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Home Newsbytes

Senators question regulators’ role in SVB collapse

March 28, 2023
Reading Time: 3 mins read
Senators question regulators’ role in SVB collapse

From left, FDIC Chairman Martin Gruenberg, Federal Reserve Vice Chairman of Supervision Michael Barr and Treasury Undersecretary for Domestic Finance Nellie Liang.

During a Senate Banking Committee hearing today, regulators agreed that rules governing financial institutions should be strengthened to better protect the overall financial system. Several lawmakers questioned, however, whether those same regulators failed to use their existing tools to rein in Silicon Valley Bank.

Representatives from the FDIC, Federal Reserve and the Treasury Department appeared before the committee for the first of two congressional hearings this week on the failures of SVB and Signature Bank, as well as the subsequent federal response. A major focus was a 2018 bill—S. 2155—that gave the Fed broad discretion over how it supervised banks ranging in size from $100 billion to $250 billion in assets. Fed Vice Chairman for Supervision Michael Barr said the agency is examining the 2019 rulemaking implementing the legislation as part of a broader review of how his agency handled SVB.

“We are looking at the range of tailoring approaches that the Federal Reserve took,” Barr said. “The decision to set those lines by asset size and other risk factors was made back in 2019. I joined the board in July 2020 and began looking at that approach… I believe we have substantial discretion to alter that framework.” Barr also said that his agency plans to propose a long-term debt rule for large banks that are not globally systemic important banks, which will require the institutions to maintain a cushion of loss-absorbing resources to support stabilization and allow for resolution in a manner that does not pose a systemic risk to the overall financial system. At the same time, he reiterated his message that the nation’s banking system is sound and resilient. “Most banks are highly effective in managing interest rate risk and liquidity risk. It is the bread-and-butter kind of work of bank management,” Barr said.

All three witnesses—Barr, FDIC Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang—said that they would support stronger rules to protect the financial system. But other committee members said that it appears that regulators already had the tools to address the problems at SVB but failed to do their jobs. “As you do your lookback into what transpired, it better be fixed,” said Sen. Jon Tester (D-Mont.) “If it’s the regulators’ fault, it better be fixed. If it’s the regulations’ fault, it better be fixed …. But it looks to me like regulators knew the problem, but nobody dropped the hammer.”

Senate Republicans press FDIC on SVB sale

During the hearing, members of the Senate Banking Committee pressed Gruenberg on whether the FDIC did enough to quickly find a buyer for the failed Silicon Valley Bank and stave off a potential special assessment to replenish the Deposit Insurance Fund.

Gruenberg said two bidders approached the FDIC on the weekend following SVB’s collapse on March 10, but one bank put forward an offer that was not approved by its board—which is required—and the other’s offer would have been more expensive than the liquidation of the institution. The FDIC announced on Sunday that First Citizens Bank has agreed to assume SVB’s deposits and purchase many of its assets, with the cost of resolving the failed bank estimated to be roughly $20 billion. Earlier this month, FDIC announced that New York Community Bancorp had agreed to assume deposits and purchase loans from Signature Bank, which failed two days after SVB’s collapse.

“We have a strong set of regional banks in the United States,” Gruenberg said. “As a general manner, their liquidity has remained stable through this episode. And I think it was a good indication that in the two failed institutions, the strongest bids we received to acquire those were from two other regional banks.”

Committee Republicans questioned whether the FDIC could have moved faster in finding buyers, which they said could have avoided declaring a systemic risk exemption to cover uninsured depositors at both failed banks. “If we had a better private sector engagement with quicker action from the feds, I think we could have avoided the concept that rushed us to a decision, which was a concern of contagion,” Ranking Member Sen. Tim Scott (R-S.C.) said.

 

 

 

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