Bank regulators eye tougher oversight after Silicon Valley Bank collapse

© Samuel Corum Michael Barr, vice chair for supervision at the US Federal Reserve, spoke Tuesday during a Senate Banking, Housing, and Urban Affairs Committee hearing with Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., left, and Nellie Liang, under secretary for domestic finance at the US Treasury.

Silicon Valley Bank’s failure was a “textbook case of mismanagement” that shows that banks with more than $100 billion in assets may need tougher oversight, and the government will review the federal insurance program that protects deposits, regulators told a Senate committee looking into the crisis.

But lawmakers squabbled Tuesday over the causes of the meltdowns at SVB and Signature Bank. In a hearing of the Senate Banking Committee, Republicans disputed the idea that tougher rules for midsize banks would have kept the institutions from failing and raised concerns that regulators’ decisions to insure all deposits at those two banks could set a dangerous precedent. Democrats, meanwhile, insisted that the recent meltdown leaves little ambiguity on the need for revamped rules.

Top officials from the Federal Reserve, Treasury Department, and Federal Deposit Insurance Corporation said they would support strengthening banking regulations, including for firms with assets over $100 billion. Silicon Valley Bank had $211 billion in assets at the end of last year.

The FDIC will also embark on a “comprehensive” review of bank deposit insurance, with its chair saying the decision to cover all uninsured depositors at SVB and Signature Bank was a “highly consequential one that has implications for the system.” The cost of SVB’s failure to the government’s Deposit Insurance Fund — funded mainly through quarterly premiums on insured banks — is roughly $20 billion, according to FDIC estimates. FDIC Chair Martin Gruenberg said 88 percent of SVB’s deposits when it failed were over the usual $250,000 limit for insurance, and the top 10 largest accounts had $13.3 billion.

Gruenberg; Michael Barr, the Fed’s vice chair for supervision; and Nellie Liang, undersecretary for domestic finance at Treasury, will testify again Wednesday before the House Financial Services Committee. But their testimony in the Senate left plenty of unanswered questions, in part because the Fed and FDIC are still investigating how SVB’s demise ricocheted through the financial system. Lawmakers have also called on SVB’s and Signature’s executives to testify, so far with no response.

‘’The scene of the crime does not start with the regulators before us,’’ said Senator Sherrod Brown, the Ohio Democrat who chairs the Banking Committee. “Instead, we must look inside the bank, at the bank CEOs and at the Trump-era banking regulators, who made it their mission to give Wall Street everything it wanted.”

Democrats argued that a 2018 move to weaken rules for banks contributed to the panic. Twelve senators — including 10 Democrats and two Independents — are urging the Fed to impose tougher rules on banks with assets totaling $100 to $250 billion, the tier on which Congress rolled back some restrictions during the Trump administration through a bipartisan 2018 vote. The Fed implemented those changes the next year.

But Republicans said regulators were “asleep at the wheel” and disputed the idea that the “tailoring” of the rules established after the 2008 financial crisis (by a 2010 law known as Dodd-Frank) allowed SVB to slip through the cracks. Many GOP lawmakers also criticized the Fed, and in particular the San Francisco Fed, which oversaw SVB, for paying attention to climate change and inequality, saying that work distracted officials from bank oversight and the risks posed by rising interest rates.

“You are not using the tools in your toolbox,” said Senator Katie Boyd Britt, an Alabama Republican. “That is what people hate about Washington.”

Piecing together a timeline of what went wrong has become a top priority in Washington. The Fed and FDIC are investigating how the firms’ back-to-back failures triggered so much panic in the financial system that regulators had to scramble to launch emergency efforts to prevent even more damage. The Fed’s probe, led by Barr, will be made public by May 1.

Senator Tim Scott of South Carolina, the committee’s ranking GOP member, said the Fed’s plans to investigate SVB’s failure was “an obvious inherent conflict of interest and a case of the fox guarding the henhouse.” He also urged Fed Chair Jerome H. Powell and Treasury Secretary Secretary Janet L. Yellen to testify.

“By all accounts, our regulators appear to have been asleep at the wheel,” Scott said.

Barr blamed mismanagement at the bank, since Fed supervisors repeatedly warned SVB that it had major issues. He also said that SVB was flagged in a presentation to the Federal Reserve Board on the risks created by rising interest rates weeks before its stunning March 10 collapse.

“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. “SVB’s failure is a textbook case of mismanagement.”

The failure of SVB — which was sold Sunday to First Citizens bank — and Signature Bank have ignited fresh political scrutiny of the Fed and other bank regulators, with lawmakers expected to investigate. Both parties are pushing for tougher oversight of the central bank itself. Senators Rick Scott, a Florida Republican, and Elizabeth Warren, the Massachusetts Democrat — two lawmakers who rarely agree on much — unveiled legislation that would replace the Fed’s watchdog with an inspector general appointed by the president and confirmed by the Senate.

Many members of Congress are pinning this month’s episode on the Fed, despite a bipartisan vote in 2018 to ease regulations on midsize institutions like SVB. That push was championed during the Trump administration as a way to pare back parts of Dodd-Frank, the historic legislation passed in the wake of the financial crisis in 2007 and 2008.

Barr was extremely critical of those moves before President Biden nominated him to the Fed board last year. As a former top Treasury staffer and expert on financial regulation, he was instrumental in crafting Dodd-Frank and routinely warned regulators against getting too complacent and reversing the steps deemed necessary to prevent another financial crisis after the Great Recession.