A top Republican has accused US regulators of being “asleep at the wheel” in the period leading up to the implosion of Silicon Valley Bank, in the first of two bruising congressional hearings intended to shed light on the failings that led to the lender’s collapse.
Tim Scott, the top member of the party on the powerful Senate banking committee, said SVB was “rife with mismanagement”, and that a “clear supervisory failure” had played a role in its collapse.
“Our regulators were simply asleep at the wheel.”
Sherrod Brown, the Democrat who chairs the committee, added: “We’re left with many questions — and a lot of justified anger — towards bank executives and boards, venture capitalists, federal and state bank regulators, and policymakers.”
“The officials sitting before us today know that their predecessors rolled back protections,” Brown said, “like capital and liquidity standards, stress tests, brokered deposit limits and even basic supervision. They greenlighted these banks to grow too big, too fast.”
The grilling comes as the collapse of SVB and Signature Bank has sparked a flurry of debate on Capitol Hill over whether new laws are needed to shore up the banking system or punish the executives of the failed lenders.
To contain the fallout, government authorities guaranteed all deposits at the banks, while the Federal Reserve launched a lending facility ensuring others could meet their depositors’ needs.
Michael Barr, the Fed’s top official on banking supervision, was forced to defend the US central bank after lawmakers suggested it had failed to act in the face of obvious warning signs of SVB’s vulnerabilities.
Barr appeared alongside Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, and Nellie Liang, under-secretary for domestic finance at the Treasury.
“It looks to me like the regulators knew the problem but no one dropped the hammer,” Jon Tester, the Democrat senator from Montana, said to Barr. “As you do your look back into what transpired, it better be fixed.”
Republican senator Steve Daines of Montana went so far as to ask Barr whether he would be willing to recommend individuals to be fired if they were found to have been “clearly negligent”. In response, Barr pointed to the Fed’s upcoming review of its handling of SVB, which is due to be released before May 1.
Senator John Kennedy of Louisiana criticised the stress tests the Fed imposes on lenders to assess their capacity to weather adverse shocks, noting they did not examine how banks would fare if interest rates rose sharply, as they have done over the past year.
Barr blamed the collapse of SVB on a “textbook case of mismanagement”. He said supervisors had found “deficiencies” at the lender dating back to late 2021, and had met with SVB’s management in November 2022 “to express concern with the bank’s interest rate risk profile”. However, Fed staff had only briefed the central bank’s board of governors in mid-February of this year, when Barr said he first learned the extent of SVB’s exposure to risks associated with rising interest rates.
Responding to questions on Tuesday, Gruenberg said that without government action, there was “significant risk of contagion” and “serious stress at other institutions” stemming from SVB’s failure. Signature Bank lost 20 per cent of its deposits in a matter of hours the day SVB was shuttered on March 10, he said separately.
Gruenberg said the FDIC estimates the cost of covering SVB’s deposits at $20bn, and that of Signature Bank at $2.5bn. He also called for “special attention” to be paid to the regulation of banks with more than $100bn in assets.
Lawmakers on Tuesday also grilled Gruenberg about the FDIC’s process to find a bidder for SVB following its failure and whether “ideology” stymied an earlier deal.
The FDIC announced on Monday that First Citizens Bank would take on all of SVB’s deposits and loans. Last week, a similar takeover was announced for Signature Bank, whose operations were sold to Flagstar, which is owned by New York Community Bank.
This week’s hearings are likely to be the first in a series of similar events relating to the banks’ collapse. The House financial services committee will hold a hearing on Wednesday with the same panellists.
The central bank is also facing further scrutiny, with senators on both sides of the political aisle calling for the Fed’s internal investigator to be replaced with one appointed by the president.
In a joint letter sent to Fed chair Jay Powell ahead of Tuesday’s hearing, Bob Menendez, a Democratic senator from New Jersey, and Mike Rounds, a South Dakota Republican, also asked for details on whether the central bank had applied particular scrutiny to SVB, which had $212bn in assets at the time of its collapse.
Under the current law, banks with more than $250bn are deemed “systemically important”, but the Fed can take special measures to supervise banks with assets between $100bn and $250bn. The letter was cosigned by Democrat Catherine Cortez Masto and Republicans Thom Tillis and Cynthia Lummis.
Despite recent turmoil, Liang said the financial system is “significantly stronger than it was 15 years ago” due to more stringent rules for lenders.
However, Democratic senator Elizabeth Warren on Tuesday accused regulators of having “burned down dozens of safeguards that were meant to stop banks from making risky bets” in the aftermath of the 2008 financial crisis and urged them to strengthen regulation.