The Silicon Valley Bank did a “terrible” job managing risk before to its collapse, a top U.S. regulator testified to a Senate hearing on Tuesday, defying criticism from lawmakers who accused bank watchdogs of failing to recognise warning signs.
Democratic and Republican lawmakers questioned the Federal Reserve’s top banking regulator during the first congressional hearing into the abrupt failure of two U.S. regional lenders and the ensuing market chaos about whether the central bank ought to have exercised greater vigilance in monitoring SVB.
Senator Jon Tester, a Democrat, said that it appeared like authorities were aware of the issue but did nothing about it.
The Fed’s vice chairman for supervision, Michael Barr, criticised SVB for operating without a chief risk officer for months and for modelling interest rate risk in a way that “was not at all aligned with reality.” Such problems with bank management had been raised by Fed supervisors, but they had not been resolved, he continued.
“The risks were there, the regulators were pointing them out, and the bank didn’t take action,” he claimed.
The bankruptcies of SVB and Signature Bank a few days later sparked a larger decline in investor confidence in the banking industry, which devastated markets and fueled worries of a full-blown financial catastrophe. Markets have stabilised somewhat as a result of an agreement to save Swiss major Credit Suisse last week and the sale of SVB’s assets to First Citizens Bancshares (FCNCA.O) this week, but investors are still apprehensive of potential future financial system problems.
Senior members of the Senate Banking Committee concurred with Barr that former executives should be held accountable for the banks’ poor management, but they also questioned how the banks could fail so quickly with regulators on the case.
Barr informed the committee that he first learned of the interest rate risk problems at SVB in the middle of February, despite the fact that Fed supervisors had been bringing up concerns with the bank directly months earlier.
After the twin disasters, regulators promised to reform their policies and practises while maintaining that the system as a whole is still sound. Barr added that he welcomed outside evaluations of regulators’ performance and that the Fed should be held “accountable” for any flaws that are discovered.
Both Barr and Martin Gruenberg, chairman of the FDIC, emphasised in their speeches the security of depositor funds.
Both stated that they are considering strengthening regulations for banks and implementing tougher control for businesses like SVB.
Some Democrats have also claimed that a 2018 bank deregulation law is to blame, including prominent bank critic Senator Elizabeth Warren of Massachusetts. The strongest regulation was loosened for companies with assets between $100 billion and $250 billion under that statute, which was supported primarily by Republicans but also by some moderate Democrats. These companies included SVB and Signature.
For businesses with more than $100 billion in assets, the Fed would likely need to tighten its capital and liquidity criteria, according to Barr.
The session is the first of several that are anticipated to look into the banking uproar. Wednesday, the same regulators will testify before the House Financial Services Committee, and congressional leaders have already stated that they intend to interrogate the former CEOs of the two banks about what went wrong.
