By This was CNBC’s live blog on Tuesday’s hearing on the collapse of Silicon Valley Bank and other lenders before the Senate Banking Committee.
The nation’s top bank regulators faced tough questions from Congress for the first time Tuesday about how Silicon Valley Bank and Signature Bank collapsed practically overnight earlier this month.
The regulators defended decisions they made both before and after the collapse of SVB, particularly their unanimous vote to invoke the systemic risk exception to the FDIC’s deposit limit.
Bank stocks turned negative following the hearing before the Senate Banking Committee, potentially spooked by the three top regulators each saying they favored more stringent rules for banks with more than $100 billion in assets. The SPDR S&P Regional Banking ETF fell 1% in afternoon trading.
At times, the hearing was contentious. Committee Chair Sen. Sherrod Brown, D-Ohio, accused regulators of having “dropped the ball” because they didn’t see the the ballooning risk that weakened SVB before its ultimate collapse.
Michael Barr, vice chair for supervision at the Federal Reserve, pushed back on his contention.
“Fundamentally the bank failed because its management failed to appropriately address clear interest rate risks and clear liquidity risks,” he said.
Sen. Elizabeth Warren, D-Mass., pressed all three regulators about their views of stricter banking rules for mid-sized banks. Barr, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, undersecretary for domestic finance at the Treasury Department, all said they supported more banking rules.
“It may be tempting to look at all this and say, we don’t need new rules, that the real problem was these arrogant executives,” said Brown. “But there will always be arrogant executives. That’s exactly why we need strong rules.”
Regulators said more rules are not all that is needed to prevent the next SVB or Signature Bank.
“We must evolve our understanding of banking in light of changing technologies and emerging risks,” said Barr.
“To that end, we are analyzing what recent events have taught us about banking, customer behavior, social media, concentrated and novel business models, rapid growth, deposit runs, interest rate risk, and other factors… And for how we think about financial stability,” he added.
The FDIC’s Gruenberg said regulators need to reassess how they look at uninsured deposits when calculating a bank’s risk profile.
“One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels,” he said.
Tuesday’s hearing was the first of two congressional committees that will hear testimony from Gruenberg, Liang and Barr this week. The second hearing will be Wednesday at 10 a.m. before the House Financial Services Committee.
— CNBC’s Jeff Cox contributed to this report.
Senate Banking Committee Chairman Sen. Sherrod Brown said independently funded financial regulators are essential for stabilizing the U.S. financial system, despite what his GOP counterparts have said.
“It’s interesting many of my Republican colleagues are now so eager for bank regulators to crack down on too many risks,” Brown, D-Ohio, said in closing statements. “I hope they remember that when it comes time to empower regulators and strengthen guardrails, including protecting the independent funding of financial regulators.”
Brown said the events of the last month illustrate the need for independently-funded financial regulators who “can quickly respond when crises happen,” but continued funding is under threat as the Supreme Court “considers whether the [Consumer Financial Protection Bureau’s] independent funding is constitutional.”
“On this and every issue, I’ll continue to fight to protect American workers from Wall Street arrogance and greed,” Brown ended.
—Chelsey Cox
The most outspoken advocate in Congress for stricter banking regulations, Sen. Elizabeth Warren of Massachusetts, is among the Democrats set to question federal regulators about the recent bank failures.
In the two weeks since the collapse of Silicon Valley Bank and Signature Bank, Warren has authored or sponsored three new bills related to bank oversight.
The first would reverse a Trump-era bill that weakened oversight of medium-sized banks. The second would create an Inspector General position within the Federal Reserve, and the third would prohibit executives at publicly traded companies from selling stock options for three years.
Warren also recently sent at least four letters to federal regulators demanding answers.
They include a request to the Justice Department to investigate any illegal activity by executives at the two failed banks.
“One of the enduring failures in the aftermath of the 2008 financial crisis was the inability or unwillingness of DOJ and bank regulators to hold bank executives accountable,” Warren wrote in a March 15 letter to Attorney General Merrick Garland. “The nation’s bank regulators cannot make the same mistake twice.”
— Christina Wilkie
GOP lawmakers investigating the failures of Silicon Valley Bank cited incompetent oversight for the bank’s collapse, unlike their Democratic counterparts who are pushing for more regulatory authority over financial institutions.
Sen. Tim Scott, R-S.C., ranking member of the Senate Banking Committee, along with Committee Chair Sen. Sherrod Brown, D-Ohio, called on ex-SVB CEO Gregory Becker and former Signature CEO Joseph DePaolo to “answer” for their banks’ “downfall.” Both former executives indicated they would not testify at the Tuesday hearing.
But Scott, and House Financial Committee Chair Rep. Patrick McHenry, R-N.C., have both stopped short of demanding more legislative oversight.
“It’s important to note that we can’t regulate competence,” McHenry said at an American Bankers Association conference in Washington last week. “Management of institutions need to be competent, boards of directors need to be competent. We can’t legislate that either in the financial sector or among financial institutions management, nor with the regulators.”
— Chelsey Cox
Sen. Jon Tester said financial regulators better fix any shortcomings discovered during the Federal Reserve’s review of the SVB failure.
“If it’s the regulator’s fault It better be fixed,” the Montana Democrat told Fed Vice Chair Barr. “If it’s a regulation fault, it better be fixed.”
Tester said it appeared to him that regulators overseeing SVB didn’t drop the hammer, therefore allowing bank executives to mismanage the firm into failure.
Barr vowed to report any shortcomings on the part of the Federal Reserve to Congress after the results of the review are issued on May 1.
“We find problems like the ones that you just described, we’re going to say clearly and describe what we’ve done,” Barr told Tester.
— Chelsey Cox
Democratic Sen. Elizabeth Warren pressed all three regulators about their views of increased banking rules, and Barr, Gruenberg and Liang all said they supported stronger banking rules.
“I’d like to know if you believe that we need to strengthen our banking rules going forward to ensure the safety of our financial system,” said the Massachusetts senator. “Let me start with you, Mr. Barr. Do you believe that we should strengthen our financial rules going forward?”
“Yes, I do, senator,” the Fed’s Barr replied.
“Chairman Gruenberg, what about you?” said Warren. “Do you agree with President Biden that we need to strengthen our banking rules?”
“I agree,” said the FDIC’s Gruenberg.
When Warren posed the question to Treasury’s Liang, the undersecretary replied, “I agree that we need to prevent these types of bank failures.”
Warren recoiled. “Of course we can do better, but that’s not by simply wishing. It’s by stronger regulation. Is that right?”
“I agree,” said Liang.
— Christina Wilkie
Fed Vice Chair Barr told Sen. Catherine Cortez Masto, D-Nev., the central bank would welcome an outside investigation of potential failures in its oversight of Silicon Valley Bank.
Barr is currently running an internal investigation of the Fed’s actions surrounding SVB, which some senators questioned as a conflict of interest.
“The Federal Reserve is undergoing an investigation to determine whether the Federal Reserve actually failed in this instance,” Cortez Masto said to Barr. “Is the Federal Reserve the appropriate body to conduct this investigation, or should we have an independent investigation?”
Barr replied: “We’re reviewing our own practices … We’re going to be thorough, we’re gonna be transparent, and we’re going to be far reaching in that self assessment. But I also think it’s appropriate for outsiders to conduct independent reviews, and we expect and welcome independent reviews.”
Barr’s initial report will be released May 1.
— Christina Wilkie
The Fed’s vice chair for supervision denied committee Chairman Sherrod Brown’s statement that regulators “dropped the ball” because they didn’t see the building risk ahead of the collapse of SVB.
“Fundamentally the bank failed because its management failed to appropriately address clear interest rate risks and clear liquidity risks,” said Barr, who is leading the review into the bank’s failure.
Barr said the interest rate and liquidity risks were noted by a supervisor for the firm in November 2021, and added that SVB received a “3” rating on the Campbell scale, which indicates it was not well-managed.
“Normally, we would not be describing these matters, confidential matters. But given that the firm failed and triggered a systemic risk determination (we are) prepared to talk about that confidential information,” Barr said of the bank’s rating.
— Chelsey Cox
Federal financial regulators told lawmakers they have and will use the authority to claw back executive bonuses in the wake of closures of SVB and Signature Bank.
FDIC Chairman Gruenberg said the agency has “significant authority under the law” to impose penalties and restitution from individuals and businesses. The FDIC will “pursue this as expeditiously as we can,” depending on what investigators find, he said.
“The FDIC, for every failed institution, is required to undertake an investigation of the conduct of members of the board, management of the institution as well as professional service providers and other institution affiliated parties. We’ve already done that investigation,” Gruenberg said.
Barr said the Federal Reserve Board also has authority to pursue actions against those who violate the law, breach fiduciary duty and engage in other unsafe practices. “We retain this authority even after a bank fails,” he added.
“We stand ready to use this authority to the fullest extent, based on the facts and circumstances,” Barr said.
— Chelsey Cox
Federal Reserve Vice Chair Barr says regulators need to take a holistic look at how they measure risk in the digital age.
“We must evolve our understanding of banking in light of changing technologies and emerging risks,” he said.
“We are analyzing what recent events have taught us about banking, customer behavior, social media, concentrated and novel business models, rapid growth, deposit runs, interest rate risk, and other factors… And for how we think about financial stability.”
FDIC Chair Gruenberg said regulators need to reassess how they look at uninsured deposits when calculating a bank’s risk profile.
“One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels,” said Gruenberg.
He said the two bank failures illustrate the outsized impact banks with more than $100 billion in assets can have on the broader system. “The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk,” he added.
— Christina Wilkie
Democratic lawmakers have placed an ample amount of blame for the largest bank failure since the 2008 financial crisis on banking executives, but federal financial regulators are also in their crosshairs.
Sen. Elizabeth Warren, D-Mass., a member of the Senate Banking Committee and an open critic of big banks, called on Fed Chair Jerome Powell to recuse himself from the Fed’s review of the Silicon Valley Bank failure earlier this month. Michael S. Barr, the Fed’s vice chair for supervision, will lead the review.
“For the Fed’s inquiry to have credibility, Powell must publicly and immediately recuse himself from this internal review,” Warren has said. “It’s appropriate for Vice Chair for Supervision Barr to have the independence necessary to do his job.”
Regulators failed to address the bank’s risky business practices, including the uninsured status of 94% of its deposits, according to market analysts.
Warren, along with Sen. Richard Blumenthal, D-Conn., also wrote to the Justice Department and the Securities and Exchange Commission to urge a thorough investigation into “whether senior bank executives and other key officials involved in the collapse met their statutory and regulatory responsibilities or violated civil or criminal law.”
— Chelsey Cox
Banking involves complicated concepts likes balance sheets and liquidity ratios, but the Silicon Valley Bank collapse isn’t difficult to understand, Sen. Sherrod Brown, D-Ohio said Tuesday as he kicked off hearings into the recent bank failures.
“It comes down to more basic concepts: hubris, entitlement, greed,” Brown said.
As an example, Brown said that former SVB CEO Greg Becker was incentivized to grow his bank’s returns. While that’s likely true for most, if not all, senior banking executives, at SVB the result was an ill-fated bet that interest rates would remain low. That ran into the reality of the most aggressive Federal Reserve rate-increasing campaign in decades.
Becker’s “own pay was tied directly to the growth of SVB,” Brown said. “So they took more risk by buying assets with higher yields to make higher profits.”
The former heads of SVB and Signature need to speak to the downfall of their institutions, but stronger enforcement is also needed, Brown said.
“It may be tempting to look at all this and say, we don’t need new rules. The real problem was these arrogant executives,” Brown said. “But there will always be arrogant executives. That’s exactly why we need strong rules.”
— Hugh Son
Sen. Sherrod Brown, chairman of the Senate Committee on Banking, Housing and Urban Affairs, said he understands Americans’ anger at the most recent bank bailouts and implied that big bank executives are all too happy for a handout when banks fail.
“Just as there are no atheists in foxholes, it appears that when there is a bank crash, there are no libertarians in Silicon Valley,” Brown, D-Ohio, said in opening remarks.
Brown said that, though no taxpayer money was used to save deposits of Silicon Valley Bank and Signature Bank after they collapsed, “I understand why many Americans are angry – even disgusted – at how quickly the government mobilized, when a bunch of elites in California were demanding it.”
He also repeated his call for the former CEOs to testify before Congress. Brown and Tim Scott, R-S.C., the committee’s ranking member, previously demanded they answer for the bank’s failures.
– Chelsey Cox
Democrats on the Senate Banking Committee intend to paint a picture of greedy bank executives and watered down regulations, two factors they say were pivotal to SVB’s collapse.
But the committee’s Republicans plan to tell a very different story. They outlined this alternate narrative in a letter last week from all 11 Senate Banking Committee Republicans to top officials at the Fed.
In it, the senators demanded to know why Fed regulators, “failed to act to prevent the bank failure from occurring.”
“In the months and years preceding the failure of SVB, several areas of concern should have been readily apparent to the Federal Reserve,” write the committee’s GOP members, led by Ranking Member Sen. Tim Scott of South Carolina.
“Rather than effectively directing SVB management to take definitive, corrective action, it is apparent that the Federal Reserve supervisors and examiners neglected to intervene in a meaningful, appropriate way to rectify the bank’s deficiencies, ensure safe and sound operations, and prevent its ultimate failure,” they write.
Regulators are prepared to push back on this version of events.
In his opening statement, Federal Reserve Vice Chair Michael Barr says, “It is not the job of supervisors to fix the issues identified; it is the job of the bank’s senior management and board of directors to fix its problems.”
— Christina Wilkie
Federal intervention softened the fallout from the collapse of Silicon Valley Bank and Signature Bank and protected the U.S. financial system, according to Treasury’s Liang, under secretary for domestic finance.
“Nearly three weeks ago, problems emerged at two banks with the potential for immediate and significant impacts on the broader banking system and the economy,” Liang says in her opening remarks. “The federal government took decisive actions to strengthen public confidence in the U.S. banking system and protect the American economy.”
This approach was two-pronged: First, the FDIC guaranteed all deposits at the failed banks, and second, Treasury created a new term lending facility to make cash available to banks experiencing a rush of withdrawals.
These actions, “helped to stabilize deposits throughout the country and provided depositors with confidence that their funds are safe.”
Liang also emphasized the importance of small and medium sized banks, a nod to the debate underway over whether the failure of a medium-sized bank like SVB posed a genuine, systemic risk to the broader economy.
“Small and mid-size banks, including community banks, serve a vital role in providing credit and financial support to families and small businesses. Smaller banks provide 60% of loans to US small businesses,” says Liang.
— Chelsey Cox
Sen. Tim Scott, S.C., the Senate Banking Committee’s top Republican, will argue at Tuesday’s hearing that the Biden administration deserves the lion’s share of blame for SVB’s collapse.
“The ranking member will focus on the message that the turmoil in the banking sector is a three-part failure caused by bank mismanagement, supervisory neglect, and the Biden administration’s inflation crisis, which caused the need for rapid interest rate hikes,” a Scott spokesman told NBC News.
They appear to be the same themes Scott laid out during a March 16 hearing with Treasury Secretary Janet Yellen.
“First, the bank failed because of its management and because of its board,” Scott said at that hearing before the Senate Finance Committee, referring to SVB.
“State and federal regulators failed to appropriately use the tools they have to supervise and regulate the failed institutions,” he added. “And Biden’s handling of the economy contributed to these banking failures.”
— Christina Wilkie
Correction: This post was updated to correct the date of the Senate Finance Committee hearing. It was March 16.
