The nation’s top banking regulators will be grilled by Congress in a series of hearings this week focused on the potential failure of regulators to spot and correct poor risk management practices at Silicon Valley Bank and Signature Bank of New York.
Republican senators have taken particular interest in regulatory missteps — writing in a letter to Federal Reserve Chairman Jerome Powell and San Francisco Fed President Mary Daly Friday that “the apparent failure of SVB’s regulators…to ensure that the bank operated in a safe and sound manner” is “even more concerning” that the “rampant mismanagement” by executives running the bank.
Federal Reserve Vice Chairman for Supervision Michael Barr will join Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary Nellie Liang in taking questions from the Senate Banking Committee Tuesday morning, followed by another hearing Wednesday before the House Financial Services Committee.
Barr will seek to preempt criticism that the Fed missed signals that the bank was mismanaged. He is planning to tell Congress that regulators issued warnings over SVB’s risk management practices as early as 2021, according to prepared testimony.
See also: Fed raised concerns over SVB risk management as early as 2021, Vice Chair Barr says
“SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk and the bank then suffered a devastating and unexpected run by its uninsured depositors,” Barr will tell the Senate Banking Committee Tuesday, according to prepared remarks.
Fed supervisors issued six warnings “near the end of 2021” and in May 2022, they issued two more, according to the testimony. That was followed by a downgrade of the bank’s management rating in the summer of last year and a meeting in October with bank senior management.
The warnings culminated in a February presentation to the Fed Board of Governors on the impact of rising interest rates on some banks’ financial condition, including SVB .
Tom Hoenig, a former FDIC vice chairman and a former president of the Kansas City Fed, pushed back against the notion that SVB’s failure can be blamed primarily on regulators.
“This is management’s responsibility, they were incompetent or irresponsible or both, and the bank failed accordingly,” he told MarketWatch in an interview.
Hoenig added that it will be important to learn whether regulators were considering issuing a formal cease and desist order to the bank to change its risk management practices, a typical step regulators would take if discussions with senior management and the board aren’t effective.
Some Democrats will likely focus on the impact of a 2019 law that eased oversight of midsized institutions like Silicon Valley, with between $100 billion and $250 billion in assets. The legal change dovetailed with an effort by banking regulators to ease capital and liquidity rules for banks of SVB’s size.
Barr is leading a review of the Fed’s oversight of the bank, due to be released May 1. The report will examine whether the Fed’s supervision of the bank was adequate given the bank’s rapid growth in recent years and its concentrated business model.
The review will also seek to determine whether supervisors “have the tools to mitigate threats to safety and soundness” and whether the “culture, policies and practices” of the Fed support effective oversight of banks, according to Barr’s prepared testimony.
Lawmakers will likely seek clarity from regulators on whether they believe additional FDIC insurance of bank deposits, above the current level of $250,000 will be necessary to prevent additional runs on regional banks, after the Biden administration sent “mixed signals” on the idea last week, according to Ian Katz, a financial-sector analyst with Capital Alpha Partners.
“We expect the three officials to coordinate their comments on this and make the case that regulators should be able to handle the banking turmoil without a broad expansion of FDIC deposit insurance,” he wrote in a Sunday note to clients.
Regional bank stocks
KRE,
and financial-sector equities
XLF,
were gaining ground Monday after news that First Citizens
FCNCA,
bank agreed to assume all of SVB’s deposits and loans.
Read more: First Citizens enters agreement to buy Silicon Valley Bridge Bank, says FDIC
