SVB Management and Banking Rules Put on Trial at Senate Hearing

Craig Torres
·5 min read
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(Bloomberg) -- The fallout of Silicon Valley Bank’s failure rumbled through Washington on Tuesday, with lawmakers from both parties demanding that the Federal Reserve explain why it didn’t use powers it had and some Democrats calling for tighter financial rules.

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Lawmakers from both parties expressed their shock and anger, at a Senate Banking Committee hearing, over the sudden collapse of Silicon Valley Bank and Signature Bank earlier this month. The regional banking crisis also has seen one lender liquidate itself and a fourth aided by a consortium of private banks.

“You don’t have to be an accountant to figure out what the hell was going on,” said Senator Jon Tester, a Montana Democrat, referring to the interest-rate risk taken on by Silicon Valley Bank, which collapsed March 10. “If it is the regulators’ fault, it better be fixed. If it is the regulation, it better be fixed.”

SVB was the largest US bank failure since the financial crisis, with about $209 billion in assets at the end of last year. Unlike previous banking blow-ups, where banks suffered from deteriorating loan quality, SVB suffered an interest-rate shock in its bond portfolio, which then led to a destabilizing deposit run.

The banking crisis has called into question how the sweeping regulatory reforms that followed the 2007-09 meltdown might have left dangerous gaps in the financial system — either through the ways regulators implemented them or through subsequent legislation that relaxed some of the parameters.

Textbook ‘Mismanagement’

The banking woes will also likely come at a cost for lawmakers’ constituents — as banks get assessed by the Federal Deposit Insurance Corp. to pay for the draws on the deposit-insurance fund, and as lenders curtail the availability of credit to companies and households.

Michael Barr, the vice chair of supervision at the Fed — SVB’s front-line regulator — called that bank’s failure first and foremost a “textbook case of mismanagement,” while adding that the Fed’s supervisory response will also be reviewed.

Banking Committee Chair Sherrod Brown, an Ohio Democrat, also put the blame squarely on the bank’s managers, accusing them at the hearing of “hubris, entitlement and greed.”

While ranking Republican Tim Scott also spoke of management failures, he pressed on why regulators hadn’t used the powers available to them.

“Clear as a bell were the warning signs,” Scott told Barr and the two other witnesses at the hearing, FDIC Chair Martin Gruenberg and Treasury Undersecretary Nellie Liang. “How can you ask Congress for more authority with a straight face?”

In many ways, the unseated witness that was the focus of many questions was a piece of legislation passed in 2018 known as Senate 2155, which had received bipartisan support. That law supported the concept of tailoring tougher supervision according to asset size — while giving the Fed discretion to single out banks for a closer look as it judged necessary.

A critical question is how the Fed, when supervision was overseen by former board member Randal Quarles, and other regulators implemented that tailoring and how it affected on-the-ground oversight. Both the Fed and FDIC are set to release findings on May 1.

Democratic Senator Elizabeth Warren of Massachusetts specifically asked the three senior officials whether banking rules needed to be strengthened — after regulators had “burned down dozens of safeguards” instituted in the Dodd-Frank legislation crafted after the 2007-09 crisis. Each responded that they agreed with the need for such strengthening.

“I anticipate the need to strengthen capital and liquidity standards” for banks with assets larger than $100 billion, Barr said in his response.

Gruenberg said in his prepared testimony that the failures of SVB and Signature Bank “demonstrate the implications that banks with assets of $100 billion or more can have for financial stability. The prudential regulation of these institutions merits additional attention, particularly with respect to capital, liquidity and interest-rate risk.”

Among the steps outlined by Barr and Gruenberg in their testimonies:

  • The Fed’s stress tests of banks will be enhanced with multiple scenarios to uncover a variety of channels of contagion.

  • The Fed will propose “a long-term debt requirement” for big banks that aren’t designated as global systemically important, “so that they have a cushion of loss-absorbing resources,” Barr said.

  • Liquidity rules will also be explored to improve resiliency.

  • The FDIC will on May 1 lay out options for potential changes to deposit-insurance coverage, which is now capped at $250,000.

  • Gruenberg called for “serious attention” to the capital requirements for the securities portfolios of banks with assets over $100 billion.

“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 in his testimony. “We are also assessing whether SVB would have had higher levels of capital and liquidity under those standards, and whether such higher levels of capital and liquidity would have forestalled” its collapse.

In one of the liveliest moments in the hearing, GOP Senator John Kennedy of Louisiana homed in on the Fed’s 2022 stress tests not having included a scenario of a surge in interest rates.

“You stress tested in 2022 for the wrong thing,” he said, quipping that it was like someone going in for a Covid test but instead being checked for cholera.

Barr responded that he wasn’t familiar with the differences between such tests, but highlighted that supervisors had indeed flagged to SVB concerns about its interest-rate risk profile.

“Republicans want to deflect blame from the Dodd-Frank rollback and target it instead on the regulators,” said Sarah Binder, a senior fellow at the Brookings Institution. “Democrats want to blame the rollback and greedy bankers.”

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