

This article originally appeared on USA TODAY: SVB bank hearing: Lawmakers say Federal Reserve shares failure blame