Senate committee questions federal regulators over US bank crisis
A senior United States Federal Reserve official has testified that Silicon Valley Bank (SVB) failed to address vulnerabilities identified as far back as November 2021, leading to one of the largest bank failures in the country’s history.
Michael Barr, who oversees banks for the Federal Reserve, appeared before the Senate Banking Committee on Tuesday to discuss the conditions that led to the collapse of Silicon Valley Bank earlier this month.
“This is a textbook example of bank mismanagement,” Barr told the committee.
Tuesday’s meeting was the first congressional hearing on the crisis, which began around March 8, when Silicon Valley Bank announced it had been forced to sell its government bonds at a significant loss. It had hoped to raise money for deficits that widened as interest rates rose.
Those sales sparked a bank run, with clients – many from the tech and venture capital industries – rushing to withdraw their funds.
The bank run coincided with the collapse of several other regional banking institutions, including Silvergate Bank and Signature Bank, and the federal government had to step in to insure deposits at institutions such as Silicon Valley Bank.
“Fundamentally, the bank failed because management failed to properly address interest rate risk and liquidity risk. That interest rate risk and liquidity risk were highlighted by the company’s regulators as of November 2021,” Barr told the committee on Tuesday.
“That exposure left the company highly vulnerable to a shock, and that shock came on the evening of Wednesday, March 8.”
Barr noted that federal regulators had given Silicon Valley Bank a three on the CAMELS scale, a rating system federal regulators use to rate a bank’s overall health, with one being the highest score.
Any rating higher than three is considered a concern. Barr explained that the bench’s three score meant it was “not well managed”.
“At the holding company level, it was assessed as deficient,” he added, noting that these assessments are normally kept confidential.
“It seems that regulators knew about the problem, but nobody dropped the hammer,” Montana Democrat Jon Tester told the committee.
However, Barr insisted that federal regulators made Silicon Valley Bank aware of the problems it faced in the years leading up to the crash.
He also criticized the bank for not having a Chief Risk Management Officer (CRO) for several months before the crisis: “Obviously I think it’s terrible risk management not to have a CRO with the company.”
Yet federal regulators were scrutinized by the commission panel, which wondered how institutions like Silicon Valley Bank could collapse so quickly without any intervention.
“The failures of Silicon Valley Bank, Signature Bank and the general turmoil in the banking industry are a direct result of the failure of regulators, including the agencies we have before us today,” said Republican Steve Daines of Montana.
In the aftermath of this month’s banking crisis, several senators — including the odd pair of progressive Democrat Elizabeth Warren and conservative Republican Rick Scott — have pushed for more government scrutiny of banking regulators.
In response to what they consider “the Federal Reserve’s gross mismanagement and lack of oversight to prevent the banking crisis,” Warren and Scott unveiled a joint proposal last week to have the president appoint an inspector general to the board of the Federal Reserve. reserve.
Warren explained that the crisis “underscored the urgent need for a truly independent inspector general to hold Fed officials accountable for errors or misconduct.”
The Massachusetts Democrat also criticized a 2018 banking deregulation bill passed under former Republican President Donald Trump for its contribution to the March bank failures. That law allowed medium-sized banks — such as Silicon Valley Bank — with assets of less than $250 billion to avoid stricter regulatory scrutiny.
At Tuesday’s committee hearing, Barr said the Federal Reserve would look at strengthening capital and liquidity standards for banks by more than $100 billion.
In the hours following the hearing, President Joe Biden warned that the US economy could still experience aftershocks from the banking crisis in March. The initial bank failures sent stock prices soaring and fueled fears of a wider financial meltdown.
“Oh no, it’s not over yet,” Biden told reporters. “We’re watching it closely.”