[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL REGULATORS' RESPONSE
TO RECENT BANK FAILURES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MARCH 29, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-12
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
52-390 PDF WASHINGTON : 2023
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
March 29, 2023............................................... 1
Appendix:
March 29, 2023............................................... 91
WITNESSES
Wednesday, March 29, 2023
Barr, Hon. Michael S., Vice Chair for Supervision, Board of
Governors of the Federal Reserve System........................ 4
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance
Corporation (FDIC)............................................. 6
Liang, Hon. Nellie, Under Secretary for Domestic Finance, U.S.
Department of the Treasury..................................... 7
APPENDIX
Prepared statements:
Barr, Hon. Michael S......................................... 92
Gruenberg, Hon. Martin J..................................... 103
Liang, Hon. Nellie........................................... 126
Additional Material Submitted for the Record
McHenry, Hon. Patrick:
Letter to the Honorable Eugene Dodaro, Comptroller General of
the United States, dated March 17, 2023.................... 129
Donalds, Hon. Byron:
Wall Street Journal article from November 11, 2022, ``Rising
Interest Rates Hit Banks' Bond Holdings''.................. 132
Peter Wallison, American Enterprise Institute, ``The U.S.
Needs a New Bank Supervisory System''...................... 137
Waters, Hon. Maxine:
Written statement of Engine.................................. 140
Written statement of Joshe Ordonez, Founder, CEO, and
Creative Director, Airpals................................. 147
Barr, Hon. Michael S.:
Written responses to questions for the record from Chairman
McHenry.................................................... 150
Written responses to questions for the record from
Representative Barr........................................ 156
Written responses to questions for the record from
Representative Casten...................................... 165
Written responses to questions for the record from
Representative Donalds..................................... 168
Written responses to questions for the record from
Representative Kim......................................... 171
Written responses to questions for the record from
Representative Luetkemeyer................................. 175
Written responses to questions for the record from
Representative Nickel...................................... 177
Written responses to questions for the record from
Representative Nunn........................................ 180
Written responses to questions for the record from
Representative Wagner...................................... 185
Gruenberg, Hon. Martin J.:
Written responses to questions for the record from
Representative Flood....................................... 187
Written responses to questions for the record from
Representative Steil....................................... 188
Written responses to questions for the record from Chairman
McHenry.................................................... 192
Written responses to questions for the record from
Representative Barr........................................ 200
Written responses to questions for the record from
Representative Donalds..................................... 205
Written responses to questions for the record from
Representative Sherman..................................... 211
Written responses to questions for the record from
Representative Lawler...................................... 214
Written responses to questions for the record from
Representative Garbarino................................... 217
Written responses to questions for the record from
Representative Nunn........................................ 218
Written responses to questions for the record from
Representative Hill........................................ 219
Liang, Hon. Nellie:
Written responses to questions for the record from Chairman
McHenry.................................................... 222
Written responses to questions for the record from
Representative Donalds..................................... 224
Written responses to questions for the record from
Representative Barr........................................ 224
Written responses to questions for the record from
Representative Sherman..................................... 226
THE FEDERAL REGULATORS' RESPONSE
TO RECENT BANK FAILURES
----------
Wednesday, March 29, 2023
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Patrick McHenry
[chairman of the committee] presiding.
Members present: Representatives McHenry, Lucas, Sessions,
Posey, Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas,
Hill, Emmer, Loudermilk, Mooney, Davidson, Rose, Steil,
Timmons, Norman, Meuser, Fitzgerald, Garbarino, Kim, Donalds,
Flood, Lawler, Nunn, De La Cruz, Houchin, Ogles; Waters,
Velazquez, Sherman, Meeks, Scott, Lynch, Green, Himes, Foster,
Beatty, Vargas, Gottheimer, Gonzalez, Casten, Pressley,
Horsford, Tlaib, Torres, Garcia, Williams of Georgia, Nickel,
and Pettersen.
Chairman McHenry. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``The Federal Regulators'
Response to Recent Bank Failures.''
I now recognize myself for 4 minutes to give an opening
statement.
Today, let us put aside the pre-baked narratives that have
dominated the political discourse. We are here because the
American people deserve answers. Before we draw conclusions on
regulations or changes to law, we need to establish the related
facts. In the run-up to its failure, Silicon Valley Bank (SVB)
experienced rapid growth, relying on an undiversified deposit
base and investments made risky by a high-inflation
environment. We know the bank was mismanaged. That much is
clear. Now, we need insight into the decisions and decision-
making processes of the financial regulators related to the
2nd- and 3rd-largest U.S. bank failures. We need insight into
those key days in March when an idiosyncratic bank became a
systemic risk, spawning a large-scale financial intervention
that is still ongoing.
Vice Chair for Supervision Barr, you have been on the job
at the Federal Reserve for less than a year. You came to the
job well-qualified. However, you made time to start a review of
climate risks in banking and a review of capital standards for
larger banks with no mention of changes to bank supervision or
liquidity provisions, two matters at issue with this bank
failure. In fact, I have never heard you say to Congress that
you didn't have the tools to do your job. In fairness, though,
neither the Dodd-Frank Act nor the technical corrections law,
S. 2155, dealt with the issues presented in March with a
digital bank run, the speed and volume of which had never been
seen before.
This committee would like to understand your thinking in
the key hours of that first week in March where your decisions
had a mighty impact. Was there adequate planning for a large-
scale bank run? Did the chief supervisor follow the playbook to
ensure the bank did not fail? How did the chief supervisor and
examiners miss the hole in the bank's balance sheet? These are
related questions.
Additionally, the committee has no insight into the
decision-making or the actions of the FDIC Chair on Friday the
10th through Sunday of that week when that systemic risk
exception was announced. Again, did the FDIC Chair use all of
the tools at his disposal to resolve the banks that weekend?
Was there a viable private-sector solution?
There are reports that multiple banks were interested and
ran the traps internally to purchase Silicon Valley Bank that
weekend. You confirmed as much yesterday, Chairman Gruenberg.
But as we all know, Silicon Valley Bank was not purchased until
late Sunday, March 26th, at an estimated $20 billion in losses
to the Deposit Insurance Fund. Why wasn't a potential buyer
accepted sooner? Was there an ideological lens that prevented
the FDIC from pursuing a private-sector solution that could
have staved off the uncertainty of the last 2 weeks?
We know that on Sunday, March 12th, another bank was
shuttered and placed into FDIC receivership, and together, this
is deemed a systemic risk event. That evening, the Financial
Stability Oversight Council (FSOC) met in executive session,
with no meeting minutes, and no transparency for the public,
just an announcement after the fact. That lack of transparency
has a negative effect on the public view of the safety of the
financial arena. Congress needs visibility into how and why
this determination was made by the FDIC, the Fed, the Treasury
Secretary, the FSOC Chair, and the President.
I will finish with this: We need competent financial
supervisors, but Congress can't legislate competence. Today,
this committee wants to understand your thinking in those key
moments and that decision-making in a moment of stress in our
banking system. Thank you for being here, and for your
willingness to give answers to our questions, at least that is
the hope.
With that, I now recognize the ranking member of the
committee, Ms. Waters, for 4 minutes.
Ms. Waters. Good morning. I would like to thank Chairman
McHenry for working with me in a bipartisan way on
investigating the failures of Silicon Valley Bank and Signature
Bank. Today's hearing is the first of what I expect to be
several hearings on this important topic.
Chair Gruenberg, Vice Chair Barr, and Under Secretary
Liang, the collapses of SVB and Signature Bank earlier this
month marked the 2nd- and 3rd-largest bank failures in U.S.
history. In fact, SVB customers withdrew a staggering $42
billion in less than a day, making it the largest bank run
ever, and threatening to snowball into a full-blown banking
crisis. But 2023 is not 2008. Because of the Dodd-Frank reforms
that Democrats on this committee passed, as well as the bold
and swift response by President Biden, Treasury Secretary
Yellen, and our banking regulators, a crisis was averted and
our banking system remained strong.
However, these events are a wake-up call. We must uncover
how management, regulatory, and supervisory failures
contributed to these events, and explore solutions to
strengthen the safety and soundness of our banks. Small-
business owners should not be expected to serve as a financial
regulator when paying their employees, and community banks and
Minority Depository Institutions (MDIs) should not have to pay
for the failures of bank mismanagement at SVB or Signature
Bank.
Since day one of SVB's collapse, committed Democrats have
been on the case. In fact, under my leadership as ranking
member, we quickly organized several bipartisan briefings with
our nation's regulators to better understand what happened,
share what we were hearing from constituents, and urge
regulators to act. Since then, we have sent letters demanding
answers from our regulators, and in response to President
Biden's call to Congress, I and my colleagues are working on
legislation to, for example, enhance clawbacks and other
penalties.
We also need answers from the CEOs who not only ran these
banks into the ground but enriched themselves. It is also
important to know how we got here: deregulation. Former and
disgraced President Trump said he would do a, ``big number on
Dodd-Frank,'' and his appointed regulators did just that. At
that time, I sounded the alarm on the dangers of weakening
capital and liquidity rules for banks like SVB. The light touch
cautions from the Fed to SVB management are clearly not what
Congress intended for bank supervision. I hope Republicans will
join Democrats in strengthening compliance with bank rules and
transparency over this process.
Before I close, I want to address the extreme MAGA
Republican narrative about the bank failures. Let me be very,
very clear: Silicon Valley Bank collapsed because of management
failures and possible regulatory weaknesses, not because there
was one Black man on the board. We saw the same racist playbook
during the 2008 financial crisis, when some Republicans blamed
the Community Reinvestment Act (CRA) and loans made to people
of color. Rest assured, Democrats will not stand for this
blatant racism. With that, Mr. Chairman, I yield back the
balance of my time.
Chairman McHenry. The Chair now recognizes the Vice Chair
of the committee, Mr. Hill, for 1 minute.
Mr. Hill. Thank you, Mr. Chairman. Today, we are confronted
with the results of 10 years of too-loose monetary policy and
recent wildly-excessive spending. Some bank management teams
have forgotten their prudential obligations to their depositors
and their shareholders, and clearly, many customers forgot
their own prudence and their own financial responsibility. But
as our committee comes together, the chairman, the ranking
member, and the members are concerned about the supervisory
failures by the regulators who are supposed to keep a watchful
eye.
Some lawmakers have been quick to use this crisis to push
their preferred policy outcomes, but that is premature. We need
to first understand what happened, when, and why, both leading
up to the bank failures as well as the decisions made by your
agencies represented on our panel today. Only then can we
design the proper path forward. That is why Republicans are
conducting a comprehensive review, starting with oversight
letters to the Federal Reserve, the San Francisco Fed, the
FDIC, the FSOC, and the California and New York State
regulators. We expect your full cooperation in this matter, and
make no mistake, today's hearing is just a first step in that
process. I thank the Chair for the hearing, and I yield back.
Chairman McHenry. The Chair now recognizes the gentleman
from Illinois, Mr. Foster, who is also the ranking member of
our Subcommittee on Financial Institutions and Monetary Policy,
for 1 minute.
Mr. Foster. Thank you, Chairman McHenry and Ranking Member
Waters, for convening this hearing at this crucial time, and
thanks to our esteemed witnesses for being here today. I remain
proud of what we did almost 13 years ago with the Dodd-Frank
Act. Although COVID presented novel and considerable challenges
to our banking system, the system held, and these recent events
represent the first real stress events since the 2008 crisis
when banks dealt with run risk and serious liquidity concerns.
What we have learned is that we now have to reinforce our
banking system against bank runs that can occur at the speed of
the internet. This will require stronger emergency liquidity
provisions to banks under attack, and it has to be available 24
hours a day, 7 days a week. This will then require liquidity
providers to have a clear and simple means of knowing that they
are loaning to an entity which will ultimately remain solvent.
I also believe that we have a lot to learn by the two side
by side bank failures--Silicon Valley Bank, with total assets
of less than 1 percent of GDP, and Credit Suisse, with total
assets greater than 100 percent of Swiss GDP--and the
difference, I believe, is contingent capital. Had we followed
Congress' direction to include contingent capital in the stacks
of U.S. large banks, we would have been able to resolve the SVB
without hitting the Deposit Insurance Fund, and I will be
bringing that up in my questions. And I yield back.
Chairman McHenry. Today, we will hear testimony from the
Honorable Michael S. Barr, Vice Chair for Supervision at the
Federal Reserve Board of Governors; the Honorable Martin J.
Gruenberg, Chairman of the Federal Deposit Insurance
Corporation; and the Honorable Nellie Liang, Under Secretary
for Domestic Finance at the U.S. Department of the Treasury.
We thank each of you for your time, and you are going to be
recognized for 5 minutes for an oral presentation of your
written testimony. We will begin with you, Mr. Michael Barr.
STATEMENT OF THE HONORABLE MICHAEL S. BARR, VICE CHAIR FOR
SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Michael Barr. Chairman McHenry, Ranking Member Waters,
and members of the committee, thank you for the opportunity to
testify today on the Federal Reserve's supervisory and
regulatory oversight of Silicon Valley Bank.
Our banking system is sound and resilient, with strong
capital and liquidity. The Federal Reserve, working with the
Treasury Department and the FDIC, took decisive action to
protect the U.S. economy and to strengthen public confidence in
our banking system. These actions demonstrate that we are
committed to ensuring that all deposits are safe. We will
continue to closely monitor conditions in the banking system
and are prepared to use all of our tools for any size
institution as necessary.
We will continue to closely monitor conditions in the
banking system and are prepared to use all of our tools for any
sized institution as needed to keep the system safe and sound.
At the same time, the events of the last few weeks raise
questions about what more can be done and should be done so
that isolated banking problems do not undermine confidence in
healthy banks and threaten the stability of the banking system
as a whole.
At the forefront of my mind is the importance of
maintaining the strength and diversity of banks of all sizes
that serve communities across the country. SVB failed because
the bank's management did not effectively manage its interest
rate and liquidity risk, and the bank then suffered a
devastating and unexpected run by its uninsured depositors in a
period of less than 24 hours.
Immediately following SVB's failure, Chair Powell and I
agreed that I should oversee a review of the circumstances
leading up to SVB's failure. In this review, we are looking at
SVB's growth and management, our own supervisory engagement
with the bank, and the regulatory requirements that applied to
the bank.
The picture that has emerged thus far shows that SVB had
inadequate risk management and internal controls which
struggled to keep pace with the growth of the bank. Supervisors
began delivering supervisory warnings near the end of 2021. Our
review will consider whether these supervisory warnings were
sufficient and whether supervisors had sufficient tools to
escalate them. We are also focusing on whether the Federal
Reserve's supervision was appropriate for the rapid growth and
vulnerabilities of the bank. While the Federal Reserve
framework focuses on size thresholds, size is not always a good
proxy for risk, particularly when a bank has a non-traditional
business model.
Turning to regulation, we are evaluating whether
application of more stringent standards would have prompted the
bank to better manage the risk that led to its failure. We are
also assessing whether SVB would have had higher levels of
capital and liquidity under higher standards, and whether such
higher levels of capital and liquidity could have forestalled
the bank's failure or provided further resilience to the bank.
We need to move forward with our work to improve the resilience
of the banking system, including the Basel III Endgame reforms,
a long-term debt requirement for large banks, and enhancements
to stress testing with multiple scenarios so that it captures a
wider range of risk and uncovers channels for a contagion like
those we saw in the recent series of events. We must also
explore changes to our liquidity rules and other reforms to
improve the resiliency of the financial system.
In addition, recent events have shown that we must evolve
our understanding of banking in light of changing technologies
and emerging risks. Part of the Federal Reserve's core mission
is to promote the safety and soundness of the banks we
supervise, as well as the stability of the financial system, to
help ensure that the system supports a healthy economy for U.S.
households, businesses, and communities. Deeply interrogating
SVB's failure and probing its broader implications is critical
to our responsibility for upholding that mission. Thank you,
and I look forward to your questions.
[The prepared statement of Vice Chair Barr can be found on
page 92 of the appendix.]
Chairman McHenry. The Chair now recognizes Chairman
Gruenberg of the FDIC..
STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Gruenberg. Thank you, Mr. Chairman. Chairman McHenry,
Ranking Member Waters, and members of the committee, thank you
very much for the opportunity to appear before you today to
address the Federal regulators' response to the recent bank
failures.
On March 10th, just over 2 weeks ago, Silicon Valley Bank,
or SVB as it is known, with $209 billion in assets at year-end
2022, was closed by the California Department of Financial
Protection and Innovation, which then appointed the FDIC as
receiver. The failure of SVB, following the March 8th
announcement by Silvergate Bank that it would voluntarily
liquidate, signaled the possibility of a contagion effect on
other banks. On Sunday, March 12th, just 2 days after the
failure of SVB, another institution, Signature Bank of New
York, with $110 billion in assets at year-end 2022, was closed
by the New York State Department of Financial Services, which
also appointed the FDIC as receiver.
With other institutions experiencing stress, serious
concerns arose about a broader economic spillover from these
failures. After careful analysis and deliberation, the boards
of the FDIC and the Federal Reserve voted unanimously to
recommend, and the Treasury Secretary, in consultation with the
President, determined that the FDIC could use, emergency
systemic risk authorities under the Federal Deposit Insurance
Act to fully protect all depositors in winding down SVB and
Signature Bank.
It is worth noting that these two institutions were allowed
to fail. Shareholders lost their investments, unsecured
creditors took losses, and the boards and the most senior
executives were removed. The FDIC has the authority to
investigate and hold accountable the directors and officers of
the banks for the losses they caused to the banks and for any
misconduct in the management of the banks, and the FDIC has
already commenced those investigations. Further, any losses to
the FDIC's Deposit Insurance Fund as a result of uninsured
deposit insurance coverage will be repaid by a special
assessment on banks, as required by law. The FDIC has now
completed the sale of both bridge banks to acquiring
institutions.
My written testimony today describes the events leading up
to the failures of SVB and Signature Bank and the facts and
circumstances that prompted the decision to utilize the
authority in the Federal Deposit Insurance Act to protect all
depositors in those banks following those failures. It further
describes the management and disposition of the bridge
institutions that were established. It also discusses the
FDIC's assessment of the current state of the U.S. financial
system, which remains sound despite these events. And in
addition, it shares some preliminary lessons learned as we look
back on the immediate aftermath of this episode.
In that regard, the FDIC will undertake a comprehensive
review of the deposit insurance system and will release a
report by May 1st that will include policy options for
consideration related to deposit insurance coverage levels,
excess deposit insurance, and the implications for risk-based
pricing and Deposit Insurance Fund adequacy. In addition, the
FDIC's Chief Risk Officer will undertake a review of the FDIC's
supervision of Signature Bank and will also release a report by
May 1st. Further, in May the FDIC will issue a proposed
rulemaking for the special assessment for public comment.
The bank failures demonstrate the implications that banks
with assets over $100 billion can have for financial stability.
The prudential regulation of these institutions merits serious
attention, particularly for capital liquidity, and interest
rate risk, and also the consideration of a long-term debt
requirement to facilitate orderly resolution. Recent efforts to
stabilize the banking system and stem potential contagion from
these failures have ensured that depositors will continue to
have access to their savings, and small businesses and other
employers can continue to make payrolls, and that other banks--
small, medium, and large--can continue to extend credit to
borrowers and serve as a source of support.
The FDIC continues to monitor developments and is prepared
to use all of its authorities as needed. The FDIC is committed
to working cooperatively with our counterparts at the other
Federal regulators as well as with policymakers in the Congress
to better understand what brought these institutions to failure
and what measures can be taken to prevent similar failures in
the future.
Mr. Chairman, that concludes my statement. I would be glad
to respond to questions.
[The prepared statement of Chairman Gruenberg can be found
on page 103 of the appendix.]
Chairman McHenry. Thank you. And Under Secretary Liang, you
are now recognized.
STATEMENT OF THE HONORABLE NELLIE LIANG, UNDER SECRETARY FOR
DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY
Ms. Liang. Chairman McHenry, Ranking Member Waters, and
members of the committee, thank you for inviting me to testify
today and for the opportunity to speak several times in recent
weeks to share updates from Treasury regarding current events.
The American economy relies on a healthy and diverse banking
system, one that includes large, small, and mid-sized banks,
and provides for the financial needs of families, businesses,
and local communities. Nearly 3 weeks ago, problems emerged at
two banks with the potential for immediate and significant
impacts on the broader banking system and the economy. The
situation demanded a swift response. In the days that followed,
the Federal Government took decisive actions to strengthen
public confidence in the U.S. banking system and to protect the
American economy.
On March 9th, depositors of Silicon Valley Bank withdrew
$42 billion in deposits in a period of just a few hours. After
concluding that significant deposit withdrawals would continue
the next day, the California State regulator closed SVB and
appointed the FDIC as receiver. Two days later, the New York
State financial regulator closed Signature Bank, which also had
experienced a depositor run, and appointed the FDIC as
receiver.
Treasury worked to assess the effects of these failures on
the broader banking system, consulting regularly with the
Federal Reserve and the FDIC. On Sunday evening, recognizing
the urgency of reducing uncertainty for Monday morning,
Treasury, the Federal Reserve, and the FDIC announced a number
of actions to stem uninsured depositor runs and to prevent
significant disruptions to households and businesses.
First, the boards of the FDIC and the Federal Reserve
recommended unanimously, and Secretary Yellen approved after
consulting with the President, two actions that would enable
the FDIC to complete its resolution of the two banks in a
manner that fully protects all of their depositors. These
actions ensured that businesses could continue to make payroll
and that families could access their funds. Depositors were
protected by the Deposit Insurance Fund. Equity holders and
bondholders of the banks were not covered.
Second, the Federal Reserve created the Bank Term Funding
Program, a new facility to provide term funding to all insured
depository institutions eligible for primary credit at the
discount window based on their holdings of Treasury and agency
debt securities. This program, along with the pre-existing
discount window, has helped banks to meet depositor demands and
bolster liquidity in the banking system. This two-pronged
targeted approach was necessary to reassure depositors at all
banks and to protect the U.S. banking system and the economy.
These actions have helped to stabilize deposits throughout the
country, and have provided depositors with confidence that
their funds were safe.
In addition to these actions, on March 16th, 11 banks
deposited $30 billion into First Republic Bank. The actions of
these large and mid-sized banks represent a vote of confidence
in the banking system and demonstrate the importance of banks
of all sizes working to keep our economy strong. Moreover, on
March 20th, the deposits and certain assets of Signature Bridge
Bank were acquired from the FDIC, and on March 26th, the
deposits and certain assets of Silicon Valley Bridge bank were
acquired from the FDIC.
We continue to closely monitor developments across the
banking and financial system and coordinate with Federal and
State regulators. As Secretary Yellen has said, we have used
important tools to act quickly to prevent contagion, and there
are tools we would use again to ensure that American deposits
are safe. Looking forward, while we do not yet have all of the
details about the failures of the two banks, we do know that
the recent developments are very different from those of the
global financial crisis. Back then, many financial institutions
came under stress because they held low credit quality assets.
This was not at all the catalyst for the recent events. Our
financial system is significantly stronger than it was 15 years
ago. This is in large part due to the post-crisis reforms for
stronger capital and liquidity.
As you know, the Federal Reserve announced a review of the
failure of SVB, and the FDIC announced a review of Signature
Bank. I fully support these reviews and look forward to
learning more in order to inform any regulatory and supervisory
responses. We must ensure that our bank regulatory policies and
supervision are appropriate for the risks, old and new, that
banks face today.
Thank you to the committee for its leadership on these
important issues and for inviting me here to testify today. I
look forward to your questions.
[The prepared statement of Under Secretary Liang can be
found on page 126 of the appendix.]
Chairman McHenry. I now recognize myself for 5 minutes for
questions.
Under Secretary Liang, when did you become aware of the
severe financial distress of Silicon Valley Bank? Date and time
would be helpful.
Ms. Liang. I became aware of issues at Silicon Valley Bank
on Wednesday or Thursday.
Chairman McHenry. Wednesday or Thursday. I would like to
have a written response to when you became aware of it. You can
search your email. That would be helpful.
Vice Chair Barr, when did you become aware of it?
Mr. Michael Barr. Thank you, Mr. Chairman.
Chairman McHenry. When did you become aware of SVB's
financial distress?
Mr. Michael Barr. I was going to answer that Thursday
morning, I received an email from staff indicating that
Wednesday evening the bank had difficult--
Chairman McHenry. Thursday morning. When did you become
aware, Chairman Gruenberg?
Mr. Gruenberg. I believe it was Thursday evening. The staff
came into a meeting in which I was taking part.
Chairman McHenry. Thursday evening, for Silicon Valley
Bank? Okay. And you had a staff presentation in February which
included Silicon Valley Bank and the distress, because of
rising interest rates, on their portfolio. What did you do
between that February staff presentation to you and the week of
March 6th about Silicon Valley Bank?
Mr. Michael Barr. Staff presented on the interest rate
risk--
Chairman McHenry. Yes, that is what I said. That was a
February presentation. What did you do as Vice Chair of
Supervision between that time and the week of the bank failure?
Mr. Michael Barr. Staff indicated that they were completing
their review of the bank and of this broader horizontal review
at that time, and I was waiting for the results of that review.
Chairman McHenry. Were you aware of Silicon Valley Bank
raising capital the week of March 6th?
Mr. Michael Barr. I believe I became aware of that in this
email that I described to you--
Chairman McHenry. On Thursday morning.
Mr. Michael Barr. --on Thursday morning.
Chairman McHenry. That they had successfully raised the
capital, but they were facing financial distress.
Mr. Michael Barr. I was not aware Thursday morning that
there were deposit outflows. I was trying to finish the answer
to that question. I was aware of the difficulty Wednesday night
in raising capital, but the bank was reporting to supervisors
Thursday morning that deposits were stable.
Chairman McHenry. When did you become aware of the deposit
outflows on Thursday?
Mr. Michael Barr. Thursday afternoon, late afternoon, I
became aware of deposit outflows, and Thursday evening, that
there was essentially a bank run.
Chairman McHenry. So Thursday afternoon, which could be
mid-morning in California? Is that what you are suggesting?
Mr. Michael Barr. I believe it was around noon in
California and for me, around 3:00 in--
Chairman McHenry. Okay. And did you make provisions for the
discount window or pledgeable assets at the time you heard of
their distress?
Mr. Michael Barr. My understanding from the staff is they
were in discussions with the bank itself beginning Thursday
afternoon to try and move plegable collateral over to the
discount window. That work continued Thursday afternoon, into
Thursday evening, and actually overnight.
Chairman McHenry. Did you make provisions to keep the
discount window open so they could provision collateral to
avoid a bank collapse?
Mr. Michael Barr. The discount window opening decision is
sort of a standard thing. It normally closes--
Chairman McHenry. A standard thing, except that in a moment
of crisis, it can be kept open. I think the Vice Chair for
Supervision should be able to make that phone call. Did you
provision for that, or did you think you needed to provision
for that?
Mr. Michael Barr. Mr. Chairman, at the time, my
understanding was that the difficulty wasn't sending funds. The
difficulty was actually evaluating the collateral and getting
it pledged to the discount window. And staff were working with
Silicon Valley Bank basically all afternoon and evening and
through the morning the next day to pledge as much collateral
as humanly possible to the discount--
Chairman McHenry. On Friday morning, Chair Gruenberg, you
were appointed receiver. When did you become aware that the
FDIC was going to have to take this measure or was going to
receive this bank?
Mr. Gruenberg. I think when we were informed Thursday
evening--
Chairman McHenry. I mean you; were you informed Thursday?
Mr. Gruenberg. Yes, I was informed Thursday evening by
staff that--
Chairman McHenry. Which meant you had Friday morning
conference calls to make a decision. Was that part of it?
Mr. Gruenberg. I think we knew Thursday evening that the
bank was going to fail and that we needed to make provisions to
take over the institution.
Chairman McHenry. Did you pick up the phone and call the
Vice Chair of Supervision at the Fed and ask, how can we
provision to keep this institution open for Friday?
Mr. Gruenberg. I can't recall that. My recollection is, Mr.
Chairman, that the institution was experiencing a liquidity
failure and that it was going to fail, and--
Chairman McHenry. It was going to fail on Friday morning or
Friday evening? Were you provisioning for this for the weekend
decision?
Mr. Gruenberg. No, I think the expectation and the
experience was that the institution was going to be closed in
the morning.
Chairman McHenry. At what point did you open an auction for
Silicon Valley Bank?
Mr. Gruenberg. I believe it was Saturday, March 11th, with
bids due Sunday afternoon. We just--
Chairman McHenry. Sunday afternoon, you opened for auction.
We only heard the announcement of Congress receiving this
information at 11:20 on Friday morning. There was an
idiosyncratic bank, and Sunday afternoon was the next
pronouncement from any of you three on the panel, and it was a
systemic risk designation. That is what has shaken the market
for the last 2 weeks. That is the reason why we have had these
extraordinary interventions in the financial system, and I want
to know the key details of that weekend. I hope we can drill
into those questions.
Mr. Gruenberg. Sure.
Chairman McHenry. With that, I will recognize the ranking
member, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Chair
Gruenberg, we know that SVB banked nearly half of all U.S.
venture-backed startups, potentially tens of thousands of
companies, which clearly posed a concentration risk to the
bank. While most of the bank's depositors were small and mid-
sized businesses, they also had large customers, too, with the
top 10 accounts holding more than $13 billion in combined
deposits.
Chair Gruenberg, and Vice Chair Barr, I am concerned that
depositors' decisions to run or stay were not necessarily made
on their own, but by the strong encouragement of their venture
capital backers who sit on the boards and hold equity in their
companies. Were a handful of large venture capital depositors
able to influence the withdrawal of $42 billion all at once
through their control over their portfolio companies?
Mr. Gruenberg. Congresswoman, I think that is something we
will need to look at in terms of the post-failure review of
these institutions. I couldn't tell you today with certainty
what occurred there. I know both the Fed, in regard to SVB, and
the FDIC, in regard to Signature, are going to do a careful
review of the events that occurred.
Ms. Waters. Thank you very much, and I agree with you. I
think we really need to know the role that venture capitalists
played in this bank. Going further, Vice Chair Barr, you said
yesterday that SVB received a 3 for its management rating,
which is considered deficient, but was considered sufficiently-
capitalized given the bank's unique customer base, an extremely
large share of uninsured deposits, and an underwater asset
portfolio. Liquidity management was also a key issue. The
liquidity rating for a bank should account for interest rate
risk and the bank's asset liability management. What was the
bank's rating on liquidity?
Mr. Michael Barr. Thank you, Representative Waters. My
understanding is in the summer of 2022, although the composite
rating was a 3, which is not well-managed, the liquidity rating
was a 2, which would have been satisfactory. And one of the
things we are looking at in the review is how that synced up
with the supervisory matters requiring attention and matters
requiring immediate attention with respect to liquidity that
had previously been issued. So, we are looking at whether those
standards were sufficiently stringent, whether the firm should
have been downgraded further, and whether further supervisory
steps should have been taken.
Ms. Waters. Whose responsibility was it to understand the
deficient rating and to do something?
Mr. Michael Barr. The Federal Reserve is responsible for
supervising this institution.
Ms. Waters. Did the Federal Reserve fail on that?
Mr. Michael Barr. I think that anytime you have a bank
failure like this, bank management clearly failed, supervisors
failed, and our regulatory system failed, so we are looking at
all of that.
Ms. Waters. Thank you. Vice Chair Barr, you said yesterday
that SVB received a 3 for its management rating. And you just
responded in a way that says, yes, that is true, and perhaps
something should have been done, and you are going to look
further at that. Are you perhaps suggesting legislation to deal
with that?
Mr. Michael Barr. We are focusing in our review on our own
supervision, ways that we could have done better as supervisors
at the Federal Reserve, and ways that our own regulatory
structure might have played a role with respect to the failure
of this firm. So, we are looking inward. It is a self-
assessment, a prudent thing, I think, for us to do. It is what
we tell banks to do. It is sort of the first thing you have to
do to understand risk within your own institution, and that is
why we are doing it.
Ms. Waters. Vice Chair Barr, I wonder what it would take to
receive a 3, 4, or 5 from a Federal examiner? I know the idea
is to keep exam ratings confidential in order to prevent bank
runs, but doing so also prevents this committee from
understanding how well the Fed and other regulators are doing
in rating banks. In the same way the stress testing results are
public, are there ways we can make the supervisory process more
transparent to promote discipline and accountability?
Mr. Michael Barr. Thank you, Representative Waters. I think
one of the things we are trying to do here today is to provide
that accountability, and we will do that in our report, which
we will do on May 1st. It will include confidential supervisory
information. We normally do not provide that information, but
given the fact that this bank failed and triggered a systemic
risk exception, we are including that information, including
exam reports.
Ms. Waters. Thank you very much. This is a very important
issue.
Chair Gruenberg, Silicon Valley Bank was purchased over the
weekend by First Citizens Bank & Trust Company. As you know, I
wrote to you on March 18th about the former SVB's community
benefits plan, which was intended to provide $11 billion in
small businesses, housing, and community development support to
communities both in my home State of California and in
Massachusetts. I understand that $2 billion in affordable
housing and other projects may be lost or delayed in California
because of the failure. Will Citizens Bank & Trust continue
implementation of the former bank's community benefits plan?
Mr. Gruenberg. The agreement between the community
organizations and Silicon Valley in regard to the community
benefits agreement was an agreement between those two parties.
First Citizens will now be taking over Silicon Valley. There
will be an opportunity for the community organizations to
engage with First Citizens. I know First Citizens has a
community benefits agreement with community organizations where
it is currently doing business, so there will be an opportunity
for the groups in California to engage with First Citizens. And
I would note that First Citizens is also subject to supervision
under the Community Reinvestment Act (CRA), and so we will be
able to evaluate the degree to which First Citizens is serving
its communities pursuant to the CRA.
Chairman McHenry. The gentlelady's time has expired. I will
now recognize the Vice Chair of the committee, Mr. Hill of
Arkansas, for 5 minutes.
Mr. Hill. I thank the chairman and the ranking member for
this prompt hearing after these weeks of tumult, and I thank
the panelists for being here as well. Mr. Barr, when were you
nominated for your job?
Mr. Michael Barr. I apologize. I don't have the date in my
head. It was in the spring of last year.
Mr. Hill. And do you know when you were confirmed for your
job?
Mr. Michael Barr. Yes, I took my post up in July of last
year, July 2022.
Mr. Hill. July of 2022. Between January 20, 2021, and July
of 2022, who was in charge as Vice Chair for Supervision at the
Federal Reserve?
Mr. Michael Barr. There was no Vice Chair for Supervision
during that time period.
Mr. Hill. When that happens, what is the Fed's process for
delegating that authority to another member of the Board of
Governors or a staffer, or how does that work?
Mr. Michael Barr. I apologize. I don't know the technical
answer to that question. We will have to get back to you with a
written response--
Mr. Hill. Yes, if you could get back to me, because what we
are saying to my colleagues here is that from the turn of
Administration, we did not have a Vice Chair for Supervision
from January 2021 until July of 2022. And that is precisely the
timeframe, colleagues, when this bank's business strategy went
awry and was under this supervisory concern by the San
Francisco Fed. So, I just want to have that on the record. And
when I look at the results of this bank in the Uniform Bank
Performance Report (UBPR), the call report data, and looking at
your good testimony about the timeline that you have disclosed,
it appears to me that we have a lack of supervisory urgency
here.
You outlined that the trends in 2021 are what triggered
concern by the Federal Reserve examiners, and, I assume, the
State of California. We haven't heard from the State of
California. We would like to, but there was an exam in the
summer of 2021. It took until the 4th quarter of 2021 to tell
the bank, ``We have some specific serious concerns.'' You met
with the board then--not you, but the supervisors--and then the
downgrades didn't come, and those tough visits didn't come
until the summer of 2022. So really, there were 12 months of
discussion between the Board and the State of California and
the San Francisco Fed. That doesn't sound like a very urgent
supervisory process. Do you consider it urgent to take a full
12 months in that process?
Mr. Michael Barr. Mr. Hill, I think you raise an absolutely
essential question. It is one of the things we are going to be
asking in our review. Obviously, these events occurred before I
arrived at the Board. I am going back and looking at what steps
were taken and not taken. I think it is a completely fair
question. Could the supervisors or should the supervisors
really have been much more aggressive in the way that they
responded to the risks that they saw and they were noting? We
are going to look carefully at that. I think it is--
Mr. Hill. Yes. I was just shocked with the business plan
way out of line with peer. You have matters requiring
attention, which is a very low level, the lowest level
editorial comment by a bank regulator. There was no proposal
for a Board resolution that I saw in your note. So, I look
forward to the results of your comments.
On this issue of Dodd-Frank versus S. 2155, in my reading
of bank law, those things are almost not important compared to
12 U.S.C. 1818 on cease and desist where the FDIC, the primary
bank regulator, can do whatever they want to a bank that is not
operating in a safe and sound manner. Isn't that right, Mr.
Barr?
Mr. Michael Barr. The bank regulators have substantial
discretion to use those authorities when banks are operating in
an unsafe and unsound manner. I agree with that.
Mr. Hill. And I thought Senator Crapo's comment yesterday
was very, very important, that in the rule of construction,
that final bit of information in S. 2155, the bipartisan,
bicameral bill signed by President Trump, it says, ``Nothing in
this bill shall be construed to limit the supervisory
authorities for safety and soundness in any way.'' Isn't that
what that rule of construction says?
Mr. Michael Barr. Yes, I agree with that. I think we have
substantial authority under existing law to regulate firms and
supervise firms in a way that is appropriate for their risk and
size and complexity.
Mr. Hill. Thank you very much.
Chairman Gruenberg, talking about the resolution process,
are you open to a full investigation not only of the deposit
insurance and not only of the supervisory process, but also to
look carefully at the resolution process itself?
Mr. Gruenberg. Yes, Congressman.
Mr. Hill. And are you going to conduct that yourself, or
would you work with us on that?
Mr. Gruenberg. We would certainly be prepared to undertake
that review and be transparent with you in regard to it.
Mr. Hill. Something I want to see considered, and I argued
this back in 2008 as a private citizen and a banker, is in the
resolution process, to consider non-bank buyers for these
assets. Do you agree that is important, and we should consider
that?
Mr. Gruenberg. Yes, it is Congressman.
Mr. Hill. Thank you. I yield back.
Chairman McHenry. The Chair now recognizes Ms. Velazquez of
New York for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Barr, the
rescue of depositors in Silicon Valley Bank demonstrates that
regulators think banks like Silicon Valley pose a systemic risk
to the system just like Global Systemically Important Banks (G-
SIBs) do. Mr. Barr, don't you think Category III and IV banks
should face the same rules as the megabanks?
Mr. Michael Barr. Thank you very much for that question. We
are looking at capital and liquidity standards for all large
banks, including firms at $100 billion and above. I still think
a tiering approach makes some sense. It doesn't have to be the
same rules for all banks, but we do need stronger rules for
firms of this size. Stronger rules on capital and liquidity, I
think, are going to be really important.
Ms. Velazquez. Mr. Barr, in my view, the decision to insure
all depositors was a necessary and correct step. However, I am
frustrated that time and time again, we fail to regulate them
like one, and as a result, we find ourselves in situations like
the one that we are currently in. Without proper regulations
that account for the systemic risk profile of a bank, we are
incentivizing bankers to search for yield and inviting moral
hazard.
Mr. Barr, the sudden and immediate collapse of Silicon
Valley Bank demonstrates the vulnerability of banks and the
broader system to interest rate rises. Yet under our current
capital rules, most banks are not required to recognize this
risk, only G-SIBs. Will the Fed rewrite this rule to require
all banks to account for interest rate risk?
Mr. Michael Barr. You raise an absolutely essential point,
and one that we are looking at very carefully. We anticipate
engaging in a notice-and-comment rulemaking process on capital
rules with appropriate transitions, and that is one of the
areas that I think would be important for us to consider in
that rulemaking process.
Ms. Velazquez. Do you think that the rules passed under S.
2155 and written by the Trump Administration need to be
rewritten?
Mr. Michael Barr. As part of our review, we are going to
look at not only our supervisory issues, but also at the
regulatory structure that the Federal Reserve put in place in
2019, and see whether the size thresholds we used, the standard
we decided to put in place--all of that is on the table. We are
reviewing that. We are going to come back and provide an
assessment of that on May 1st.
Ms. Velazquez. Thank you. And, Mr. Barr, the Fed has been
raising interest rates more rapidly than it has in decades in
an effort to lower inflation. It appears that many banks were
unprepared for this. Can you explain how the Fed's bank
supervision staff coordinates with its monetary policy-focused
staff to ensure that banks are properly prepared for well-
telegraphed shifts in monetary policy? Does the Fed see
regulation and supervision as separate from monetary policy?
Mr. Michael Barr. The whole of the Federal Reserve staff
communicate very well together. As you noted, the monetary
policy decisions were very well-telegraphed. The decisions were
essential to meet our congressional mandate of price stability
and maximum employment, and we need to make sure that we
continue to pursue that. We have separate tools that we use, of
course, and as I said in other contexts, interest rate risk
management is a core bread-and-butter issue in banking. It is
not an esoteric issue, an exotic issue, or a complicated issue.
It is a straightforward issue, and the bank management failed
to do that here.
Ms. Velazquez. Thank you. During his news conference last
week, Chairman Powell said that the Federal Open Market
Committee (FOMC) considered a pause in the interest rate
increases in light of the recent banking failures but,
ultimately, unanimously approved the decision to raise rates
due to intermediate data on inflation and the strength of the
labor market. How will the Fed balance its supervisory role
with its monetary policy role as it considers future interest
rate increases?
Mr. Michael Barr. We really have all of the tools that we
need on the macroprudential and microprudential side to assess
financial stability and bank safety issues. And as I said, the
banking system overall is sound and resilient, and deposits are
safe. On the monetary policy side, we are going to be looking
at incoming data, we are going to be looking at changing
financial conditions, and we will make a judgement on a meeting
by meeting basis about that decision.
Ms. Velazquez. Thank you. Mr. Chairman, I yield back.
Chairman McHenry. I will now recognize Mr. Sessions for 5
minutes.
Mr. Sessions. Mr. Chairman, thank you very much, and thank
you to the witnesses for being here today. I think you see that
this committee will work together, has questions, and would
wish to hold you accountable. But I must confess to you after
hearing the questions that have taken place, I have heard none
of you three accept real responsibility for your role in this
endeavor. I have heard that you were aware of it the week of, I
have heard that the notice was given of oversight back in 2021,
that a frailty was noticed. I have heard you say that we used
all of our tools. I have heard you say things like the FDIC
will use all of its authorities, but I have not heard any of
you three talk about a systemic failure, or letting the bosses
know what is happening. I have heard you say, well, this got
staffed and that got staffed and staff did this.
I think this is a wake-up call to all three of you. I hope
it is a wake-up call to your organizations, that evidently,
they could see these bread-and-butter failures back in 2021,
but evidently, nothing realistic ever occurred to avoid what
seemingly anybody who is a professional banker could see. I
have seen excessive regulatory oversight by this Administration
across-the-board. I have seen a lot of what I would call
inattention by decision-makers.
So, I would specifically tell you that we will drill down
on the need to know more about the recommendation for systemic
exception that was invoked, in other words, that was invoked by
presumptively the people at this table. And yet, it took all
this time to filter up before you were even aware. Failure
occurred, was occurring, and then you were given notice. So, I
would hope myself that there would be some inward thinking
about your actual roles. Instead of staffing everything and
waiting for it to bubble up to you, there should be hooks in
place.
I spent 16 years in the private sector, ran a large
organization, over 700 employees. I had more than a fiduciary
responsibility. I had a managerial responsibility to report up
the things that we saw to a very large organization, and I
believe, by and large, those people welcomed my feedback and
set ourself up for that. So, take the remaining minute and 50
seconds and give me some inward thinking because I heard no one
say we were part of the problem. We need to look at us being
part of the problem, and we need to be a part of the solution,
because as was noted, this will be paid by all banks across the
country of the FDIC. Please, Mr. Barr?
Mr. Michael Barr. Thank you very much, Mr. Sessions. I
agree with you. I think we need to take a good, hard look
inside at the Federal Reserve, at our supervision, at our
regulation. I think we need to be humble about that, and I
think we are going to be unflinching in our review about--
Mr. Sessions. Does that include your role?
Mr. Michael Barr. Absolutely. And I am here today to be
accountable to you for that purpose.
Mr. Sessions. Accountable is one thing, but coming back and
actually admitting that you were part of the systemic failure
is an entirely different process. People say, well, we will
hold accountability, but actually, it is banks that are across
the country that play by these rules and offer this money are
the backstop. And while I don't want to argue against that, I
do want to say I believe there is lots of room to say someone
should have caught this as early as and done something back in
early 2002. Chairman?
Mr. Gruenberg. Congressman, I really don't mean to shirk
responsibility here. I think we share responsibility. I think
bank management had responsibility. I think we as the
regulators of the institution had responsibility. I think we
are going to conduct reviews to get the facts as to what
occurred and a measure of internal as well as external
accountability. My own sense here in terms of the supervision
of these institutions, from my perspective, is that both
agencies, and I would include ourselves, were aware that there
were issues at these institutions and trying to address them
through the supervisory process. It is also my judgment, and we
are going to conduct a review to get all the facts here.
Chairman McHenry. The gentleman can answer the rest for the
record.
With that, I will now recognize Mr. Sherman of California
for 5 minutes.
Mr. Sherman. Due to Dodd-Frank, our banking system is
strong. Our regulators avoided a crisis by quick action this
month, but the solution was not free. Some $22 billion of
special assessments will be imposed on banks that will lead to
lower rates on certificates of deposit, perhaps a quarter
percent, perhaps an eighth of a percent, and our entire economy
has been hurt. It has been rattled by what happened this month.
Our bank regulatory system has some real flaws. It is an
undemocratic system in which the Financial Accounting Standards
Board (FASB) writes the accounting rules and doesn't even claim
to be part of a democratic government. In the Federal Reserve
Boards, and the regional banks, it is not one person, one vote,
it is one bank, one vote. The bankers vote on who is on the
regional board, and the bankers of my State elected the CEO of
Silicon Valley Bank.
Banks get to pick their regulators, State or Federal,
holding company or no holding company, Fed or OCC. They can use
regulatory arbitrage, and every regulatory agency knows that if
it gets a reputation of being too tough, the banks can flee and
go to one of their regulatory competitors. Our accounting
system for banks is absolutely perverse. If you make a Main
Street loan, you are penalized under the Current Expected
Credit Losses (CECL) system, and you will always list that loan
on your balance sheet as being worth less than you paid for the
note.
If you instead go to Wall Street and buy long-term bonds,
you are rewarded. If the bond goes up in value, you can sell it
or classify it as available for sale, and recognize a profit,
and justify a bonus. If the bond goes down in value, you can
hide it by listing it as held for maturity and listed at the
original purchase price on your balance sheet, even though you
know it is worth 20 percent or 30 percent less.
The crypto billionaires fanned the flames because they
understood that if they can besmirch our banking and dollar
system, crypto goes up and they have made tens of billions of
dollars. Silicon Valley Bank could have saved itself in 2022 by
hedging its risk or selling its long-term bonds, but they knew
that would cut profits and bonuses, so they decided to take the
risk, and here we are. And of course, our clawback provisions
are inadequate.
There are $600 billion worth of unrecognized losses on the
balance sheets of American banks. That needs to be juxtaposed
with the $2.2 trillion of capital American banks have. So, we
are overstating the capital of our banking system by perhaps a
quarter.
Mr. Barr, I watched your Senate testimony in which you
basically said it was bank mismanagement for them to ignore the
good advice your people gave them. It is also misregulation to
let banks ignore that advice. You are not running a consulting
operation. You are running a regulatory operation which can
force banks to follow that advice.
Interest rates go up, and interest rates go down. Certainly
the Fed, in auditing banks, ought to know that, especially when
this is not an 100-year event. Interest rates go up, interest
rates go down, 2023 has its peculiarities. But it is
particularly ironic that it is the Fed that is raising the
interest rates, and then the Fed that is not examining banks to
see if they can survive if interest rates go up. The concern we
all have is, are there other banks that could go under because
they invest in long-term bonds that aren't worth as much as
they paid for them?
So, I will ask Mr. Gruenberg, and perhaps, Mr. Michael
Barr. Are there any banks out there, and roughly how many, that
have capital of under 5 percent if you subtract from their
stated capital, their unhedged, unrealized losses on long-term
debt?
Mr. Gruenberg. Congressman, that is a fair question and a
factual question. If I may, let us get back to you on that. We
will get the numbers and share them with you very quickly.
Mr. Sherman. And please don't give me the names.
Mr. Barr, do you have any other answer?
Mr. Michael Barr. No, sir.
Mr. Sherman. Mr. Gruenberg, I know that you are going to be
giving us a report about possibly expanding FDIC insurance this
spring. I look forward to it, and I hope that you would
consider $3 million of coverage, but only of non-interest-
bearing accounts, because when a bank is used as a utility for
a checking account, we need that coverage. If people are making
investments, we ought to be able to be more careful. And I
yield back.
Chairman McHenry. The gentleman's time has expired. We will
now go to the gentleman from Missouri, Mr. Luetkemeyer, who is
also the Chair of our Subcommittee on National Security,
Illicit Finance, and International Financial Institutions, for
5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Vice Chair Barr,
for more than a year now, financial news has focused on the Fed
raising rates. There isn't a person in the financial services
sector of the country who hasn't heard about it on a seemingly
everyday basis since the beginning of 2022. It has been the
fastest rate increase in the country's history, which I believe
is probably too fast. Chairman Powell has made his intentions
very clear: No bank should have been caught off guard by rate
increases. In fact, the Federal Reserve is in the same position
themselves.
Chairman Powell was here a couple of weeks ago, and
acknowledged that his bond holdings and the interest rates
situation that they have is actually losing money as a result
of this. So, it is even more surprising that $100-billion banks
are not considering effective rate increases. In fact,
according to your testimony, the Fed staff hasn't presented to
the Board of Governors with its impacts on rising rates until
February of 2023, this last month. So are you telling me that
every time the Fed raises rates or drops rates, there is no
economic analysis done on the impact on our economy?
Mr. Michael Barr. Mr. Luetkemeyer, I was referencing that
particular meeting because the staff--
Mr. Luetkemeyer. No, that is not my question. My question
is, does the Fed, before it raises rates or lowers rates, have
an economic study done by its economists? They have a team of
economists there. Do you have an economic analysis done of the
impact of that?
Mr. Michael Barr. Yes, we evaluate all of the economic
conditions--
Mr. Luetkemeyer. You get a report from your economists. Did
the Fed--
Mr. Michael Barr. --and financial conditions when making
any interest rate--
Mr. Luetkemeyer. Does the Fed Board get a report from their
economists saying what the impact of their rates will be on the
economy? Yes or no?
Mr. Michael Barr. Yes, we get staff forecasts that forecast
the expected impact on the economy of rate decisions.
Mr. Luetkemeyer. Okay. Why did you make a specific mention
of this in your February report then? Why did you specify that
the rate impact--
Mr. Michael Barr. That is what I was trying to explain
earlier. I mentioned that because the report specifically
called out Silicon Valley Bank. We regularly discuss interest
rate problems.
Mr. Luetkemeyer. Okay.
Mr. Michael Barr. Interest rate risk is an important part
of supervision and a bread-and-butter issue.
Mr. Luetkemeyer. Okay. A bank this size, normally you will
have an examiner or two or a team that goes in on a daily
basis. Was there an examiner or team of examiners in Silicon
Valley Bank on a daily basis?
Mr. Michael Barr. The team consisted of about 20 full-time
equivalent staff at the San Francisco Federal Reserve Bank.
Mr. Luetkemeyer. They were not in Silicon Valley then?
Mr. Michael Barr. I don't know precisely the extent of
their in-person meetings versus their remote analytic work.
Mr. Luetkemeyer. Okay. That is another problem that we have
to talk about, having all this work offsite, when they need to
be onsite, to be able to have access to the daily data. But as
a result of this, I will follow up with some of the questions
that have been asked before, but ask them in a little bit
different way.
You knew that we had an interest rate risk problem and a
liquidity problem. You acknowledged it all the way through from
2021. It has been established this morning. You have examiners
in the bank who are watching it on a daily basis, and you know
that you have had some reports that say we need to take some
action. Why was no action requested or not forced on the bank?
Mr. Michael Barr. There was action requested of the bank in
the matters requiring immediate attention.
Mr. Luetkemeyer. Why were they not enforced?
Mr. Michael Barr. I think that is a question for our
review. I don't yet know the answer. Could the staff have
escalated more? Should they have escalated more? What were the
interactions with the bank? That is all part of the supervisory
record that will be in the May 1st report.
Mr. Luetkemeyer. That begs the question then, Mr. Barr, if
you think you need more rules and you are not even enforcing
the existing ones, why do you need more rules? I don't think we
need to look at more rules until we figure out which rules are
not being enforced, what messages were not being delivered to
the bank to be able to do your job. At that point, then, we can
take a look and see if we need to do something else, but for
you to make the statement that we need more rules and
regulations, how about enforcing the existing ones first?
Mr. Michael Barr. We are going to be looking, as I said, at
our own supervision under the existing framework, ways in which
existing rules--
Mr. Luetkemeyer. Okay. I have one more quick question for
you here. This situation points out a very unique situation
because of the new social media of the world of instantaneously
being able to do some things. I have grave concerns because
within less than a 2-day period, $42 billion rolled off the
books here, basically as a result of a Tweet, a little
informational thing. Mr. Barr, it opens up the possibility that
whenever you have a bunch of specifically-distressed banks,
there could be a short sell on some of these things that could
be out there. We need to be talking about that. Are you
thinking about that at all yet?
Mr. Michael Barr. Yes, I think you are raising absolutely
important and critical questions about the role of social
media, the role of networks, depositors with each other, and
the potential risk.
Mr. Luetkemeyer. You are working on a real-time payment
system. This is going to be--
Chairman McHenry. The gentleman's time--
Mr. Luetkemeyer. --ripe for a problem like this with
Twitter if we don't fix it beforehand.
Chairman McHenry. The gentleman's time has expired.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Chairman McHenry. You can answer it for the record.
We will now go to Mr. Scott of Georgia for 5 minutes.
Mr. Scott. Thank you very much. Vice Chair Barr, we know
that this was basically the fault of the management, but what
we want to know is, where did the Fed go wrong? Where did the
Fed go wrong, and specifically, did the Fed miss red flags or
ignore warning signs that were brought to you by your staff
months or even years before the collapse?
Mr. Michael Barr. Thank you very much for the question. We
do have in the supervisory record staff reaching out to the
bank highlighting these problems. As you noted in the first
instance, it is bank management's responsibility to fix those
problems. They didn't do so.
Mr. Scott. Vice Chair Barr, is it true that the San
Francisco Fed, which supervised Silicon Valley Bank, sent
multiple warnings to the bank's management about the risks it
was taking, including its substantial holdings of Treasuries
and other bonds that were steadily losing money as the interest
rates rose?
Mr. Michael Barr. Yes, the supervisor pointed out to the
banks that they were exposed to interest rate risk and
liquidity risks, and that they didn't have the risk management
in place to address those. The bank failed to fix those
problems.
Mr. Scott. And how often did Fed staff share with the Board
of Governors that rising interest rates were threatening the
finances of some banks, particularly the risk-taking at Silicon
Valley Bank?
Mr. Michael Barr. My understanding is that the particular
issue with Silicon Valley Bank did not rise to the level of the
Board of Governors until mid-February of this year.
Mr. Scott. Why do you think that the full extent of the
bank's vulnerability did not become apparent until it was too
late, especially when the FDIC data was showing that SVB was
doubling in size in 2020 and 2021, doubling in size within 12
months. Was that not a red flag?
Mr. Michael Barr. I think that one of the things we are
looking at is that the way the Federal Reserve's regulations
set up the structure for approach to supervision, treated firms
in the $50 billion to $100 billion range with lower levels of
requirements and had a phase-in period for firms that got above
the $100-billion line. That meant that their transition into
those higher standards took a long time. So by the time the
group was actually looked at in an intense way by the group in
the large and foreign banking organizations team, a lot of that
growth and a lot of that activity had happened. So in a sense,
it was very late in the process, and that is one of the things
we are looking at in our review.
Mr. Scott. Good. And I want you to know that I appreciate
your recent announcement that there will be a formal review
into whether the Fed failed. It is good to admit failure. That
is the first step in correcting the problem. And that a review
of whether the Fed failed to properly oversee Silicon Valley
Bank will take place, and more importantly, it will be shared
with us in the public. Is that true?
Mr. Michael Barr. Yes, that is absolutely right. We thought
that it is really important as a first principle of risk
management for us to do our own self-assessment. We have a team
of people working on that self-assessment who are not involved
in the supervision of Silicon Valley Bank. We are going to make
all of those findings and recommendations public on May 1st.
And let me also say that we welcome other outside reviews as
this body is doing today, and others will as well.
Mr. Scott. Thank you very much, Vice Chair Barr.
Chairman McHenry. The gentleman from Michigan, Mr.
Huizenga, who is also the Chair of our Oversight and
Investigations Subcommittee, is now recognized.
Mr. Huizenga. Thank you, Mr. Chairman. I am going to
quickly move ahead here. A loss in confidence in the banking
system is a loss of confidence in regulators, in many of our
minds. And regulators seem to have had the tools at their
disposal to prevent these failures from happening, but they
seem to have missed that. We are going to be exploring that. As
Chair of the Oversight and Investigations Subcommittee, I find
it necessary to reiterate how important congressional oversight
is, and that it is a constitutional authority that we have and,
frankly, an obligation that we have to maintain the well-being
of our system of government.
Mr. Barr, you just said that it was appropriate for
outsiders to do their independent reviews. That is what we are
trying to do here today. You were authorized on March 13th to
do your report, correct? Who authorized that?
Mr. Michael Barr. Chair Powell and I made--
Mr. Huizenga. Okay. That is all I need to know. Chair
Powell authorized you?
Mr. Michael Barr. Chair Powell and I jointly made the
decision.
Mr. Huizenga. Okay.
Mr. Michael Barr. We made a proceeding with this.
Mr. Huizenga. Great. Is it your understanding as well that
under Dodd-Frank, anytime Section 13(3) is invoked and utilized
that the GAO is also supposed to do a report?
Mr. Michael Barr. I am not familiar with that precise
provision, but it makes sense to me that GAO should do a
review.
Mr. Huizenga. Okay. And do you know when GAO is going to be
starting their report or investigation?
Mr. Michael Barr. I respect the independence of the GAO and
suggest that--
Mr. Huizenga. Okay. Great. On page 2 of your testimony, you
said that the May report will include confidential supervisory
information (CSI). Will you be providing that CSI to the GAO?
Mr. Michael Barr. Yes, consistent with normal practice.
Mr. Huizenga. Okay. Great. We might have to unpack that a
little bit. Will you also commit to me, and to this committee,
and to the chairman that you will provide this committee with
all of the confidential supervisory information needed to
appropriately assess on our end what happened?
Mr. Michael Barr. Yes, the same information in the May 1st
report will be available.
Mr. Huizenga. No, no, not in the report. If you are giving
that supervisory information for the GAO to do their review,
not before you review it yourself and decide what is
appropriate and not appropriate. I thought you just said that
you would be providing GAO with all of that data and
information that you will be using to make your report. Is that
correct?
Mr. Michael Barr. We will make the information that we are
using for the report available to you and to the GAO.
Mr. Huizenga. Okay. So, we have your commitment that you
are going to be providing us with all of that raw, confidential
supervisory information so that we can do our job?
Mr. Michael Barr. The same information that we would use
for the GAO and for the public report.
Mr. Huizenga. I am not looking for the report, though. I
want to make sure we have the information. I am trying to make
sure that our semantics aren't getting--
Mr. Michael Barr. I am just trying to be careful. We follow
our rules.
Mr. Huizenga. Okay. I will accept the answer that you are
going to give us the exact same information in a timely fashion
that you are using for your report, fair?
Mr. Michael Barr. Yes.
Mr. Huizenga. Okay. Mr. Gruenberg, I want to touch on the
FDIC's commitment to look at what was going on there. The same
question to you, will you commit to providing the committee
with all related confidential supervisory information that is
needed for us to assess what is going on?
Mr. Gruenberg. Yes, Congressman. One, I think you have the
authority to compel that information. We will be responsive to
you.
Mr. Huizenga. Okay. ``Timely manner,'' is the key phrase
here. Between myself and Chairman McHenry, we have a number of
requests to all of you.
Ms. Liang, I want to touch on this to obtain the
information. FSOC was convened on March 10th, March 12th, and
March 24th. Has FSOC met since March 24th?
Ms. Liang. They have not met since March 24th.
Mr. Huizenga. They have not. Okay. It was reported that
Secretary Yellen convened these officials via video conference.
Is that correct?
Ms. Liang. Yes, I believe there were two--
Mr. Huizenga. And you were part of that?
Ms. Liang. --FSOC meetings.
Mr. Huizenga. Okay. And you were part of that?
Ms. Liang. I was part of the second one. I was not part of
the first one.
Mr. Huizenga. You were not part of the 10th? Okay.
Ms. Liang. I was not. That was the evening, I believe, we
announced. I was not part of the March 12th meeting.
Mr. Huizenga. Okay. Were minutes taken at those meetings?
Ms. Liang. By normal process, minutes would have been
taken.
Mr. Huizenga. And will we have access to those minutes?
Ms. Liang. Yes, they are released, according to--
Mr. Huizenga. Before they are released, because we only
have minutes from December 22nd. There is nothing that has been
released publicly since December 22nd.
Ms. Liang. That is correct. I believe the process is that
minutes are released following the next formally-scheduled FSOC
meeting.
Mr. Huizenga. Only if formally scheduled.
Ms. Liang. We can come back to you on that, on when they
will be released.
Mr. Huizenga. So, we have to wait until the next formally-
scheduled time to get those minutes?
Ms. Liang. I understand--
Chairman McHenry. The gentleman's time has expired.
Ms. Liang. --that is the process, but we can--
Mr. Huizenga. We will be following up in writing. Thank
you.
Ms. Liang. Yes.
Chairman McHenry. We will expect a written response for
that, Under Secretary Liang.
The Chair now recognizes Mr. Lynch of Massachusetts for 5
minutes.
Mr. Lynch. Thank you, Mr. Chairman, and thank you, Ranking
Member Waters, for holding this hearing.
I want to follow up on Ranking Member Waters' line of
questioning. Prior to its collapse, Silicon Valley Bank was a
major lender and investor in low- and moderate-income housing
in Massachusetts, in my district, in large part because it
acquired the Boston Private Bank & Trust Company back in 2021.
And that includes not only deposits, but construction
financing, permanent financing, mortgage lending for low- and
moderate-income home buyers, equity investments, and direct
purchase of tax-exempt bonds for affordable housing
development.
Right now, I have 18 affordable housing developments in my
district, and on the outskirts of my district, currently under
construction in Massachusetts, and they depend on the
fulfillment of outstanding debt and equity commitments that
were made by Silicon Valley Bank. And this is the back of the
envelope, I am sure there are more, but I have 754 homes,
including 702 affordable homes for residents with low incomes,
and 118 homes for residents with extremely low incomes, as well
as workforce housing.
Here's the thing: While the vast majority of high-net-worth
investors and depositors at Silicon Valley Bank have been held
harmless, they have been rescued. The First Citizens assumption
agreement is completely silent on the status of these low-
income victims, and that is a problem that flies in the face of
your mission and mine.
I appreciate all three of you. You worked quickly once you
saw the problem, and I find great fault with the reckless
management on the part of Silicon Valley Bank in that they
concentrated so much risk and there was an absence of
meaningful risk management. But we have a problem, and while
the bank crisis might be over, it is not over in my district
with all of these families, all of these low-income families
who are struggling. I have Cities like Brockton, Massachusetts,
we have a great mayor there, who is doing a wonderful job, and
they are really going in the right direction, as well as Boston
and Quincy and others, but we need help. We need to resolve
this.
Mr. Gruenberg, I need a commitment from you, sir, that you
will come to Brockton, in my district, and we need to work this
through so that we provide the kind of protection for low-
income families, a lot of them families of color, many of whom
are first-generation immigrants, and they need help. And I
think you and I need to be there, and I will get my mayors
together and these 18 affordable housing development managers,
and we will try to get this done. But can I get your
commitment? Any thoughts on that?
Mr. Gruenberg. Yes, Congressman, I would be glad to do
that, and follow up with you. As First Citizens takes over, it
is in a position to continue to serve the customers of the
former institution, and work with you in regard to the
community issues you just described.
Mr. Lynch. That is great. I am very happy to hear that.
There is something new and different though in this collapse.
There was a concentration of risk on the part of Silicon Valley
Bank. They catered to early-stage startups, which have a high
rate of failure in the first place. They are very skittish, so
those aren't core deposits that are going to stay through any
period of unsettled economy. And then, on top of that, you have
panic that is driven by social media. In many cases, you had
venture capitalist firms telling their clients at that bank to
get the heck out.
And the speed at which this happened was a matter of hours.
Again, I commend you on the speed at which you acted, but is
there something more that we need to be doing now because of
the velocity of money, people can move their money out like
that, and are we equipped? The FDIC has a long and strong
history, but is something new and different needed to protect
us from that phenomenon?
Mr. Gruenberg. Congressman, I think that is an important
question to ask. I think we are dealing with a different
environment and the point you raise in terms of how quickly
money can move out, what the technology enables now that
exceeds what has occurred in the past, is a new risk factor
that we have to think about.
Chairman McHenry. I would ask the panel to respond to the
gentleman in written form about that very, very important
subject.
The Chair now recognizes Mrs. Wagner of Missouri for 5
minutes.
Mrs. Wagner. Thank you, Mr. Chairman. Vice Chair Barr, we
are going to go very quickly here, so I would like some
succinct, brief answers, if you could.
Vice Chair Barr, referring specifically to Federal Reserve
supervisors, do you know how many citations, specifically the
matters requiring attention, (MRAs) and matters requiring
immediate attention (MRIAs) that were issued to Silicon Valley
Bank regarding its management of liquidity risk Do you know how
many?
Mr. Michael Barr. In November 2021, there were six MRAs and
MRIAs on liquidity. In the fall of 2022, there was an
additional MRA on interest rate risk modeling. I think I
inadvertently misidentified it yesterday as an MRIA, but it is
an MRA.
Mrs. Wagner. That is fine. I don't need to go through all
of them. We have six, maybe seven of these citations that were
given. Yesterday, you were asked about an MRA that was issued
in the fall of 2022. You stated that the MRA was issued,
``based on the inaccuracies of their interest rate risk
modeling. Essentially, the risk model was not aligned with
reality.'' Is that your quote?
Mr. Michael Barr. Yes.
Mrs. Wagner. Did the supervisors provide the bank a
timeline to remediate this misalignment, since changing an
interest rate risk assessment model seems to be something that
could be done very quickly?
Mr. Michael Barr. Yes, my understanding is that there were
time limits associated with each of these MRAs and MRIAs, but I
don't have the information to be precise at the time.
Mrs. Wagner. Really? Okay. Well, clearly, those alerts were
ignored at the bank. Why didn't the Fed consider escalating any
of these issues into a cease-and-desist order or other formal
enforcement action against the bank to require senior
management and the board of directors to remediate these
serious deficiencies?
Mr. Michael Barr. I think you raise a fair point, and we
will be looking into that.
Mrs. Wagner. I certainly hope so. Vice Chair Barr, in your
testimony you stated, ``The failure of SVB illustrates the need
to move forward with our work to improve the resilience of the
banking system. For example, it is critical that we propose and
implement the Basel III Endgame reforms, which will better
reflect trading and operational risks in our measure of a
bank's capital requirements needs.'' Sir, I strongly disagree.
These reforms will result in additional costs to consumers, to
businesses, and to investors. I am going to go quickly here.
Was trading risk the reason SVB had almost 94 percent of its
deposits uninsured?
Mr. Michael Barr. No.
Mrs. Wagner. Was trading risk the reason SVB did not have a
risk officer for nearly 9 months last year?
Mr. Michael Barr. I do not believe that was the focus of
why there was not a credit risk officer.
Mrs. Wagner. So no, trading risk was not the reason. Was
trading risk the reason SVB had 51 percent of its deposits in
the tech industry? Yes or no?
Mr. Michael Barr. Not to my knowledge.
Mrs. Wagner. I fail to see how SVB illustrates the need to
implement Basel III Endgame reforms, particularly as it relates
to trading risks. Can you show how trading risks directly
resulted in SVB failure, or, sir, are you just looking for any
reason, correlated or not, to justify increasing capital
requirements for banks?
Mr. Michael Barr. I think it is really quite important that
we strengthen capital and liquidity requirements in the system.
It is something I have been working on since arriving at the
board in July. And I think that the work that we are going to
do, that we will propose to notice-and-comment rulemaking, will
make the financial system safer and sounder and reduce risks
that firms, such as SVB, in the--
Mrs. Wagner. You stated yesterday that our banks are well-
capitalized, did you not?
Mr. Michael Barr. Yes. I have been consistent in saying
both that the system is strong and that we also need to think
about stronger capital rules. And I think that is appropriate
given the risks--
Mrs. Wagner. We are going to have a hearty give and take on
this. I want to say this in closing: Despite U.S. regulators
having clear knowledge of insufficient risk management, it
seems that the examiners and your supervisors were asleep at
the wheel while signs that Silicon Valley Bank was heading
towards a collapse were staring them right in the face for
many, many months.
Vice Chair Barr, I look forward to the release of your
review of the supervision and regulations of Silicon Valley
Bank so that we can dig in some more on May 1st, and I hope
that it provides more clarity to the events leading up to these
bank failures. I thank you, and I yield back the balance of my
time, Mr. Chairman.
Chairman McHenry. The Chair now recognizes Mr. Green of
Texas for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. And I thank the ranking
member, and I thank the witnesses for appearing. Witnesses, you
have all made the case for mismanagement at Silicon Valley
Bank. If you disagree with that statement, please extend a hand
into the air.
[Hands raised.]
Mr. Green. Let the record reflect that all witnesses agree
that mismanagement was occurring. I have before me a news
article from what is perceived by many to be a reliable source,
CNBC. The style of the article is--that would be the title--
``Silicon Valley Bank Employees Received Bonuses Hours Before
Government Takeover.'' Hours before government takeover,
bonuses. It is also alleged by other sources that these bonuses
could exceed $100,000.
Mr. Gruenberg, is it true that hours before the takeover of
the bank, before it was seized, that bonuses were accorded to
employees?
Mr. Gruenberg. Congressman, since we weren't the
supervisor, I would not have that direct information. I am sure
we can get it for you or the Federal Reserve could provide it.
Mr. Green. I welcome the intelligence from the Federal
Reserve.
Mr. Gruenberg. But if I could just make an additional
point, the FDIC is under a legal obligation, after the failure
of Silicon Valley, to conduct an investigation of the conduct
of the board and the management of the institution. And if
misconduct occurred, we do have the authority to impose civil
penalties, including civil monetary penalties and restitution,
and to bar individuals from the business of banking.
Mr. Green. Thank you.
Mr. Gruenberg. So, we do have some significant authorities
and responsibilities.
Mr. Green. Vice Chair Barr?
Mr. Michael Barr. Thank you very much, Representative
Green. The Board also has the authority--
Mr. Green. Without the authority, right now, just tell me,
were there bonuses given out hours before the bank was seized?
Mr. Michael Barr. I have seen reporting of that, but I am
still trying to chase down the facts. Our Enforcement team has
the ability to go after actions against individuals.
Mr. Green. So you are saying you do not know, but you have
heard that this is the case?
Mr. Michael Barr. Yes. I do not have the supervisory record
of that to know, but I have seen reporting of that, and we are
looking into it.
Mr. Green. Okay. For the moment, let us just assume that
bank X hands out bonuses. Management has failed to do its job.
Do you have the inherent or accorded or statutory power to claw
back those bonuses?
Mr. Michael Barr. We have the ability to pursue actions for
the individuals who violated the law.
Mr. Green. May I kindly ask about clawback of bonuses? Can
you claw back those bonuses?
Mr. Michael Barr. Under our authority, if there are
violations of the law or unsafe or unsound practices or any
breach of fiduciary duty, we can get restitution, we can get
civil money penalties, and we can have--
Mr. Green. So, should I assume that your answer is no, you
do not have the authority to claw back those bonuses?
Mr. Michael Barr. We do not have generalized clawback
authority.
Mr. Green. You do not. Okay. I see a hand raised. Mr.
Gruenberg, please?
Mr. Gruenberg. Just to try to respond directly to the
question, the FDIC does not have explicit clawback authority
under the Federal Deposit Insurance Act. We have that authority
under the Dodd-Frank Act in regard to failures under Title II,
but we do not have that under the Federal Deposit Insurance
Act. So, we are considering additional authorities that
Congress might provide. That might be something worth
considering.
Mr. Green. Thank you, Mr. Gruenberg, because that is
exactly where I am going. We live in a world where it is not
enough for things to be right. They must also look right, and
it just does not look right that hours before the bank is
seized, bonuses are accorded to employees. And some of these
bonuses totaled more than $100,000.
Chairman McHenry. The gentleman's time has expired.
Mr. Green. Thank you.
Chairman McHenry. We will now recognize the gentleman from
Kentucky, Mr. Andy Barr, who is also the Chair of our
Subcommittee on Financial Institutions and Monetary Policy.
Mr. Barr of Kentucky. Thank you, Chairman McHenry, and
Ranking Member Waters, for holding this important hearing. Vice
Chairman Barr, true or false, Silicon Valley Bank experienced
rapid asset growth in a short period of time?
Mr. Michael Barr. Yes, that is correct.
Mr. Barr of Kentucky. Silicon Valley's rapid growth was
fueled by an extremely high concentration of deposits from a
single sector?
Mr. Michael Barr. Yes, that is correct.
Mr. Barr of Kentucky. Silicon Valley Bank became overly
dependent on an extremely high percentage of uninsured
deposits?
Mr. Michael Barr. Yes, that is correct.
Mr. Barr of Kentucky. Silicon Valley Bank failed to hedge
the risk of holding long-duration securities in a rising
interest rate environment?
Mr. Michael Barr. My understanding is at one point they had
hedges and those were not in place at the time they failed.
Mr. Barr of Kentucky. And that was apparent to the Fed?
Mr. Michael Barr. Yes, it was apparent to the Federal
Reserve.
Mr. Barr of Kentucky. Silicon Valley Bank had no chief risk
officer for 8 months before its collapse?
Mr. Michael Barr. Yes, that is correct.
Mr. Barr of Kentucky. Was the San Francisco Fed unaware of
any of these basic facts in the months leading up to its
failure on March 9th?
Mr. Michael Barr. Not to my knowledge.
Mr. Barr of Kentucky. So, nothing in the existing
regulatory framework concealed these basic facts from the San
Francisco Fed, which had the responsibility of supervising this
bank?
Mr. Michael Barr. The regulatory structure does not conceal
facts. It may have an effect on how supervisors act with
respect to those facts.
Mr. Barr of Kentucky. True or false, Silicon Valley Bank
was subject to enhanced prudential standards under Dodd-Frank,
as amended by the 2018 Bipartisan Regulatory Relief Law.
Mr. Michael Barr. The Federal Reserve supervisory structure
did not apply most enhanced prudential standards to the firm.
It did have some enhanced prudential standards. Once it became
subject to those standards after it passed the rolling average
at the $100-billion level.
Mr. Barr of Kentucky. But before it passed that $200-
billion threshold, when it passed the $100-billion threshold,
it was under 2155, the Bipartisan Regulatory Relief Law, under
Section 401 (a)(1)(c) of that law. The Fed could have applied
enhanced prudential standards to Silicon Valley Bank, isn't
that correct?
Mr. Michael Barr. Under the 2019 rules that the Federal
Reserve put in place, most enhanced prudential standards did
not apply to the firm.
Mr. Barr of Kentucky. Wait a minute. I don't know about
that, because under Section 401(a)(1)(C) of that law, the Fed,
by order or rule, could apply enhanced prudential standards to
banks, not above $200 billion, but above $100 billion in assets
on a one-off basis?
Mr. Michael Barr. Yes, the legislation provided the Federal
Reserve with ample discretion. The way that discretion was
implemented in 2019 was with a rule and that rule provided--
Mr. Barr of Kentucky. Reclaiming my time Vice Chair Barr,
by order, the Fed could have applied enhanced prudential
standards before the bank reached the size it did by February
of 2023. My point is, it does not seem appropriate to change
the tailoring rules for all banks to account for a lapse in
supervision by the Fed and the inability of the Fed to deploy
enhanced prudential standards to firms when it is currently
able to do so under existing law.
And, Vice Chair Barr, as you and I have discussed and as we
agree, we need to preserve the diversity of the financial
ecosystem here. The Fed had all of the existing tools it needed
to supervise this bank and apply those enhanced prudential
standards. I think pushing a one-size-fits-all or reimposing a
one-size-fits-all regulatory regime on community and regional
banks, especially regional banks under distress right now,
would result in fewer of those institutions, more
consolidation, and less competition for too-big-to-fail banks.
Chair Gruenberg, the vast majority of community banks in my
district are well-managed, and they actually understand how to
manage interest rate risk in a rising interest rate
environment. And since the failure of Silicon Valley Bank,
those Kentucky banks and their customers have been asking me
why they should have to pay an assessment for your rescue of
Silicon Valley Bank with 100 percent guarantee of deposits of
largely wealthy, sophisticated depositors at Silicon Valley
Bank, some of whom apparently cared more about the bank's
commitment to environmental sustainability than their
capability to be good stewards of their deposits. I think this
is a legitimate question.
And I also think it is a good question whether invoking the
systemic risk exception to the least cost resolution mandate
under the Act was, in fact, the least cost solution. After all,
your decision to cover all of the uninsured deposits cost the
Deposit Insurance Fund an estimated $20 billion. Will you
commit to using your authority under 12 U.S.C. 1817 to
establish separate risk-based assessment systems for large and
small members of the Deposit Insurance Fund so that these well-
managed banks do not have to bail out Silicon Valley Bank?
Mr. Gruenberg. I'm certainly willing to consider that,
Congressman. And as I indicated, we are going to be preparing a
comprehensive review of the deposit insurance system, so we
will come back to you and I will happy to engage with you.
Chairman McHenry. The gentleman's time has expired.
Mr. Barr of Kentucky. Thank you. I yield back.
Chairman McHenry. The Chair now recognizes Mr. Himes of
Connecticut for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman. It is interesting to me
to listen to my friends on the other side of the aisle who
ordinarily spend all of their time trying to defund, destroy,
and denigrate your organizations, now hold you entirely
responsible for where we find ourselves today, despite
activities within the bank that I think we all agree, and, Mr.
Barr, you have said were on the verge of outrageous.
So, I would like to begin by thanking all of you and your
organizations for the intense and sleepless actions you took
beginning on March 9th. I do not know if you acted perfectly,
and you do not know if you acted perfectly, but we all know
that today, the financial system appears to be stabilized. And
we certainly know that Congress is not lighting itself on fire
crafting a massive publicly-funded bailout as it was in the
fall of 2008.
I hope that we have dispensed with the absurdity that it
was Silicon Valley's woke activities that drove this failure.
And while I do not necessarily agree, Mr. Barr, with your
predecessor's statement blaming the Bipartisan 2018 Reform Law;
it is so nonsensical, it is not even wrong. The truth is that
Silicon Valley Bank was crawling with supervisors and
regulators who had been raising the alarm for a long time.
And that is what is interesting to me about this whole
episode. It was not a surprise. It was not a surprise to the
regulators and supervisors who had been raising those alarms
for years. It should not have been a surprise to the management
team who had been the target of those alarms.
By the way, just as a side note, it was a surprise to the
Wall Street research analysts who were paid very good money to
evaluate Silicon Valley Bank: 24 Wall Street analysts cover
Silicon Valley Bank, 11 had buy ratings on it, 11 had hold
ratings on it, and only one analyst rated it a sell. More
seriously, the credit rating agency, S&P Global, rated Silicon
Valley investment grade right up until March 10th when it
announced that it expected a bankruptcy. There is an
uncomfortable echo of 2008.
By the way, Mr. Chairman, I would like to insert for the
record, with unanimous consent, a remarkable article by
Professor Rajgopal of the Columbia Business School, which
elaborates many of these points that I am making.
Chairman McHenry. Without objection, it is so ordered.
Mr. Himes. The facts have been put out there pretty
comprehensively. In 2021, 2 years ago, the Fed review resulted
in the finding of serious weaknesses, the issuance of six
matters requiring attention, and one matter requiring immediate
attention. In July of 2022, the full supervision review rated
the bank, deficient. That was 7 to 8 months before March's
meltdown. In early 2023, there was a horizontal review. Again,
the word, ``deficient,'' and by the way, that is complicated
for most people to understand.
Here is something that is not complicated for people to
understand. As far as I can tell, Silicon Valley Bank had
precisely one individual who was a banker on their board, Mr.
Thomas King. The risk committee of this bank, which tripled in
size in 2 years, had not one banker. There was no one on the
risk committee with any significant banking experience.
So Mr. Barr, I am going to put you in an uncomfortable
position and say, clearly what we have here is a gap of time
and a failure of action between the deficiency rating in July
of 2022 and the meltdown in March. That is a long period of
time. I am going to ask you for ideas, not necessarily good
ideas. I understand that you are going to be uncomfortable
about making recommendations. But clearly, we need to tighten
up the process by which good things happen after a finding of
deficiency. So, should that be left in your regulator's
discretion, or should we act in such a way as to make actions
mandatory subsequent to a deficiency rating?
Mr. Michael Barr. It is a great question you raise and one
that, I think, is appropriate for reviewing both by you and by
us. I think that we need to put in place risk mitigants and
incentives that are much stronger, and faster in the
supervisory process. That is one of the things that we will be
looking at in the review. But I do think that in instances like
this where it is such a fundamental issue, we need to have risk
mitigants in place that are ordered by the supervisors quickly.
Mr. Himes. I am just going to make this observation as I
run out of time. As we all saw, one of the problems here and
one of the new things here were the chat rooms and the speed by
which deposits could be withdrawn, and billions of dollars went
out the door because of these devices. So, I am not convinced
that giving humans who operate in human time additional
authority is going to do the trick here. I think we need to
think about automatic mechanisms, and that may require
statutory change, automatic mechanisms that when a finding of
deficiency or other adverse observations have been made, kick
in automatically, perhaps after some cure period. But this was
a meltdown that happened at the speed of light, and humans with
discretion are not going to solve it in the future.
Chairman McHenry. The gentleman's time has expired. The
gentleman from Texas, Mr. Williams, is now recognized for 5
minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. I am going
to repeat a little bit of what you have heard today, but when I
talk to community banks in my district--and full disclosure, I
am a car dealer, and I talk to them a lot and owe them a lot of
money--one of their top worries right now is being left to foot
the bill for the failures of Silicon Valley Bank and Signature
Bank. Community banks, which most of us live by, should not be
liable to pay for the rescue of larger banks that gambled and
made a risky bet. Community banks are relied upon by Main
Street America to be a lifeline and provide crucial banking
services to small businesses. These smaller banks, which we all
need to have, are some of the most-trusted institutions in the
financial industry.
Mr. Gruenberg, you talked about it before, but could you
elaborate on if smaller community banks in Texas, where I am
from, will be left responsible for bailing out the failed banks
in California and New York?
Mr. Gruenberg. Thank you, Congressman. I am keenly
sensitive to the concern. Let me just say that under the law,
the FDIC is required to impose a special assessment on the
banking industry to recover any cost to the Deposit Insurance
Fund from covering these uninsured deposits. And we have to do
that by a notice-and-comment public rulemaking, which we are
going to do in May. And just to be clear, the law gives the
FDIC the authority to consider the types of entities that
benefit from any action taken or assistance provided so that
the FDIC does have discretion. And let me just say without
forecasting how our Board is going to vote, we are going to be
keenly sensitive to the impact on community banks.
Mr. Williams of Texas. Take a look at it, because we all
know that what they will do is pass the cost on to someone like
me. The Federal Reserve was supposed to be the primary
supervisor over Silicon Valley Bank, but from all we have seen
and heard today, they failed to do their job, and it has been
reported that Silicon Valley Bank's risk practices were on the
Federal Reserve's radar. We have talked about that for over a
year. In 2022 alone, Fed supervisors issued three findings on
SVB's ineffective board oversight, weakness in their risk
management, and flaws with the bank's internal audit function.
So, it should raise major concerns that the Federal Reserve,
which is tasked with regulating and overseeing banks, knew
about Silicon Valley's risky practices for more than a year and
failed to take any corrective action.
Mr. Barr, what actions, if any, did the Federal Reserve
take, and you talked a little bit about this after issuing
those risk findings, and how did the Federal Reserve become so
complacent? It is on a supervisory role and missed these
warning signs, and I think that is what people across America
really want to know.
Mr. Michael Barr. Thank you very much for the question. My
understanding is that the supervisors identified the issues.
They brought them to management's attention, but the response
clearly was not an effective response. Bank managers failed to
manage the firm in an appropriate way. They did not manage
their interest rate risk and their liquidity risk well, even
though it was pointed out by the regulators. And I do think it
calls for a heightened need for more-aggressive supervisory
action to take care of these problems.
Mr. Williams of Texas. But you all missed it, too.
Mr. Michael Barr. I'm sorry?
Mr. Williams of Texas. You missed it, too.
Mr. Michael Barr. The supervisory staff were aware of the
underlying issues. I think all of us were caught incredibly
off-guard by the massive bank run that occurred when it did on
March 9th and 10th, the scale and speed of that $42 billion
going out the door Thursday afternoon, and it was expected by
the bank that $100 billion more would go out the next day. That
is just an extraordinary scale and speed of a run unlike
anything I had ever seen before.
Mr. Williams of Texas. Okay. Out of all of the banking
supervisors, I would expect the Federal Reserve, and most of us
would, to be the most aware of the impacts that increased rate
hikes would have on the value of security for banks. However,
the Fed has stress tests, which we talked about, which are
conducted to determine how large domestic banks would perform
under hypothetical and stable economic scenarios, currently do
not test for the problems that caused Silicon Valley Bank to
fail. SVB failed because of inflation, rapid increase in
interest rates, and loss of value of government bonds. So even
if SVB had been subject to testing, it would not have led to
the changes that could have prevented their failure, because
the Federal Reserve is asking the wrong questions and not
running the scenarios that ultimately led to SVB's downfall.
Quickly, Mr. Barr, how can the American people trust the
Federal Reserve if you are not testing for all scenarios? How
was the Federal Reserve so far off? That is a question that
everyone asks.
Mr. Michael Barr. I think that the Federal Reserve should
use multiple scenarios. That is one of the reasons why I
proposed that this year's test include a rising interest rate
environment for the trading book. I think multiple scenarios
makes a ton of sense and should be done.
Mr. Williams of Texas. You know that saying, they can get
it right 100 times. You have to get it right once, so you get
one crack at it. Thank you very much.
Chairman McHenry. The gentleman's time has expired. I will
now recognize the gentleman from Illinois, Mr. Foster, who is
also the ranking member of our Subcommittee on Digital Assets,
Financial Technology and Inclusion, for 5 minutes.
Mr. Foster. Thank you. As you know, 12 years ago, during
Dodd-Frank, a number of us put a lot of effort into
specifically authorizing U.S. bank regulators to put contingent
capital requirements into the capital stack of large banks.
These were conservatively thought of as sort of privately-
funded insurance policies that large banks are forced to carry,
that pay out if a bank gets into trouble and automatically
injects capital into a struggling, but not-yet-failed bank. For
the last 12 years, U.S. bank regulators have completely ignored
this authorization from Congress, which I have complained about
in numerous hearings. But in the last 12 years, European bank
regulators and others have used contingent capital
successfully.
I believe that we have a lot to learn about two side-by-
side bank failures: Silicon Valley Bank, a large bank by some
measure, but with total assets less than 1 percent of U.S. GDP;
and Credit Suisse, with total assets greater than 100 percent
of Swiss GDP, too-big-to-fail by any metric. A couple of
weekends back, the U.S. banking regulators tried to find
someone to buy SVB, but they failed. The result was potential
systemic risk and emergency intervention by regulators, which
risked abandonment of a lot of market discipline and market
chaos, and the Deposit Insurance Fund and eventually banks and
their customers must take the hit. But when Swiss regulators
tried to find a partner to buy out Credit Suisse, they
succeeded.
And at this point, it seems likely that the Swiss taxpayer
will be off the hook for this giant bank's failure. The
difference was contingent capital, because when Credit Suisse
got into serious trouble, their contingent capital triggered
and injected $17 billion of equity into Credit Suisse. This was
absolutely essential to finding a buyer for Credit Suisse
since, as you know, Credit Suisse was bought for about $3
billion, but only after the $17 billion of capital injection by
their contingent capital instruments.
So, the Swiss contingent capital succeeded at its two
design objectives: first, to prevent contagion; and second, to
keep the Swiss taxpayer off the hook for the failure of a truly
giant bank. Now, if Silicon Valley Bank had been forced to
carry an appropriate amount of contingent capital, then capital
would have been automatically injected, probably by Friday at
the latest. And it is very likely that a buyer could have been
found over the weekend as well, and we would not be having this
hearing today.
In fact, it is possible that they would not have gotten in
trouble in the first place since Silicon Valley Bank would have
had to answer not only to the regulators, but to the bond
markets for their risky practices. When they went through their
gigantic growth spurt, they would have had to issue a lot of
contingent capital instruments. And I am pretty confident that
one of the wizards in the bond market would have said, ``This
is interesting. This bank has very flighty deposits and
essentially no risk management in place. Maybe we should charge
a pretty big risk premium,'' and the markets might have
detected that.
My question is, Vice Chair Barr, as part of your holistic
review of bank capital requirements, will you commit to finally
seriously considering contingent capital requirements in the
capital stacks of large banks?
Mr. Michael Barr. Thank you very much for your question,
and I very much appreciate it. Both the Fed and the FDIC have
had conversations over the years on this very question of
contingent capital instruments, and we have issued an Advance
Notice of Proposed Rulemaking (ANPRM) of a different type of
contingent instrument, an ongoing concern capital instrument
that would be required for large banks. But I think it does
make sense to consider alternative options, and I would be
happy to continue the conversations with you about that.
Mr. Foster. Okay. And I would specifically appreciate it if
your analysis included a counter-factual analysis of how much
better off we would have been if regulators had listened to
Congress and included contingent capital requirements into the
capital stacks of these banks, because I think there is a lot
to be learned from just the counterfactual analysis.
I would like to just close out by finishing up a little bit
with questions about the nonresponsiveness of SVB management to
the early warnings they got. Is there leverage that we can
provide you? An obvious one is to say all of these matters
requiring immediate attention and so on are private. For
example, if they had to become public after 60 days if they
were not resolved, would that have lit a fire under the
management? Are there other things? For example, you could say
any management that had an ongoing appending MRIA, matters
requiring immediate attention, we simply put all the bonuses in
escrow. That would almost certainly get their attention.
Chairman McHenry. The gentleman's time has expired.
Mr. Foster. So if you could include these sort of ideas, I
would appreciate it.
Chairman McHenry. The gentleman's time has expired. Please
submit your responses for the record, Mr. Barr.
The Chair now recognizes Mr. Emmer of Minnesota for 5
minutes.
Mr. Emmer. Thank you, Chairman McHenry. Thanks for holding
this important hearing today. The collapse of three regional
banks over the course of 2 weeks is directly related to failed
Democrat policies. Record inflation as a result of reckless
government spending led to historic interest rates the banks
were not ready to manage. It appears financial regulators were
not appropriately communicating financial risks of the high-
rate economy with banks in their supervisory capacity. And this
Administration's political attack, quite frankly, from the
highest levels of our government on the digital asset industry,
which, by the way, had nothing to do with causing the runs,
sparked fear, leading to bank runs--it is Silvergate, Silicon
Valley Bank, and apparently Signature--bringing these core
issues plaguing our economy and the broader banking sector to
the surface.
Let us not be fooled. Providing financial services to legal
businesses in the U.S. should not be risky, but this past month
has proven that the mismanagement of our monetary policy has
apparently made it risky to put dollars in a bank.
Mr. Gruenberg, will the FDIC sell off Signature's deposits
from digital asset businesses? Yes or no?
Mr. Gruenberg. We are returning those deposits to the
depositors, Congressman.
Mr. Emmer. Okay. Does the FDIC plan to sell the
intellectual property for Signet?
Mr. Gruenberg. I believe that has already been sold out of
the bridge institution, Congressman.
Mr. Emmer. Okay. We would like to see that information.
Will you commit that a bank that buys Signet will be able to
use it to facilitate 24/7 access to the banking system for
digital asset companies?
Mr. Gruenberg. I am happy to look into that. I don't know
who the buyer was, but I would be glad to look into it and
follow up with you.
Mr. Emmer. You are not going to block the buyer from doing
24/7 banking for digital asset companies. Is that correct?
Mr. Gruenberg. If that is the nature of the acquisition,
yes.
Mr. Emmer. And will you commit that the bank that buys
Signet, or the bank that did, will be able to onboard new
digital asset customers?
Mr. Gruenberg. Again, I would like to look into the
transaction, but I would be glad to follow up with you in
regard to it.
Mr. Emmer. When the FDIC sold off Silicon Valley Bank's
deposits to First Citizens, did that include deposits from any
digital asset firms or VCs in the digital asset space?
Mr. Gruenberg. I believe all of the deposits from the
failed Silicon Valley Bank were transferred to First Citizens
in that.
Mr. Emmer. Including the digital?
Mr. Gruenberg. All of them. Yes.
Mr. Emmer. Were all of SVB's deposits from digital asset
businesses, again, transferred to Citizens? Is that what you
are saying?
Mr. Gruenberg. Yes. My understanding was Citizens assumed
all the deposits of the--
Mr. Emmer. Has the FDIC ever communicated implicitly or
explicitly, sir, to any banks that their supervision will be
more onerous in any way if they take on new or maintain
existing digital asset clients?
Mr. Gruenberg. No.
Mr. Emmer. Thank you. The FDIC estimates that resolving
Signature Bank is going to lead to a $2.5-billion loss to the
Deposit Insurance Fund, and resolving Silicon Valley Bank will
lead to a $20-billion loss to the Deposit Insurance Fund. When
the FDIC sold Signature, it had the effect of closing Signet,
which is an innovative payment system that facilitated 24/7
access to banking services, frankly, a private-sector
innovation that apparently will be rivaled by the Fed now.
Signet is intellectual property that has significant value, so
I do want to see that sale.
Chairman Gruenberg, when managing the resolution of any
failed bank, the FDIC is statutorily required to do so using
the least-costly resolution option, thereby minimizing losses
to the Deposit Insurance Fund, which is replenished by the
banks through fees that are indirectly passed on to everyday
Americans with bank accounts. I am concerned that the FDIC has
deviated from its statutory requirement to minimize costs here
and, instead, has opted to pursue a lazy and destructive
regulatory campaign to, in fact, oust digital asset
opportunities from the United States. No bank is designed to
survive manufactured bank runs. And in analyzing what caused
this fiasco in the first place, many signs point right back to
you and the FDIC, this Administration, and certain reckless
Democrat Senators.
I want to thank you again for coming today, and I would
appreciate a response to my March 15th letter, because to me,
it is still clear that we have a lot of questions that need
answers. And with that, Mr. Chairman, I yield back.
Chairman McHenry. The gentleman yields back. The ranking
member of our National Security, Illicit Finance, and
International Financial Institutions Subcommittee, Mrs. Beatty,
is now recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and thank you,
Ranking Member Waters. Mr. Gruenberg, we know that both SVB and
Signature had very high proportions of uninsured deposits,
somewhere between 90 and 95 percent. Can you share with us or
explain to us what the typical ratio is for your average bank
and how this factor played into the bank run that we witnessed
on March 9th?
Mr. Gruenberg. Thank you, Congresswoman. It is an important
question. I think it's fair to say these two institutions were
outliers in terms of their exceptional concentration of
uninsured deposits, both around 90 percent. In the regional
bank space, between $100 billion, and $500 or $600 billion--I
think it is generally in the 40-percent category. So, these two
institutions were outliers, and it was a significant part of
the liquidity risk on their balance sheet.
Mrs. Beatty. And would you say that this half a portion of
uninsured deposits left the bank more susceptible to this run?
Mr. Gruenberg. Yes.
Mrs. Beatty. Let me also have a follow-up question to you.
We have heard many ideas proposed about modifying the $250,000.
And we know in, I think it was 2008 with the Emergency Economic
Stabilization Act, we went from $100,000 to $250,000. For
example, what about temporarily insuring all deposits,
increasing the limit to $500,000 or a million, insuring all
deposits for small and mid-sized firms or limiting it for the
largest financial institutions? What are your thoughts on some
of these proposals?
Mr. Gruenberg. As you understand, Congresswoman, the
coverage for deposit insurance is statutorily set at $250,000
per account, so to adjust it would require legislative change.
And as I indicated earlier, the FDIC is undertaking a
comprehensive review of our deposit insurance system, and we
will come back with a report that we will release publicly
outlining policy considerations for--
Mrs. Beatty. Is this one of them? And you can weigh in
also, Mr. Barr, or Ms. Liang. You are experts. You are
testifying here on your opinion. I understand that it is
statutory and requires it to come back here, and certainly, as
you know, we have changed many things over the years in rooms
like this. So to the public, I don't want you to think that
this may be far-fetched. We had large banks when we had too-
big-to-fail, and we are certainly more than $50 billion now as
we hit legislative ways to change it. What are your thoughts on
increasing that? That is one of the number-one things I am
getting from my constituents. In 2008, it was $100,000. We made
the change then through an Emergency Act. What now?
Ms. Liang. Congresswoman, the FDIC, as Chairman Gruenberg
mentioned, is doing a review of the deposit--
Mrs. Beatty. Would you support an increase?
Ms. Liang. I would support a study and proposals for reform
if needed. The rise in uninsured deposits--it has been
increasing over the years.
Mrs. Beatty. Okay. Mr. Barr? Only because my time is
running out, and the next question is going to be for you.
Mr. Michael Barr. We would be happy to work with you on
thinking through that. I think taking a step back, the
important thing is that our banking system is sound and
resilient.
Mrs. Beatty. Okay.
Mr. Michael Barr. The actions the regulators took
demonstrate that deposits are safe, and we would love to
continue the conversation with you.
Mrs. Beatty. Okay. I am glad you said, ``sound and
resilient.'' In your opening testimony, you said the same
thing, that you thought banking was sound. You also used words
like, ``strengthening the public confidence,'' or paraphrasing
it. I am from Ohio, and the public pension funds nationwide, as
you know, lost millions of dollars that were invested in SVB
and Signature. In my home State of Ohio, the State Teachers
Retirement System took the biggest hit, with some $27 million
that was invested in SVB, representing I know maybe only 3 or 4
percent of the fund's total portfolio. But I am concerned about
reports that the CEO of SVB unloaded millions of stocks in the
days and weeks leading to the collapse. I know that we are
expecting a report on the Fed's investigation of SVB in May.
But is there anything you can share today regarding the bank's
executive management?
Mr. Michael Barr. [Inaudible.]
Mrs. Beatty. Okay. Thank you, and thank you, Mr. Chairman.
Chairman McHenry. Thank you. We ask the panel to respond in
writing to Mrs. Beatty.
We will now recognize the gentleman from Oklahoma, Mr.
Lucas, for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman, for holding this
important hearing. And, Chairman Gruenberg, I would like to
discuss--and I know my colleague, Congressman Williams, who is
also the Chair of the House Small Business Committee, has
focused on this a little bit--the special assessment fee that
will be used to cover the losses from the uninsured deposits.
You have explained the proposed rulemaking for the special
assessment will occur in May of this year. And while you are
thinking about that, be thinking about a discussion of the
flexibility the FDIC has during the rulemaking to ensure that
our small community banks don't disproportionately carry the
burden.
Being one of the older members of this committee, I have
been around long enough to have observed firsthand several
banking crises. In 1982, I was getting ready for my final
semester at Oklahoma State when an institution in Oklahoma City
called Penn Square Bank went down, and took Continental
Illinois of Chicago down with it, a bank from, what, the 1840s
or 1850s. They took Seattle-First National Bank down with them
too.
Now, FDIC and the regulators responded in the appropriate
fashion and addressed that, but it was a combination of a
collapse in the oil and gas industry and in production
agriculture. And the chain reaction in my great State was the
slaughter of community banks, a slaughter. There was no quarter
given to those folks. They were locked up, chopped up, sold
out. The legislature met in the middle of the night to
authorize not just one town, one physical location, one charter
banking, but we went to branch banking because it was all
falling down on us.
The people whom I represent were brand-new, young banking
men and women 40 years ago, when they saw how community banks
were handled in my State. They weren't Penn Square, they
weren't Continental Illinois; they were Seafirst. They are now
my most-senior bankers 40 years later, and they are looking at
this situation and they are saying to me, we have been the
least problematic of any sector in the financial services
industry for decades to the regulators and the FDIC, but yet,
in every crisis since then, we have been kind of the orphans.
And this time, they are saying, we were wiped out as an
industry 40 years ago, but now we are going to get a special
assessment to pay for the mistakes of the most-sophisticated
institutions, the biggest institutions.
Can you tell me how it is possible, when this special
assessment fee process is completed, that my community bankers
aren't going to wind up disproportionately paying for the
mistakes and the folderol of the biggest institutions in the
country, or should they just be prepared to be the scapegoat
one more time?
Mr. Gruenberg. That's a critically-important question,
Congressman, and we are keenly sensitive to it. We have
discretion under the law. We have to act pursuant to a notice-
and-comment rulemaking. Anything we put out will be subject to
public comment. We have discretion, as I indicated earlier, and
will repeat, we will be keenly sensitive to the impact on
communities. I do not want to front-run my Board. We are going
to have to do a notice-and-comment rulemaking, but I hear you
and I'm keenly sensitive to the point you raised.
Mr. Lucas. I would just offer, once again, the observation,
the perspective of my community bankers is, if you are big
enough, we have now given you an emphatic protection. It
appears with what we have done in the last few months, if you
are in that intermediate range, we are going to protect you.
But if you are the little bankers, the little guys and ladies
out there meeting the day-to-day capital needs, you are going
to be the one to pick up the bill. And I kind of appreciate
their point, having lived through 40 years of these experiences
in my great State.
Shifting to another question, as has been discussed today,
Treasury approved the systemic risk designation on March 12th,
upon the recommendation of the Federal Reserve and the FDIC. I
want to discuss for a little bit the process leading up to
this. I think it is important that we have a clearer picture of
how the regulators made this designation, not just in theory,
but in practice.
Vice Chair Barr, could you provide insight into which
regulator acted first in proposing that uninsured deposits be
protected? These are the kinds of questions I am getting back
home. And while you are thinking about that, were there
discussions between the FDIC and the Fed prior to the
respective board meetings?
I see my time has expired. But I am happy to follow up with
you--
Chairman McHenry. You can go ahead and answer--
Mr. Lucas. I bet somebody is looking at the time--
Chairman McHenry. --right now, that is interesting, plus we
are close to getting a little break here.
Mr. Michael Barr. I am happy to do so.
Mr. Lucas. Please. Thank you.
Mr. Michael Barr. We were in conversations, all three
agencies, over the course of that weekend trying to think
through what the potential ramifications might be in the
financial system. It was a very difficult judgment to make and
involves, of course, information we are getting from around the
system hearing from community bank--
Chairman McHenry. We ask the gentleman to provide a
timeline of those conversations between the two agencies and
the two principals of the FDIC in writing for the record.
The gentleman's time has expired. We will now go to Mr.
Vargas of California for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman, and Ranking
Member Waters. I guess I am looking at this a little bit
differently, and that is, we could have been here today looking
at the collapse of hundreds of banks. We could have been here
today trying to figure out how to stop the contagion, but
instead, we are here looking at significant banks with
significant problems. I think that is important, but I think
what is more important is that everyone work together. We
certainly have our ideological differences, and they are
significant. I heard right away that it was President Biden's
fault, from several Members, and I could easily say, no, it was
President Trump's fault. But the truth of the matter is that we
are out of our ideological silos and trying to figure out
practical solutions.
I want to thank the Chair. I think the Chair worked very,
very hard on this. And I think that he probably was a little
uncomfortable with his ideologues on his side maybe, but I
think he did a fabulous job, and I want to thank him publicly.
I think the ranking member did the same. I think they worked
very, very closely together to try to figure out what we can do
as a legislature to make sure that there is not contagion. I
want to thank all of you who have acted very honorably, nobly,
as you should have, to try to figure out what is the solution
here, and, again, I appreciate that deeply. Again, we could be
here talking about a disaster, an unmitigated disaster. I was
worried about that. I worry about these things, and we are not.
Instead, we are looking at these important issues. So now that
we are, I got that off my chest.
I do want to ask you, Mr. Barr, you were quoted quite
extensively for saying that--and let me get it correct here; I
don't want to put words in your mouth--``SVB's failure is a
textbook case of mismanagement.'' Was that a correct quote?
Mr. Michael Barr. Yes.
Mr. Vargas. Then, the natural question is, to begin, why
wasn't that a textbook case of enforcement?
Mr. Michael Barr. I think that is a good question, one we
are exploring very much. The supervisors looking at the bank
identified the problems with the bank, and the question is, did
they identify them with enough level of urgency? Did they
escalate appropriately? And I think that is an incredibly fair
question that we are looking at carefully. I expect that we are
going to find that we need to have more of an emphasis on
supervisors using the tools they have more promptly and putting
mitigants in place more promptly when they see problems at
banks that they are supervising.
Mr. Vargas. Yes. In fact, they had a number of MRAs, and
MRIAs, I guess, and it didn't seem like you did anything other
than write a letter. It didn't seem like there was any
enforcement. Where was the stick?
Mr. Michael Barr. Yes, sir. I think that is exactly the
right question. Normally in the supervisory process, when a
supervisor issues an MRA or an MRIA, the bank promptly takes
care of those matters. In this case, obviously, it did not take
care of them in such a way that it prevented its sudden
failure--
Mr. Vargas. It seems like they blew you off. It seems like
they blew you guys off, and you didn't do anything. That is
what it seems like from reading all of this information, I can
tell you. Maybe I am wrong, but that is what it sounds like.
Mr. Michael Barr. Yes, I think that, again, we are looking
at the whole supervisory record. I share your concern very
much. I think it is something we are going to have to explore
both in terms of the way the bank responded and the bank's
responsibility for its failure, but also, should regulators
have used tools to escalate more promptly and quickly? I think
that is a completely fair question.
Mr. Vargas. Okay. Chairman Gruenberg, in your hearing
before the Senate Banking Committee, you testified that the
collapses of SVB and Signature Bank demonstrate the
implications that banks with assets over $100 billion can have
financial stability issues. I think that is what you stated.
Additionally, you stated that the prudential regulation of
these institutions merits serious attention, particularly for
capital liquidity and interest rates hikes. Can you please
elaborate more about what prudential regulations need to be
reviewed? What steps can we take to mitigate the potential for
similar bank failures?
Mr. Gruenberg. Thank you, Congressman. I think we should
start with supervision and how we supervise liquidity risk. And
two big things in this episode were liquidity risk from
concentration of uninsured deposits and the accumulation of
unrealized losses on the balance sheets of our institutions,
both of which could have fundamental management of interest
rate risk, which is--
Mr. Vargas. But I am talking about the size of the bank. I
think that is significant.
Mr. Gruenberg. No, and I think it applies to all
institutions. I think in the past, we have looked at these
regional banks and smaller regional banks, and in terms of
their prudential regulation have treated them somewhat more
lightly than the larger institutions.
Mr. Vargas. My time has expired.
Mr. Gruenberg. In light of this episode, we need to take a
close look at that.
Mr. Vargas. Thank you. I yield back.
Mr. Gruenberg. That was the point I was trying to make.
Chairman McHenry. After the windup that Mr. Vargas gave, I
just want to give him, like, 10 more minutes, so thank you.
With that, we will now recognize Mr. Loudermilk of Georgia
for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. And thank you all
for being here. I know you have been spending a good bit of
time on Capitol Hill, but we appreciate you being here. One of
the concerns that I have received from a lot of my smaller
institutions, smaller banks, is with the extension of insuring
deposits across the board. They felt vulnerable in that larger
institutions may decide to pull deposits that they have in the
smaller institutions because then they would be covered.
Under Secretary Liang, I wanted to get a little clarity on
what seem like conflicting accounts from Secretary Yellen
regarding deposit insurance. On Tuesday, March 21st, the
Secretary suggested deposits would be insured. She said, ``If
smaller institutions suffered deposit runs, that posed the risk
of contagion.''
Then, during her testimony to the Senate Finance Committee
the very next day, the Secretary said she was not considering,
``blanket insurance or guarantees of deposits,'' but then a day
later, she said that Treasury, ``would be prepared to take
additional actions to protect depositors, if warranted.'' Could
you clarify the Department of the Treasury's position regarding
deposit insurance?
Ms. Liang. Yes. Thank you, Congressman. As Secretary Yellen
has said, we have used tools to prevent contagion in the
banking system and have reflected our commitment to ensure that
all deposits are safe. That means we would use the tools again,
if needed, to ensure that Americans' deposits are safe.
Mr. Loudermilk. So your answer is, yes, you would include
smaller institutions, smaller banks, community banks, or am I a
little confused?
Ms. Liang. If conditions warranted that smaller
institutions could pose a risk of contagion to the broader
system, we would absolutely use the tool.
Mr. Loudermilk. I guess the question would be, what is that
condition? If it starts with one community bank, then that
would be a trigger, or do you have more of a definition of what
would be the condition?
Ms. Liang. I think it is very difficult to just make
decisions on the hypothetical. But in this environment that we
made the systemic risk determinations based on unanimous
approvals from the FDIC and the Fed, we determined that the
risk of contagion in the banking system was very high.
Mr. Loudermilk. So with that, and the action of extending
it to larger institutions, regional banks, and then smaller
institutions, do you have any concerns that regulators may be
creating moral hazard across the entire banking system?
Ms. Liang. I think we are concerned with addressing the
current situation that we are facing. We think the system has
stabilized. We have information and evidence that deposits have
stabilized. We will need to address reforms going forward to
address concerns about moral hazard.
Mr. Loudermilk. Okay. And I agree with you. I think that we
are stable at this point, but as we have seen already, things
can turn around in a 24-hour period, right? And I am one of
those to whom, from raising three young children, and now with
five grandchildren, consequences matter in future behavior, and
we can't ignore that going forward.
Last question: Why did the Secretary's position appear to
change regarding extending insurance to smaller institutions?
Why did she change her position between the 21st and the 23rd?
Were there internal discussions going on between the Secretary
and the President or other prudential regulators that caused
the shift?
Ms. Liang. I am not aware of any conversations.
Mr. Loudermilk. Okay. I appreciate that. Mr. Chairman, no
further questions at this time, and I yield back.
Chairman McHenry. Mr. Casten of Illinois is now recognized
for 5 minutes. And after his 5 minutes, we will give the panel
a 5-minute break to stretch your legs, then we will come back
and we will finish with questioning. My expectation is that we
will be able to get through this final segment. But I do think
it is humane to actually give the panel this bit of a break,
and, frankly, I need one as well. So, Mr. Casten, for 5
minutes.
Mr. Casten. I would like to thank the chairman for putting
me on the inhumane end of that transaction. Vice Chair Barr, I
am trying to understand the calendar, and I have just four or
five questions for you, and I want to walk through the calendar
as I understand it. If you disagree with anything I have in the
calendar, let me know, but otherwise, I will just try to run
through quickly to get to the questions.
In January 2019, SVB was notified by the Fed of deficient
risk management. A year later, they were notified that their
risk management was not up to large bank standards. About 2
years after that, April 2022 to 2023, SVB no longer had a risk
officer, and in their 2023 proxy statements, they say that they
have doubled the number of risk meetings from 9 to 18. Given
the prior concerns from the Fed, did the Fed participate in or
otherwise have visibility into any of those risk meetings at
SVB in that window?
Mr. Michael Barr. The calendar you described, some of them
in the future, I think that we might need to look at the
calendar reconciliation together or maybe I misheard--
Mr. Casten. No, no, I am just going up to January of this
year, was the last date. From April of 2022 to January of 2023,
there was no risk officer but a doubled frequency. Did the Fed
participate in any of those risk meetings within SVB during
that 9-month period?
Mr. Michael Barr. I don't yet have the full supervisory
record, so I am not able to answer the question, but we will
have that information in the May 1st report.
Mr. Casten. Okay. Do you know if they were at any time
cited for violating Section 165 of Dodd-Frank, which requires
banks over $50 billion to have a risk officer for the 9-month
period when they did not?
Mr. Michael Barr. The deficiency downgrade that occurred in
the summer of 2022 focused on a wide range of risk management
practices at the firm and found them to be deficient.
Mr. Casten. Okay. Moving back to the calendar, Q3 of 2022,
their 10-Q showed that their held-to-security bonds were $15.9
billion, undervalued relative to mark-to-market, and they had
$15.8 billion in equity at the time. Three months later, their
10-K for the year showed a slight improvement. They only had a
$15.1-billion overvaluation of their bonds and $16.3 billion in
equity. Was it perceived by the Fed or by management that they
were in an improved risk situation at the end of 2023 than they
were 3 months earlier?
Mr. Michael Barr. I don't know the answer to the question
with respect to how the management of the firm were viewing the
situation. The supervisors were telling the firm at that time
that basically their risk models were divorced from reality,
that the model suggested they would earn more money, when they
were actually losing more money.
Mr. Casten. Okay. I am glad to hear that, because now I
want to move to 2023 and sort of what happened up to March 8th.
On January 26, 2023, about 3 weeks after they finally got a
risk officer back, CEO Becker announced that he was going to
execute $3.6 million in stock sales. On February 22nd, he
executed those sales. On March 8, 2023, they announced a sale
of all of their available-to-sell equity portfolio to Goldman,
the same day the $1.8-billion loss of a security sale was
disclosed, apparently also to Goldman. Heads, Goldman wins.
Tails, Goldman wins. And of course, the next day a $42 billion
withdrawal.
Do you have any visibility of when was the security sale
and/or the equity sale to Goldman process initiated? In other
words, when was it announced? When internally was the company
initiating the process to secure additional cash from those two
Goldman processes?
Mr. Michael Barr. I do not know the answer to that
question.
Mr. Casten. I would imagine you probably also don't know
whether the January 26th sale was cleared with a risk officer
who had been on board for 3 weeks when the January 26th
announcement was made?
Mr. Michael Barr. I don't yet have full visibility into
that transaction. I hope that we will be able to get as much
detail as we can as part of our review.
Mr. Casten. Okay. If I am Mr. Becker, I am obviously in a
lot of trouble. You have a deposit base that is extremely well-
heeled and very sophisticated. Was there any outreach to the
depositors during this period to ask them either to provide
equity infusions to the bank or other forms of capital prior to
the run on the bank?
Mr. Michael Barr. I do not know.
Mr. Casten. Last question: In the exchange with Mr. Scott,
you had indicated--and I think I got this right--that the Board
of Governors' concerns about SVB were really heightened in mid-
February?
Mr. Michael Barr. What I said is that the staff presented
to the Federal Reserve Board of Governors in mid-February on
interest rate risk generally, and one of the firms they
highlighted as having interest rate risk was Silicon Valley
Bank. And the staff indicated that they were doing a further
horizontal review and would come back with further results of
that review.
Mr. Casten. Okay. Was it your position that the trigger for
the heightened security was simply interest rate movement, or
was there anything else about this calendar that triggered that
heightened concern?
Mr. Michael Barr. I didn't describe it as heightened
concern. Basically, the staff were presenting on interest rate
broadly, and the firm they singled out as having interest rate
risk was Silicon Valley Bank. And they discussed the horizontal
review they were doing and the fact they would come back with
further information after horizontal review.
Mr. Casten. Okay. Thank you. I yield back.
Chairman McHenry. Okay. We will now stand in recess. The
committee stands in recess for 5 minutes.
[Brief recess.]
Mr. Steil. [presiding]. The committee will come to order.
The Chair now recognizes Mr. Rose for 5 minutes.
Mr. Rose. Thank you. Before I get into my questions, Chair
Gruenberg, I would like to say that as you consider any new
special assessment on banks to replenish the Deposit Insurance
Fund, that you use your special exemptive authority in
implementing that assessment to ensure that Tennessee bankers
and, frankly, bankers in a number of other States across the
country are not paying for the mistakes of California and New
York bankers serving wealthy real estate moguls and tech-
related venture capitalists. Tennessee bankers understand how
to manage risks and should not be punished for the mistakes of
those in our coastal banks.
Now, I would like to jump right into my questions as time
is limited. Chair Gruenberg, the value of First Citizens Bank
is up over 50 percent over just the last 5 days and is still
rising. Shareholders have benefited by $3 billion by last
calculation. Chair Gruenberg, why did the FDIC cap its
potential gain on First Citizens stock at $500 million?
Mr. Gruenberg. I think it was a negotiation, Congressman,
and that is what we were able to work out.
Mr. Rose. Why not allow the Federal Government to recoup
more of its losses and share in this outsized gain at First
Citizens?
Mr. Gruenberg. I wouldn't argue with that, but we had a
negotiation with the acquiring institution, and that is what
came out of it.
Mr. Rose. Okay. Do you think you had good negotiators at
the table?
Mr. Gruenberg. Maybe we could have been better. I don't
know.
Mr. Rose. Okay. And, Chair Gruenberg, did you receive any
pressure from the White House or other elected officials not to
allow for consolidation of large or mid-sized banks with
Silicon Valley Bank as part of the review process of potential
bidders?
Mr. Gruenberg. No, Congressman.
Mr. Rose. Okay. Vice Chair Barr, as you know, as committee
members, we have been undergoing a series of briefings with
regulators both at the State and Federal level on these bank
failures. Earlier this week, I learned that the California
banking regulators were conducting their examinations of SVB
remotely. Vice Chair Barr, can you tell us whether or not the
Fed was also conducting its examinations remotely or onsite and
in person?
Mr. Michael Barr. My understanding is that there is a mix
of activities. I don't know how much was onsite. A lot of
activity occurs remotely doing analytical work and so on, but I
don't have a precise answer to that question.
Mr. Rose. I hope you will provide that answer to us. As a
former bank board member, I know there is nothing that strikes
fear in the heart of a banker more than an onsite review, maybe
for good reason, and it's perhaps more effective. I would like
to personally know the answer to that question as you conduct
your review.
You said earlier, and I think reaffirmed your quote that
this was a textbook case of mismanagement. I hope that you will
conduct a thorough review to decide whether the oversight by
the Fed examiners was being done in the way that it should and
that the escalation of that up through your process was
appropriate and that you will take appropriate actions. It
seems to me, and I will just say again, based on my personal
firsthand experience, that you have the tools you need, and the
question is, were they being used effectively? And I hope that
in the days ahead, and the weeks ahead, we get to the answer to
that question.
Under Secretary Liang, earlier my colleague, Mr.
Loudermilk, was questioning you about some of the comments of
Secretary Yellen. And I guess I am still a little bit confused,
because I think what I am hearing both from the Secretary and
maybe from you is that if it is a systemically important bank
that is failing, there is going to be perhaps a more strident
effort to make sure that no one loses. But if it is a less
significant bank, like maybe the one that I was director at,
that perhaps the concern won't be as high. Can you clear that
up for me? Am I mishearing what you and the Secretary are
saying?
Ms. Liang. Yes, Congressman. The point that we have been
making is that we would use the systemic risk exception or our
end tools to prevent contagion in the broader system if a bank
were to fail, and that could be a bank of different sizes. And
it would be designed to keep all American depositors safe.
Mr. Rose. You understand, no doubt, the confusion that
these statements leave some of us with. And I just wonder, do
you have confidence in Secretary Yellen at this stage?
Ms. Liang. Absolutely.
Mr. Rose. And as I think about what I heard earlier today
from Representative Green--I know this is not a quote of my
mother, but it is a quote I have heard often, ``It doesn't just
have to be right, it has to look right.'' And so, as I leave
you, gentlemen and ladies, this afternoon, I would just say the
American people are watching, and I think right now, we have
grave concerns about whether the regulatory process looks
right. I hope you take that to heart as you conduct the review
of what you are doing.
My personal conviction is that you don't need new tools;
you need better craftsmen using those tools to accomplish the
purposes that you have, and so I commend that to you. Again, as
a former bank board member, I feel that if Silicon Valley Bank
had had the supervision that I feel like our bank got, we
wouldn't be here today talking about this. Thank you, and I
yield back.
Mr. Steil. The gentleman yields back. The gentleman from
New Jersey, Mr. Gottheimer, is now recognized for 5 minutes.
Mr. Gottheimer. Thank you, Mr. Chairman, and Ranking Member
Waters. The conditions at Silicon Valley Bank in the months
leading up to its failure set the stage for a classic run on
the bank. What was not typical of the situation, though, was
the speed and intensity of the run, as we have talked about.
Depositors driven by panic on social media platforms, and armed
with online banking tools capable of rapidly moving large sums
of money, withdrew nearly $42 billion in deposits within 24
hours on the 9th of March.
Under Secretary Liang, do you think social media and online
banking tools have the potential to increase the intensity of
future runs? And if so, what do you think the appropriate
response from Treasury, Congress, and the regulators should be?
Ms. Liang. Congressman, I do agree that the runs that
occurred at Silicon Valley were unprecedented in speed and
size, aided by social media and technology. Those are new risks
that challenge the banking system and the financial system and
we will definitely need to be considering and working with
Congress on those issues.
Mr. Gottheimer. So, you are working on that?
Ms. Liang. Yes, we have been working on how to think about
the payment system, how to think about fintech and digital
assets. And this has now also been become apparent--
Mr. Gottheimer. Thanks. I would like to work with you on
that if that is okay. I will follow up. Thank you. Some Members
of Congress are using the failures of Silicon Valley's bank
management and bank supervisors to criticize the bipartisan
2018 amendment to Dodd-Frank that ended the one-size-fits-all
approach to bank regulation. Before Dodd-Frank, we had a system
of too-big-to-fail. We don't want a system, in my opinion,
where banks are too-small-to-succeed.
Those who say Congress eliminated annual stress tests and
other prudential safeguards need to read the bill again. The
bill tasked the Federal Reserve with correcting rules for banks
like SVB with more than $100 billion in assets. And Section 104
of the 2018 amendments to Dodd-Frank says clearly, ``The Board
of Governors may by order a rule apply any prudential standards
established under the section to any bank holding company with
assets equal to or greater than $100 billion if the Board of
Governors determines the prudential standard is appropriate to
mitigate risks in the banking system and promote safety and
soundness.''
The Federal Reserve could and should have applied annual
stress tests to banks like SVB, but it chose not to. While
stress tests are an important component, it is clear that the
existing Fed supervisory tools are equally, if not more
important. During a Senate Finance Committee hearing earlier
this month, Treasury Secretary Yellen was asked about
supervisory stress tests, and her response was, ``Supervisory
stress tests focus on capital and not on liquidity. In these
bank failures, liquidity played an important role.'' When
Secretary Yellen was asked whether stress tests would expose
management failures of banks, she replied, ``That is the
purpose of supervision,'' concluding that supervision is
critical.
Vice Chair Barr, do you agree with the comments made by
Secretary Yellen that supervision is critical to identifying
the failures of bank management? And clearly, there was a huge
hole in Fed supervision of SVB. Can you talk about that a
little bit, please?
Mr. Michael Barr. I think supervision and regulation both
play an important role in overseeing bank management.
Obviously, in the first instance and in the last instance, it
is bank management that is responsible for running the bank,
and in this case, it did so in a way that caused its failure.
We are taking a careful look at the role of supervision and
regulation, and not forcing managers to do a better job in
running their own bank.
Mr. Gottheimer. Just digging into that a little bit more,
The Wall Street Journal reported that the Fed had concerns
about the risk management practices at SVB as early as 2019.
You admitted in your testimony that the Fed knew that there
were issues at SVB for years and only started more in-depth
review in February 2023, which I worry was too little, too
late. When exactly does the Fed give the supervisory review
some more muscle and step in to prevent a disaster, and can you
talk a little bit more about what happened here and what you
are trying to learn? Thanks.
Mr. Michael Barr. Thank you. That's a great series of
questions. The Federal Reserve System is based on a tailored
approach, where firms between $50 billion and $100 billion are
really part of the regional banking organization group, and
firms with $100 billion and above are in the large and foreign
banking organization group. And even within that, there are
distinctions between firms at $100 to $250 and $250 and above.
And I think part of the problem is that framework, which really
focuses on asset size, is not sensitive to the kinds of
problems we saw here with respect to rapid growth in a
concentrated business model. That is one of the reasons why
earlier this year, I announced that we were going to have a
novel supervision group that really focuses on these kinds of
issues.
Mr. Gottheimer. So to that point, you said yesterday before
the Senate that the Federal Reserve has broad authority to
apply additional prudential standards to banks with more than
$100 billion in assets, like Silicon Valley Bank. Is this a
situation where the Fed needs different authorities, or has the
Fed simply chosen not to use the authorities given by Congress?
Where should you be jumping in?
Mr. Michael Barr. We are going to look at our own
framework, our own supervision, and our own regulation. I think
that self-assessment is really critical part of risk
management. As I mentioned earlier, we have a team of staff
working on it who are not responsible for supervising SVB. We
are going to look at our own structure and suggest reforms.
Mr. Gottheimer. Thank you. I yield back.
Mr. Steil. The gentleman yields back. The gentleman from
South Carolina, Mr. Norman, is now recognized.
Mr. Norman. I thank each of you for testifying today. Let
me ask a very simple question. We had a $209-billion bank in
assets have a total meltdown from March 8th through March 26th,
18 days. You had a bank that basically, from all outward
appearances, was strong to the taxpayers, and to the investors,
and over those 18 days, it had a meltdown. Now, the warning
signs that have been mentioned at this hearing, like the six
citations, like the absence of a chief risk officer for 8
months, like the deficient government controls; the signals
were there for a bank that was in trouble. When the chairman
started it off, I didn't see a sense of urgency from any of you
all on things to do other than, ``We contacted staff,'' or,
``We contacted the immediate supervisors.''
When I was a director of a bank, if one of these citations
had been issued, somebody's head would roll. We would be having
a conference call. Give me some assurance that I am wrong, or,
I guess, give me some assurance of what specific actions you
would take if this is duplicated, because you had $20 million
lost in the Insurance Fund, and the calls I am fielding in my
office are from the smaller banks. And a lot of people are
denying that the taxpayers are going to take the hit. The
taxpayers are going to take the hit at the end of the day,
because they are the ones who make the profit for the banks to
pay the fees to the FDIC. What does it take to get your
attention and to put a sense of urgency to situations like
this?
Mr. Michael Barr. I think it is an incredibly urgent
situation. Obviously, when we learned of the immediate distress
of the firm, we stepped in and took decisive action to make
sure every American's deposits are safe. And we put in place a
liquidity measure to make sure that banks all across the
country would have the liquidity they need, in case any
institution were to--
Mr. Norman. You are talking about over the weekend? Well,
you found out on Thursday. And you are saying that over the
weekend, you took these steps. I am asking, did you not get
these warning signals ahead of time?
Mr. Michael Barr. Sir, the bank supervisory staff certainly
issued those warnings to the bank. The question we are looking
in the review is why those were not escalated in a more rapid
way. I agree with you. We want banks to be paying attention to
supervisors. And at almost every bank in the country, as you
just described, if you get a letter like this, you get a series
of problems like this. They had many, many problems. I am
focusing on liquidity, and management, and interest rate risk,
but they had many other problems, too. When you have a bank
like that not responding, that is a real problem.
Mr. Norman. In your role as regulators, what would you do
differently, each of you?
Mr. Michael Barr. I think I would start with making sure
that we escalate things faster and intervene more promptly with
respect to mitigation, but as I said, we have just started this
review. I am going to get a staff review back, and I want to
really hear their expert judgment without any preconceptions
about what they are going to find.
Mr. Norman. Did they jump to conclusions on having this as
a systemic risk?
Mr. Michael Barr. Pardon me?
Mr. Norman. Was it the right decision for the President to
issue this, or I guess, the Board that voted on it to deem this
a systemic risk?
Mr. Michael Barr. I think it was the correct judgment, sir.
It was a very difficult judgment, I know, for everyone. But a
unanimous Federal Reserve Board, a unanimous board of the FDIC,
and the Treasury Secretary agreed after consulting with the
President. I think it was the right thing to do for the
country. I think it saved a lot of small businesses,
households, community banks, and regional banks from a kind of
contagion that really could have been quite destabilizing. And
we are now in a situation where I can say the banking system is
sound and resilient. I think that was really the right thing to
do.
Mr. Norman. I sure hope so. This has rattled the markets. I
was in the commercial real estate business, and banks that are
loaning to commercial ventures are shook right now,
particularly on the concentrations of credit on where they put
their money, and particularly for that family who has put their
life savings in an account that they thought was insured. I get
asked questions on the $250,000 insured limit.
Mr. Gruenberg. Let me respond, if I may, Congressman. It
seems to me the decision to guarantee the deposits of these two
institutions really raises that question up. As I indicated in
my testimony, the FDIC is going to undertake a comprehensive
review of our deposit insurance system. Certainly, one of the
things we will look at and identify different options for
consideration is the scope of coverage and whether we should
increase coverage overall or for particular--
Mr. Norman. I am running out of time. I would like to see
those reports, if you could furnish that, and ask, if a rerun
of what happened to these two banks happens again, what
decisive role you all would take that you may have not taken
earlier?
I yield back.
Mr. Gruenberg. Congressman, the report will be out by May
1st.
Mr. Steil. The gentleman yields back. The gentlewoman from
Massachusetts, Ms. Pressley, is now recognized.
Ms. Pressley. Thank you, Chairman McHenry, Ranking Member
Waters, and all of our witnesses for joining us for this
critical hearing. I know it has been a long morning, but that
being said, I truly hope that this is the first and not the
last hearing that we are going to have on these recent bank
failures. When SVB collapsed, my office received urgent phone
calls, texts, and letters from throughout our district, from
our constituents who were genuinely shocked and afraid for
their future, affordable housing residents unsure about the
status of mortgages, tech companies not able to pay their
employees, and small businesses worried that they had lost most
of their money.
Now, while I am glad we did avoid the worst possible
scenario, Congress should consider the SVB collapse a wake-up
call and take action. After the 2008 financial crisis, Congress
stepped up to enact Dodd-Frank, a comprehensive package of
regulations, in order to prevent big failures and systemic
risks that hurt the economy.
However, in 2018, the Republican Majority in Congress
passed the deregulation bill that stripped away crucial
requirements and got rid of enhanced prudential standards.
Donald Trump and Republicans, including some of my colleagues
sitting in this very room, celebrated signing this dangerous
piece of legislation. The 2018 deregulation law specifically
made it easy for SVB and Signature Bank to engage in risky
management practices with little to no oversight. And we must
rightfully assign some of the responsibility for this bank
turmoil to deregulation efforts.
Vice Chair Barr, when Congress passed the deregulation bill
in 2018, which was lobbied for by banks like SVB, is it fair to
say that it reduced supervision requirements by the Fed for
small and mid-sized banks?
Mr. Michael Barr. The overall effect of the law was for the
smallest banks, to reduce regulatory burden for banks within
the $50 billion to $100 billion in range, to limit the Federal
Reserve discretion with respect to those institutions. But for
institutions over $100 billion, the Federal Reserve retained
discretion to do something different. It chose, in 2019, to put
in place a set of rules that I think had the effect overall of
reducing supervision and regulation of such firms.
Ms. Pressley. Right, so it definitely did. The deregulation
bill relaxed requirements for stress tests and resolution
plans. The dangerous and irresponsible nature of this
deregulation bill was completely predictable. In no way was
this turmoil inevitable. Then-Federal Reserve Governor Brainard
opposed it, as well as both of you, Vice Chair Barr and Chair
Gruenberg, and yet here we are. In the aftermath of the
collapse of SVB and Signature Bank, it is clear that the
Republican deregulation bill shares the blame alongside
Treasury, the Federal Reserve, and the FDIC due to the lapses
in supervision and oversight.
Chairman Gruenberg, for folks who are concerned about the
future of small and medium-sized banks in this country, what
assurances can you give them?
Mr. Gruenberg. Congresswoman, as a general matter, our
small and medium-sized banks remain in good condition,
including their liquidity, and I think the actions we took
helped to stabilize the system. As I indicated, any expense by
the Deposit Insurance Fund to cover uninsured depositors will
be imposed through a special assessment on the industry. And we
have discretion to tailor that assessment to the institutions
that most-directly benefited, so we are going to try to be
thoughtful in this process.
Ms. Pressley. Thank you. And I am requesting that each of
your agencies provide my office and this committee by May 1st a
list of recommended regulations that need to be enacted to
strengthen the banking industry and to prevent future failures.
The story of SVB's collapse is the story of a Republican
Administration in cahoots with the banking industry to weaken
our financial regulations, but it is also a story of
regulators' failure to do their number-one job: regulate banks.
And since I am accused of this often, I think I will close with
a wokeism: The American public are tired of the super-wealthy
pocketing bonuses and leaving working-class folks hiding in the
back for their fiscal mismanagement. They are even more tired
of Congress allowing them to do it. It is time to regulate.
Thank you, and I yield back.
Mr. Steil. The gentlewoman yields back. The gentleman from
Ohio, Mr. Davidson, is recognized.
Mr. Davidson. I thank the chairman. And I thank our
witnesses. I appreciate your endurance here today and
yesterday. And as I listened to my colleague ask questions, I
know my constituents are tired of seeing Washington, D.C.,
Congress in particular, socialize risk and watch profits be
privatized. They are also tired of people who don't listen.
Mr. Barr, when I was listening to what you said yesterday
and today, S. 2155 isn't the reason that these banks failed.
These banks were over $100 billion in assets, and therefore, it
is just a red herring. Isn't that accurate?
Mr. Michael Barr. What I would say is that the Federal
Reserve's rules, issued in the wake of the legislation that was
issued in 2019, did have the effect of lowering supervisory and
regulatory standards for firms, but the Federal Reserve retains
the discretion to have different rules. And one of the things
that I think would be my job going forward is to put in place
rules that are appropriate for that size of institution. We
have the discretion to do that.
Mr. Davidson. Yes, thank you. And so obviously, it wasn't
the regulation per se that failed, it was the regulator that
failed, and I want to understand the context in which that
occurred. Over the past year-and-a-half, we have seen a
substantial increase in the Federal funds rate. During that
span, are you aware if the Fed or other prudential regulators
had conversations, not specific to Silicon Valley Bank, about
the inevitable interest rate risks that presents?
Mr. Michael Barr. Yes, that is a core topic in supervision.
Supervisors were very focused on interest rate risks. It was an
important part of what we highlighted in our fall supervision
report. Beginning last year, examiners were given extra
training on interest rate risk. So, it is just a bread-and-
butter supervisory issue. It is not some esoteric problem.
Mr. Davidson. In that sense, did Silicon Valley Bank's
failure surprise you?
Mr. Michael Barr. Its failure did surprise me. Its risk-
taking was excessive. But even then, I don't think anybody
anticipated that they would have a devastating bank run that
basically wiped out $42 billion on Thursday afternoon, with
another $100 billion expected the next day. That would be 85
percent of its deposit base in a 24-hour period. That was
shocking.
Mr. Davidson. Yes. We are anxious to understand all of the
factors which drove that run on that particular bank, but we
are also curious when you stated yesterday to Senator Kennedy
that stress testing does not examine institutional risks
precipitating from interest rate risk. And when we were on the
conference call with Treasury, with the Fed, with the FDIC, and
with House and Senate Republicans and Democrats, I asked the
question of whether there is some complex model that the stress
test involves. You said, ``if macroeconomic conditions and
whatever kick in.'' Well, I submit that the hold-to-maturity
spread has to be considered, not just the available-for-sale
risk, because of the need for liquidity. Is that something that
you are focused on as you conduct your review?
Mr. Michael Barr. Yes, I think you are absolutely right
that we need to look at both sides of the balance sheet. We
need to look at the liability structure and the asset
structure. And the whole point is to assess whether, under
certain conditions, you can have more stress in the liability
side that forces you to sell on the asset side. Those are
interrelated.
Mr. Davidson. Mr. Gruenberg, do you share that concern
about how we are looking at systemic risk?
Mr. Gruenberg. Yes, I do Congressman.
Mr. Davidson. Yes. I would love to go into everything that
I could on this. But Mr. Barr, on March 9th, you gave a speech
that touched on stablecoins and brought up specific risks
associated with stablecoins. In that speech, you stated, ``This
mismatch in value and liquidity is a recipe for a classic bank
run. Stablecoin issuers are not supervised by the Fed and lack
capital and liquidity as a backstop. The banks we regulate, in
contrast, are well protected from bank runs through a robust
array of supervisory requirements.'' Would you revise those
comments if you could?
Mr. Michael Barr. It demonstrates the need for humility in
thinking about how financial risk happens in the system. That
has been a theme of basically all of my academic work on
systemic risk, that we need humility, and that is why you need
really strict capital and liquidity rules because of exactly
the kind of circumstance we just saw.
Mr. Davidson. Yes. Thank you for that. I will note,
obviously, stablecoins are backed by assets and are properly
regulated in many States, including the State of New York. The
last thing I would say is we have this pressure to socialize
more of the market. There are credit unions that are completely
privately-insured, many in my district and others, and I think
we should look to that market for private credit risk
insurance. I yield back.
Mr. Steil. The gentleman yields back. The gentlewoman from
Michigan, Ms. Tlaib, is now recognized.
Ms. Tlaib. Thank you so much, and thank you all for being
here. Vice Chair Barr, Silicon Valley Bank, which I feel like
no one is focusing more on them as the bad actor here in the
mismanagement and the inappropriate actions--you kept saying
over and over again that they weren't responding. We should
have done something when we knew they weren't responding. What
could have been done?
Mr. Michael Barr. It is an excellent point. I agree with
you. You start with a basic problem that the bank manager has
mismanaged the bank--
Ms. Tlaib. Did they hide something from us? They hid all
this from us. Do you believe they hid this intentionally from
the Fed?
Mr. Michael Barr. I don't have access yet to the full
supervisory record to really answer your question.
Ms. Tlaib. Yes. Will you let us know, because I really do
think they misled and probably lied, and made some
inappropriate and fraudulent, probably, actions for which I
hope that we will hold them accountable.
Mr. Michael Barr. We will definitely be looking into that.
And we retain enforcement authority to go after people at the
bank who violated the law, or who breached their fiduciary
duty, or who engaged in unsafe and unsound practices, and we
will hold them accountable to the fullest extent.
Ms. Tlaib. Yes, and let us not negotiate with bad actors
like that. We think this is the time to really hold them
accountable, honestly. This is how we set a precedent. But
going back to you Vice Chair Barr, bonuses were paid out when?
When was the last bonus paid out before they--
Mr. Michael Barr. As I said, I am still getting access to
the--
Ms. Tlaib. But we know it was a couple of hours before,
correct?
Mr. Michael Barr. I have heard news reports about that, but
I want to make sure that I get full--
Ms. Tlaib. So, you don't even know when the bonuses were
paid out? You don't have that information for this committee
right now?
Mr. Michael Barr. I do not have that information right now.
Ms. Tlaib. Was it the day of?
Mr. Michael Barr. I would like to respond to you fully and
accurately, and I want to be careful to do that properly. I
have heard news reports about the timing, but I don't have the
full--
Ms. Tlaib. Why does the news know, but we don't?
Mr. Michael Barr. Pardon me?
Ms. Tlaib. Why do the media and the news know, but we
don't? How do you not know this before our Financial Services
Committee, because this is important?
Mr. Michael Barr. I share your outrage about it. I just
want to make sure we get to the facts.
Ms. Tlaib. Do you even know how much the bonuses were?
Mr. Michael Barr. As I said, I think you are hitting at
exactly the right issues. We are going to use our enforcement
authority to the fullest extent possible.
Ms. Tlaib. Everyone is saying, oh, we are going to go ahead
and introduce some clawback legislation, let's see, but
Chairman Gruenberg, I asked Fed Chair Powell, about this.
Section 956, it has been, what, 12, 13 years? When are we going
to have a rulemaking on that? This is about excessive pay. This
is something that Congress already considered. So, why has it
been over a decade and we don't have a rulemaking? In 2016,
there was a proposal. It wasn't great, but it was a really
great start. It would have been instrumental here.
Mr. Gruenberg. No, I am familiar with the rulemaking,
Congresswoman. I was strongly supportive of it. We didn't
complete it in time.
Ms. Tlaib. Why not?
Mr. Gruenberg. I think there was a change of
Administration, and that may have had something to do with it.
There is every reason to come back to it now and complete that
rulemaking, and I think--
Ms. Tlaib. If you had it today, what could you have done in
this instance, because I am tired of being asked to pass things
when I feel like we already did. But it has been over 12 years,
and we don't actually have something, again, that we could have
used as a tool.
Mr. Gruenberg. I just answered. It would have given us
explicit clawback authority on compensation. As I pointed out
earlier, we do have, in fact, a legal obligation, the FDIC, to
investigate the board and management of failed institutions and
hold them accountable for any misconduct that might have
occurred.
Ms. Tlaib. Yes, public advocates really believe this could
have maybe been prevented, primarily because you all know that
there were some inappropriate decisions made up so they could
do the bonus and the payouts. It is clear as day, and I don't
know why my colleagues are not even talking about that. They
are talking about you all not getting things. Well, they didn't
respond. How come nobody is mad at the bank for not responding?
Mr. Gruenberg. All I can tell you is we have initiated the
investigations to get the facts to take action, assuming the
facts support the allegations.
Ms. Tlaib. Chairman Gruenberg, please, for the American
people, we need a rulemaking decision on Section 956. You know
how critically important this is.
Mr. Gruenberg. I understand.
Ms. Tlaib. I read somewhere this is the 563rd bank to fail
since 2001. There are going to be more, and I know you all
don't want to talk about it, but there will be, because they
will mislead us. They will lie. They will do anything for the
bailouts. Even the risk manager person, what did she give
herself? What was it? This is a crazy amount of money she
walked out with; it is crazy. And then Gregory Becker, the CEO,
on February 27th sold $3 million worth of stock, netting $2.2
million, and he knew this was going to be where we land. And we
are not angry about that. We are angry because you all didn't
notice. What about the fact that they don't respond to
inquiries and things?
Mr. Steil. The gentlewoman's time has expired. The
gentleman from Pennsylvania, Mr. Meuser, is now recognized.
Mr. Meuser. Thank you, Mr. Chairman. We know that the
receivership for SVB occurred on Friday, March 9th. On Sunday
morning, Secretary Yellen stated on national television that
the American banking system was really safe and well-
capitalized. On Sunday night, Secretary Yellen approved the
FDIC to protect all depositors at SVB, and certainly implied
that all bank deposits beyond the $250,000 would also be
secured.
My first question to Vice Chair Barr is, what data over
that time period drove you to go beyond the SVB and Signature,
which was made aware, I guess, on Sunday? And did you think
that if you were to protect an idiosyncratic bank such as SVB,
you would need to protect all? What data drove you to imply
that all bank deposits would be secured?
Mr. Michael Barr. The decisions that we made that weekend
were obviously in a very compressed period of time. They
involved not only gathering information about what is going on
in the economy, but also the exercise of judgment. It was our
judgment collectively on the Federal Reserve Board, and an
unanimous decision of the FDIC and the Treasury Secretary, that
we needed to do that to protect contagion from infecting
healthy banks in the system, community banks, and regional
banks around the country. It was a judgment call, based on the
information we had at the time. I think it was the correct
decision.
Mr. Meuser. I don't want to prolong it. So, there was
actual data from other banks that they could be in jeopardy
from a systemic problem?
Mr. Michael Barr. We were learning. I'm sorry. I didn't
mean to cut you off.
Mr. Meuser. It being a systemic problem as opposed to a
unique problem.
Mr. Michael Barr. As you said, it is a human judgment, but
the information we were getting from other regional banks
suggested pressure that was building.
Mr. Meuser. It may have been the right call. I am just
wondering what data drove Secretary Yellen to go from, hey,
everything is okay, to 8 hours later, no, we are going to
protect all deposits. But I am going to move on.
Chair Gruenberg, it was stated as well that all bank
deposits were being secured, at no cost to taxpayers. I
understand the FDIC fund is going to pay for it, as you stated,
per law, but will FDIC rates go up on community and regional
banks, and aren't banks taxpayers, too?
Mr. Gruenberg. They certainly are, Congressman. As I have
explained previously, just to be clear, the action covered
uninsured depositors at those two institutions. The FDIC is
required by law that any loss to the Deposit Insurance Fund as
a result of those uninsured deposits has to be paid for by a
special assessment on the banking industry. And we have
authority under the law to consider the types of entities that
benefit from any action taken or assistance, so we have
discretion in designing the implementation of the assessment.
As I indicated previously, we are keenly sensitive to the
potential impact on community banks.
Mr. Meuser. Good, because they are very concerned, as you
know, community and regional banks, that they will pay for the
bad actions of a few, and I am glad you are very much aware of
that.
Vice Chair Barr, excessive spending by Congress, QE, the
Fed doubling its balance sheet from $4 trillion to $9
trillion--no surprise to you--followed by the quantitative
tightening, many banks holding excessive Treasuries were highly
devalued and devastated in the case of SVB. On November 21,
2022, there was a report that the Fed was aware of the balance
sheet issues of SVB. It was the 16th-largest bank in the
country and 57 percent of its portfolio was in Treasuries being
devalued. Why wasn't there more enforcement taking place?
Mr. Michael Barr. I think it is an excellent question. We
were aware and focused at the supervisory level of interest
rate risk in the firm and liquidity risk to the firm. I don't
think anybody expected a devastating bank run of the kind I
described before, with 85 percent of deposits fleeing or
expected to flee in a 24-hour period.
Mr. Meuser. The 16th-largest bank. You can see why people
find that unacceptable from an enforcement standpoint. Lastly--
I only have 10 seconds--there is a high concentration of
commercial real estate loans out there owned by small banks. I
will follow up with you on that one in writing.
I yield back, Mr. Chairman.
Mr. Steil. The gentleman yields back. The gentleman from
New York, Mr. Torres, is now recognized.
Mr. Torres. Thank you. When interest rates rise, long-term
securities become less valuable, but deposits become more
valuable. If you have a stable deposit base, the gains from the
deposits can offset the losses from long-term securities. But
if you have an unstable deposit base, like Silicon Valley Bank,
there is no built-in offset. Silicon Valley Bank had an
uniquely-uninsured, unstable deposit base that made it
singularly susceptible to a bank run in the age of social
media.
Vice Chair Barr, should a bank with an unstable, uninsured
deposit base like SVB be subject to a higher standard of
regulation than a bank with a stable insured deposit base?
Mr. Michael Barr. Representative Torres, I couldn't have
said it better myself. I think you describe the situation
exactly correctly. And the unique--
Mr. Torres. Flattery will win you no points, but it's true.
Mr. Michael Barr. It is just the truth. I wish I had said
it that way. But no, I think there are unique risks to this
kind of heavy uninsured deposit base. And for most banks in the
country, as you described, they handle their interest rate risk
properly. They have stable deposits.
Mr. Torres. But you agree that the rigor of regulation
should depend not only on size, but on deposit stability, yes?
Mr. Michael Barr. I do.
Mr. Torres. Regarding commercial real estate, the rapid
rise of work-from-home during COVID has driven down office
property values, and the rapid rise of interest rates has
driven up financing cost, creating a perfect storm. Office
buildings with declining property values are set to be
refinanced at far higher interest rates. There is reportedly
$2.5 trillion in commercial real estate debt coming due over
the next 5 years, a substantial share of which is office debt.
Chair Gruenberg, to what extent do you worry about the
office loan portfolio representing a ticking time bomb in the
banking system?
Mr. Gruenberg. It presents a risk. It is one the FDIC has
talked about and identified publicly.
Mr. Torres. And Signature was the largest commercial real
estate lender in New York City. How much of Signature's
commercial real estate portfolio consists of office real
estate?
Mr. Gruenberg. That is a good question. It is a substantial
portion of--
Mr. Torres. Can you give me an answer in writing?
Mr. Gruenberg. I can get that for you.
Mr. Torres. More important to me locally, residential real
estate--Signature Bridge Bank has a housing portfolio of 3,000
properties consisting of 80,000 units in New York City. The
portfolio includes 479 properties consisting of 19,000 units in
the Bronx, where I serve as a Congressman.
I have two questions for the FDIC, Chair Gruenberg. As you
go through the process of seeking a buyer for Signature's
residential real estate debt, to what extent will you seek the
input of New York State and New York City housing officials,
who have an obvious stake in preserving the affordability of
these properties and units? And to what extent will you
prioritize affordable housing preservation in your selection of
a purchaser?
Mr. Gruenberg. Thank you, Congressman. Just to be clear, we
have sold Signature to New York Community Bank--
Mr. Torres. You sold everything but the real estate
portfolio, as I understand it. That has been publicly reported.
Mr. Gruenberg. I take your point. No, we will be glad to
work with you and other local officials in New York in regard
to the disposition.
Mr. Torres. I appreciate that commitment.
Mr. Gruenberg. Sure.
Mr. Torres. I am not advocating the following course of
action, but I want to provide you with a hypothetical. The
banking system is reportedly sitting on more than $600 billion
in unrealized losses from securities, and those losses will
only rise with rising interest rates. Since the problem with
these assets is one of asset duration rather than asset
quality, should the Federal Reserve consider purchasing these
securities? Unlike a bank, which needs liquidity to honor
obligations to depositors, the Federal Reserve has the ability
to hold these assets to a maturity without realizing those
unrealized losses. Wouldn't that solve the problem?
Mr. Michael Barr. You raise an excellent point. Under
existing law, we cannot do asset purchases. But what we do do
is provide ample liquidity to the financial system on the basis
of those assets--
Mr. Torres. Even with the emergency liquidity, the losses
remain on the balance sheet. Those losses are arguably
undercutting public confidence in the banking system, and, as
you know, banking is as much about psychology as it is about
finance. Why not just remove the losses?
Mr. Michael Barr. I would go back to the first point you
made in your earlier question, which is that for most banks,
they are managing this well. They are doing fine. They have
stable deposits, and they don't need to sell the assets they
have on their balance sheet. Those assets can stay there and be
held to maturity. If institutions need liquidity, they can get
access to that from the discount window. And the program we
established, the Bank Term Funding Program, gives longer-term
stability at par for those very assets.
Mr. Torres. I want to squeeze in one more question. Did the
bank supervisor at the San Francisco Fed have the supervisory
authority to prevent Silicon Valley Bank from investing in
unhedged long-term securities? Did you have that authority?
Like, is the problem a lack of authority or a failure to
exercise the authority you had?
Mr. Michael Barr. The bank examiners cited them for not
behaving properly with respect to--
Mr. Torres. But did they have the authority to prevent it?
Mr. Steil. The gentleman's time has expired. The witness
can answer in writing for the record.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thanks, Mr. Chairman. It seems that Washington
continues to create crisis after crisis and then come in to
bail out the crisis. If you go back to 2008, it was the
policies coming out of Washington that everyone was entitled to
own a home, and it didn't matter what their credit score was,
or whether they were able to pay it back; it was a human right.
And fast forward a few years, the compounding impact of that
resulted in the 2008 financial crisis.
What did we learn from that? I would argue nothing. The
government came in, bailed everybody out, bailed out the big
banks, caused chaos in the smaller banks, and picked winners
and losers. And that is the theme I am going to be hitting on,
picking winners and losers, because the free market capitalism
is supposed to have consequences. And when the government
continues to bail out bad decisions and pick winners and
losers, it severely impacts the free market and it undermines
our ability to compete in the global economy.
In 2008, we understand the policies coming out of
Washington caused the crisis. We had two votes. The first vote
failed on TARP. The second vote passed. It was very painful. I
was not here. But at the end of the day, it solved the short-
term problem, but we didn't learn anything. We did learn one
thing, actually. It was that the TARP wasn't fun. So in 2008,
we gave extraordinary power to the Executive Branch to avoid a
future TARP vote, and this is the first time that you all used
that authority.
Let's fast forward to 2023. A number of policies coming out
of Washington, particularly the emphasis on ESG and on DEI, and
that, compounded with the spending of trillions and trillions
of dollars that caused inflation, which resulted in higher
interest rates, destabilized SVB and Signature. So, we didn't
really learn anything, in a way, because the Executive Branch
used the 2010 authorities to, again, pick winners and losers,
so there are no consequences for risk-taking. There are no
consequences for poor decisions, and we keep talking about what
caused this.
Really, it is the San Francisco Fed's misplaced priorities.
Last fall, when every other Fed was sending out notifications
regarding interest rates and inflation and the future stressors
of the banking system, they were still sending out DEI and ESG
updates. So that, combined with the SVB and Signature
mismanagement, and the inflation we created, caused this
problem. And we have, again, not learned anything, and have
bailed out poor decision-making.
I guess I want to start with Under Secretary Liang. Is this
a problem? We invoked the systemic risk exception and covered
both insured and uninsured depositors. Is it not creating more
systemic risk in the overall system, because capitalism is no
longer a thing? The government is backstopping everything. Is
that a concern?
Ms. Liang. Congressman, I understand your question and your
concern. In this case, the systemic risks exception was taken.
All depositors were covered. Shareholders and debt holders were
not. They lost their investment. Those who took the risks lost
their investments in this case.
I do think in this situation, the actions were taken to
prevent contagion spreading to other banks. It was to help save
banks, small and other regionals, who were losing their
deposits to either the largest banks or to outside the banking
system. I do think this requires that we will need to be
assessing and looking for reforms.
Mr. Timmons. But the lack of consequences, the government
continuing to pick winners and losers, my biggest thing is the
justification. Treasury and the White House both said that
there are no taxpayer dollars. And what about the people who
are going to miss payroll? Neither one of those were
necessarily true because it is taxpayer dollars, because the
increased premiums from the FDIC are going to be passed down to
Americans all over the country. And they are taxpayers, so
those are their dollars. It is not coming out of the general
fund, but it is semantics.
And as it relates to payroll, only $22-plus billion is
going to be at issue, so there were opportunities to make them
whole. I just really think that: one, delegating to the
Executive Branch the ability to bail out banks is dangerous;
and two, bailing out these banks in this manner has caused more
problems than was possibly worth it. And with that, Mr.
Chairman, I yield back.
Mr. Steil. The gentleman yields back. The gentlewoman from
Texas, Ms. Garcia, is now recognized.
Ms. Garcia. Thank you, Mr. Chairman, and thank you to the
ranking member for bringing us together for this really
important hearing. And I wanted to start with just a quick
question to the three of you, because I have been troubled by
the use of the word, ``crisis.'' I know I shared with the
ranking member the other day that I never saw this as a crisis.
Perhaps it was a boo-boo, maybe a major boo-boo, but not a
crisis. I don't personally think that two bank failures equals
a crisis. I just want to quickly ask each one of you for just a
yes-or-no answer. Do you think this is a crisis, Mr. Barr?
Mr. Michael Barr. As I said at the outset, I think our
system is sound and resilient.
Ms. Garcia. Is it a crisis, sir? Yes or no?
Mr. Michael Barr. I think that it was an appropriate use of
the systemic risk exception to prevent a crisis.
Ms. Garcia. Is it a crisis? Yes or no?
Mr. Michael Barr. As I said, I think that where we are now,
the banking system is sound and resilient. There was a risk
that if we did not invoke the systemic risk exception it could
have led--
Ms. Garcia. Would you have used the word, ``crisis,'' is
the question?
Mr. Michael Barr. I have not used that word.
Ms. Garcia. Okay. Chairman Gruenberg?
Mr. Gruenberg. I think we were at risk of crisis, and I
think the actions that we took have stabilized the system.
Ms. Garcia. Ms. Liang?
Ms. Liang. I agree with that. The actions we took
stabilized the system.
Ms. Garcia. I think you are right. And I guess that we
should focus on the swift action over a weekend, no less, and
how we were able to avert a crisis, and how we were able to
prevent contagion, and how we were able to, frankly, not just
save those banks, but potentially other banks as well.
And I know that recently, as the ranking member mentioned,
there has been some notion that it is the woke policies that
have done this. And I know that some extreme MAGA Republicans,
like Florida Governor, Ron DeSantis, have even suggested that
it was the ESG policies, frankly, with zero evidence, but yet
they continue with some of this rhetoric.
Vice Chair Barr, yes or no again, do you believe that ESG
investing played any role in the failure of Silicon Valley
Bank?
Mr. Michael Barr. No.
Ms. Garcia. Mr. Gruenberg?
Mr. Gruenberg. No.
Ms. Garcia. Ms. Liang?
Ms. Liang. I do not have the information that the
supervisors have, but my strong preference would be, no.
Ms. Garcia. Right. As I said, there has been no evidence,
and thank you for reaffirming that. As you will recall, the
claim that ESG investing caused the failure of Silicon Valley
Bank is really strongly reminiscent of the claim back in 2008
that the financial crisis then was because of the Community
Reinvestment Act obligation, so it's very similar. The
Financial Crisis Inquiry Commission examined this claim and
rejected it, as did researchers within the Federal Reserve.
Vice Chair Barr, would you remind us what researchers at
the Fed have concluded about attempts to blame the housing and
foreclosure crisis on historically-disadvantaged communities of
color?
Mr. Michael Barr. The research shows that there is no basis
for the conclusion that low-income or moderate-income
households were responsible for causing the financial crisis.
Ms. Garcia. Okay. Do you think that the communities of
color, the disadvantaged communities, and particularly people
in my district, which is 77-percent Latino, should be concerned
that these bank failures and some of the remedies that are
being put in place may cause a lack of capital and the lack of
opportunities to be able to buy homes? Will it impact mortgage
rates?
Mr. Michael Barr. I think the steps that we took together
to stabilize the economy and provide public confidence in the
banking system are of assistance to low- and moderate-income
households and to all Americans around the country.
Ms. Garcia. But do you think there will be some negative
impact on interest rates and the ability to borrow to purchase
homes?
Mr. Michael Barr. My estimate is that the banks' reactions
to the current economic circumstances are likely to lead to a
reduction in credit availability overall. That is something
that we are watching very carefully at the Federal Reserve.
Ms. Garcia. Right. And Ms. Liang, I had a question for you
about crypto. I know that there is an additional bank that is
going through some process of voluntary liquidation. What role
did crypto play in all this?
Ms. Liang. I don't believe crypto played a direct role in
either of the failures.
Ms. Garcia. Was there an indirect role?
Ms. Liang. I know that Signature had activities involved in
digital assets, but I don't believe that is the main--
Mr. Steil. The gentlewoman's time has expired.
Ms. Garcia. Mr. Chairman, I will follow up in writing with
the three panel members on this issue.
Thank you. I yield back.
Mr. Steil. The gentleman from New York, Mr. Garbarino, is
recognized for 5 minutes.
Mr. Garbarino. Thank you, Mr. Chairman. Chairman Gruenberg,
I want to talk a little bit about Signature Bank. Can you
describe the condition of Signature Bank at the time of its
receivership, and what evidence you had that showed Signature
was also facing a liquidity crunch on March 10th? And what was
Signature's available funding at the time the New York State
Department of Financial Services closed the bank and placed it
in FDIC receivership?
Mr. Gruenberg. Congressman, we can get you the specific
data. But the fact is that on Friday night, that bank had real
difficulty in meeting its obligations at the end of the day,
and barely met them by the 5:30 closing time. And I think both
New York State and the FDIC, who jointly had responsibility,
did not think that the bank could open and make it through the
day on Monday. I think that was the determination, and that is
why New York State, on Sunday, decided to close the
institution.
Mr. Garbarino. Okay. And you can get me the specific
numbers?
Mr. Gruenberg. Yes, we can.
Mr. Garbarino. Thank you very much.
I want to follow up on something that my colleague, Tom
Emmer, asked before. When New York Community Bancorp (NYCB)
assumed Signature's deposits and some of its loans, it
refrained from including roughly $4 billion of deposits related
to Signature's digital assets banking business. As a result,
Signature's real-time payments network remained under the
FDIC's receivership. It was reported early yesterday evening
that the FDIC sent a notice to depositors whose deposits were
not included in NYCB's bid, informing them that any accounts
not closed by April 5th will be automatically shut and
depositors will receive a check in the mail. Can you walk me
through the FDIC's reasoning for this decision?
Mr. Gruenberg. Yes, Congressman. The winning bid for
Signature by NYCB's subsidiary, Flagstar, was for all of the
deposits, except the winning bid chose not to bid on the
digital assets, and there were about $4 billion of those. And
we provided those depositors a couple of weeks to determine
what they might want to do, and we sent them a notice that we
will return their deposits to them by early next week, I
believe.
Mr. Garbarino. In your response to Mr. Tom Emmer, you
mentioned that Signet was included in the sale of Signature
Bank, while the deposits were not. So, you are still currently
looking for a buyer?
Mr. Gruenberg. Just to clarify my earlier response, the
digital deposits are being returned to their deposit holders.
It is my understanding that Signet was not acquired and
remained in the receivership and is in the process now of being
marketed.
Mr. Garbarino. So, Signet is still under FDIC receivership?
Mr. Gruenberg. Yes, it is in the process.
Mr. Garbarino. Okay. Thank you very much.
Chairman Gruenberg, I also want to bring this up. In the
Senate Banking Committee hearing yesterday, there was an
exchange between Senator Van Hollen and Vice Chair Barr on
guidance issued in 2018 and codified in 2021 when Randy Quarles
was Vice Chair of Supervision of the Federal Reserve Board of
Governors. This has become a target of some, even though this
initiative doesn't limit any action an agency can take; it
simply clarifies which actions will be accomplished through
regulatory measures, and which through supervisory measures.
You stayed silent during the entire exchange, but I
recently read an op-ed in The Wall Street Journal written by
Randy Quarles, which has said that both you and Lael Brainard
voted for this guidance. Is that true? Did you vote for this
guidance?
Mr. Gruenberg. Yes, we did, Congressman.
Mr. Garbarino. Thank you very much.
Vice Chairman Barr, as we look back at the events of the
past couple of weeks, there have been a number of similarities
identified between Silicon Valley Bank (SVB) and Signature
Bank, the first of which is a high concentration of deposits
well above the FDIC insurance limit, with a report showing 90
percent for Signature Bank, and 87 percent for SVB, and the
second being the lack of diversity in both banks' deposits. The
news has discussed the potential impacts of these similarities.
However, I would like to explore how the Federal Reserve and
the FDIC view deposit diversification as it pertains to
determining the soundness of financial institutions?
Mr. Michael Barr. Sorry. I couldn't hear the last four
words of your sentence.
Mr. Garbarino. I am out of time, so I will submit this
question in writing for you to respond for the record. Thank
you so much.
Mr. Steil. The gentleman yields back. The gentlewoman from
Georgia, Ms. Williams, is recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Mr. Chairman. I want to
start by making it clear that the failures of the Silicon
Valley Bank and Signature Bank were not just about wealthy
people, as some of the narrative that we have heard in
conversation. There is a significant chance of a disastrous
impact on hardworking people who are trying to make payroll,
and it is important that this detail doesn't get lost in the
shuffle.
The weekend that SVB failed, I woke up to text messages
from constituents asking what the government was going to do,
what kind of intervention there would be, because they had
money in this bank. Atlanta is a booming area for tech
startups, so the impact was felt very much by my constituents.
They wanted to know if they would be able to access their funds
on Monday morning. Black-owned businesses were worried about
paying their employees, and entrepreneurs who are creating
wealth in marginalized communities were concerned about
covering basic business expenses. These businesses are closing
the racial wealth gap, of which, unfortunately, my home
district of Atlanta leads the nation, and the banking system
has to work for them.
Mr. Gruenberg, in the aftermath of SVB's failure, there has
been substantial debate about raising the $250,000 deposit
insurance gap to minimize any potential payroll disruptions and
economic pain that may follow when the next thing fails, which
my constituents are so concerned about. There is reportedly
bipartisan legislation in the works to temporarily raise the
cap. If the cap is raised or eliminated to help protect
depositors, we will need to take measures to reduce the risk of
moral hazard. One proposed measure is the continuance of risk
price deposit insurance premiums. Mr. Gruenberg, as we consider
different deposit insurance reforms, should we seek to maintain
risk price deposit insurance?
Mr. Gruenberg. I think we do want to maintain risk-based
deposit insurance, but I do think if you change one part of the
system, it impacts another part of the system. As I indicated
earlier, the FDIC is undertaking a comprehensive review of the
deposit insurance system in light of this episode, and we will
release a report by May 1st, also laying out policy
considerations for changes to the system that we hope will
inform the discussion around this.
Ms. Williams of Georgia. So beyond the report and moving
forward, what steps can the FDIC take when making decisions
about deposit insurance assessments to make banks think twice
about various financial stability threats that
disproportionately impact marginalized communities?
Mr. Gruenberg. We have the authority now to do risk-based
pricing. And I think it is fair to say that in light of this
experience, we need to think hard about liquidity risk and
concentrations of uninsured deposits, and how that is evaluated
in terms of deposit insurance assessments. But I also think it
is an appropriate moment to take a look at how our system
works, in light this episode, and consider what other changes
might be prudent.
Ms. Williams of Georgia. Thank you. And we all know that
part of maintaining a healthy banking system is confidence,
specifically consumer confidence that their money is safe in
the banks that they have chosen. People of color have a harder
time getting affordable loans from the largest banks, and thus
turn to the community banks, Minority Depository Institutions
(MDIs) , and the like. And when there is fear in the financial
sector of an economic downturn, minority-owned banks and
community financial institutions are hit hard as customers
transfer their funds to what they think are safer and larger
banks.
Vice Chair Barr, what can Congress do to strengthen and
support community and minority-owned banks in situations like
we just experienced?
Mr. Michael Barr. Thank you very much, Representative
Williams. I agree with you that having a wide diversity of
kinds of institutions in our country is really critical,
including community banks and regional banks, Minority
Depository Institutions, and Community Development Financial
Institutions (CDFIs). All of these institutions, I think, are
really important for economic vibrancy and inclusion in our
society. We would be happy to work with you on ways that we can
continue to support those institutions going forward.
Ms. Williams of Georgia. I would be happy to work with you,
and we will definitely follow up.
Mr. Gruenberg, I would love to hear from you what kind of
deposit insurance reforms would help support Minority
Depository Institutions and other community banks?
Mr. Gruenberg. It is an interesting question. We are in the
process of finalizing a major revision of the Community
Reinvestment Act. And in the proposed rulemaking, there were
specific provisions to encourage banks to work with and support
Minority Depository Institutions (MDIs) and Community
Development Financial Institutions (CDFIs). So, I think that is
actually an important vehicle and opportunity to strengthen our
MDIs and CDFIs which serve low- and moderate-income (LMI )
communities. And we should give some thought in our review
whether deposit insurance may play into this as well.
Ms. Williams of Georgia. I have many more questions, but we
are going to work together on this. And my time has expired.
Thank you, Mr. Chairman. I yield back.
Mr. Steil. The gentlewoman yields back. The Chair now
recognizes himself for 5 minutes. Vice Chair Barr, did you
originally believe that inflation was temporary and transitory?
Yes or no?
Mr. Michael Barr. I was not on the Federal Reserve Board at
that time.
Mr. Steil. Did you believe it was temporary and transitory
or you had no opinion?
Mr. Michael Barr. I would say at that time, I did not have
an informed opinion.
Mr. Steil. You did not have an informed opinion if it was
temporary and transitory. The Federal Reserve continued to call
inflation temporary and transitory until Q4 of 2021. The Biden
Administration continued to call inflation temporary and
transitory. I apologize. The Federal Reserve Q4 of 2021, Biden
Administration, Q1 of 2022, following the Russian invasion of
Ukraine. That is when they stopped calling it temporary and
transitory. Would the challenges that we saw with SVB have
taken place if inflation truly was temporary and transitory?
Yes or no?
Mr. Michael Barr. The problems that came about from SVB are
from classic interest rate risk management.
Mr. Steil. So if inflation was temporary and transitory, I
will make the assumption for myself that interest rates would
not have gone up. If interest rates didn't go up in the manner
and hold in the way that they are, SVB would not have occurred,
the breakdown of the bank?
Mr. Michael Barr. Sir, banks have an obligation to manage
interest rates, whether they are going up or going down. It is
just classic good banking, and it wasn't done here.
Mr. Steil. Okay. Let me dive in then. Yesterday, in
response to a question from Senator Rounds, following the
matter requiring immediate attention (MRIA), you noted that
there was a challenge in the model that it, ``was not at all
aligned with reality.'' Was that a challenge in modeling in
particular interest rates, or what part of reality was it not
connected with?
Mr. Michael Barr. Let me also say, as I mentioned earlier
today, I called that an MRIA yesterday, but I meant an MRA. It
was just a staff mistake.
Mr. Steil. Understood.
Mr. Michael Barr. But it is an MRA on interest rate risk.
And basically, what I meant is that their model showed that
they would earn more money as rates were going up, and they
were losing more money.
Mr. Steil. So, interest rate was at the core of how it was
disconnected from reality?
Mr. Michael Barr. Yes, it was about interest rate.
Mr. Steil. That is fair. So, here is my chance. As I look
at the ability to prevent all of this, the Federal Reserve
would have had to admit that they were wrong, that inflation
was not temporary and transitory. I think that is in the core
of our conversation here. And Congress, I think, continues to
do an abysmal job with the Administration to bring inflation
under control.
Let me switch gears if I can, pretty substantively here,
Vice Chair Barr. I have in front of me the H.4.1 from the
Federal Reserve, and, in particular, looking at the loans that
the Federal Reserve has made to depository institutions. There
has been a significant shift in particulars related to other
credit extensions. Other credit extensions, it is noted that
the Fed is taking collateral from the FDIC. That account, March
9th, $0; March 16th, 1 week later, $57.6 billion; March 23rd, 1
week after that, $178.6 billion. The Federal Reserve is taking
collateral from the FDIC and loaning the FDIC money. Under what
statutory authority is the Federal Reserve engaged in that?
Mr. Michael Barr. Sir, the Federal Reserve is lending
through the discount window to the bridge institutions that
were established by the FDIC. They are lending to banks. There
is a provision in the statute which clearly contemplates that.
Mr. Steil. You are noting that when I read Footnote 7, that
would not have fallen under the line of either primary credit
or secondary credit?
Mr. Michael Barr. For the purposes of enhancing
transparency to the public, that line was broken out so that
everybody could see exactly what it was.
Mr. Steil. Okay. That is helpful.
If I can shift to you, Chair Gruenberg, as we look at this
dramatic increase, is there a reason that you used this
facility rather than: one, selling assets; or two, tapping your
line of credit at the Treasury, which I believe is to the tune
of $100 billion?
Mr. Gruenberg. We certainly have sold assets to meet our
liquidity needs. And these bridge institutions are nationally-
chartered banks eligible to borrow from the Fed and utilize
that in order to manage the liquidity situation.
Mr. Steil. But is there a reason that you are not either:
one, utilizing in a more-substantive way the credit line
available from the Treasury; or two, selling assets? And the
reason I ask this is, so that maybe I can be more specific,
does the FDIC have the same risk that we are seeing in other
banks with unrealized losses, and is that why you are tapping
this facility rather than selling assets?
Mr. Gruenberg. No, Congressman, we are selling assets to
meet the obligations of the failed institution, and we are also
managing the liquidity. And these bridge banks have the
authority and ability to access the Fed resources.
Mr. Steil. So, you are both selling assets and borrowing
from the Fed to the tune of $178 billion at the same time?
Mr. Gruenberg. For these institutions to meet immediate
liquidity demands, which we will eventually get back to now.
Mr. Steil. And did the Treasury at any time discourage you
from taking a loan from the line of credit from the Treasury
for purposes of addressing the debt ceiling limit?
Mr. Gruenberg. I think there were discussions in regard to
that, but I think the principal purpose here, frankly, was
liquidity management, and also to be able to preserve liquidity
in our deposit insurance fund.
Mr. Steil. I appreciate your time here today. I yield back.
I will now recognize the gentleman from North Carolina, Mr.
Nickel, for 5 minutes.
Mr. Nickel. Thank you, Mr. Chairman, and thank you to our
witnesses for being here with us today. People in my district
are already living paycheck to paycheck, and they are worried
about making ends meet. They are already dealing with the
rising costs of everyday goods and services, and the last thing
they need to worry about right now is their bank or their
employers' banks failing. That is why I am working to provide
transparency and accountability to this process. Where were the
regulators? I want to know what the bank executives were doing
in the months, weeks, and days leading up to this failure. My
constituents deserve to know that we are going to hold bank
executives accountable and ensure that this doesn't happen
again.
These bank failures rattled our financial system. Working
families in my district need a stable economy they can rely on.
They can't afford more uncertainty when it comes to their next
paycheck. And right now, the looming debate over the debt
ceiling crisis has the ability to rattle our economy even
further.
Vice Chair Barr, in just a few months, the United States
Congress needs to raise the debt ceiling. If the U.S. defaulted
on the debt, would it be really bad for our economy? Would it
be really, really bad for our economy, or would it be really,
really, really bad for our economy?
Mr. Michael Barr. The basic answer to that question is that
the Congress needs to increase the debt ceiling. There are no
other options around that. In the absence of an increase in the
debt ceiling, it could cause enormous dislocation to our
economy.
Mr. Nickel. So, one really? Two reallys? Three reallys?
Mr. Michael Barr. I wouldn't characterize it--I think that
it is the right thing to do. I think Congress needs to do that
and really leave anything else about the debt ceiling up to
discussions between the Administration and Congress. Just to
say from an economic perspective, it would be quite
unfortunate.
Mr. Nickel. Thank you. Vice Chair Barr, this was the
second-largest banking failure in U.S. history, with $42
billion pulled in a day. Who was asleep at the wheel?
Mr. Michael Barr. I think in the first instance, as I have
said, the bank management is responsible for running the bank.
They failed in basic measures of interest rate risk and
liquidity risk. They had very many outstanding matters
requiring attention, and matters requiring immediate attention.
They were deficient in governance and controls. They were rated
a 3 overall with respect to the firm, which means they are not
well-managed. And at the end of the day, it is the job of the
bank and their board of directors to run themselves the way
they should. We, of course, are looking internally at our own
supervision and our regulation, and looking at ways that we
could have forced the firm to do more faster, or raise
standards so that if the firm got into trouble, they had more
capital and liquidity.
Mr. Nickel. I certainly hope there is some accountability.
Chair Gruenberg, moving to you now, First Citizens Bank,
which is located in my congressional district, North Carolina's
13th District, was the successful bidder for Silicon Valley
Bank. They have a proven track record in this space and are
already instilling greater confidence in our banking system.
Can you tell us about the evaluation process for the bids that
were submitted, and what made First Citizens the most-
attractive bidder?
Mr. Gruenberg. Two reasons I would say, Congressman: one,
financially, it was the strongest bid for the FDIC; and two, it
was a bid for all of the deposits of the institution and all of
the loans of the institution so that it provided operational
certainty as well. So from both a financial standpoint and an
operational standpoint, it was really the strongest bid we
received.
Mr. Nickel. And it took a while. Why wasn't Silicon Valley
Bank purchased sooner? I think that certainly would have
created more stability in this situation.
Mr. Gruenberg. If we could have sold it that first weekend,
that would have been desirable. The fact is, Silicon Valley was
a pretty large institution, $200 billion in assets, and pretty
complicated in terms of its business activity. So for a
potential acquiring institution to do the due diligence over a
weekend and reach a conclusion and make up was, frankly, not
practical. And so, we set up a bridge institution for both of
the failed banks, and were able, in a pretty orderly way, to
set up bidding processes for each.
And, in fact, for Silicon Valley, we had considerable
interest and got a couple of requests for additional time for
interested parties to do due diligence. So, we extended the bid
date a couple of times to give people time, and we ended up
getting, I think, 27 bids from 18 different sources. And it
ended up being a pretty constructive process.
Mr. Nickel. Thank you very much. I yield back.
Chairman McHenry. The gentlewoman from California, Mrs.
Kim, is recognized for 5 minutes.
Mrs. Kim. Thank you, Mr. Chairman. Let us examine what we
are discussing here. At the time of its failure, Silicon Valley
Bank was the 16th-largest bank in the United States, with
assets more than tripling from $71 billion in 2019, to over
$200 billion at the end of 2022. Obviously, we all know banks
have a responsibility to manage their operation well.
Unfortunately, with our economy facing inflation not seen in
decades, and increasing interest rates, supervisory missteps at
the Federal and State level failed to correct and mitigate
SVB's rapid growth in its balance sheet and management risks.
Mr. Barr, yesterday, you mentioned that you first heard
about SVB's interest risk and liquidity management issues back
in February of this year. So I want to ask you, who decided to
put SVB under the horizontal review process? Considering there
are at least 6 warnings going back toward 2021, and given SVB's
risk profile, how did you conclude that the firm did not merit
actions beyond the horizontal review process?
Mr. Michael Barr. Thank you, Representative Kim. I think
that is one of the things we are trying to figure out in the
review. The supervisors on the ground saw the risks that you
described, saw the interest rate risk and saw the liability
risk. They required the firm to make changes. The firm didn't
make those changes in time. The concern of supervisors grew.
You can see that from the fall of 2021 to the deficiency rating
in 2022 and then further action that year. But you are
absolutely right that at the end of the day, the bank failed,
and so you need to look at--
Mrs. Kim. Reclaiming my time, it seems to me that you could
have considered downgrading ratings or considering enforcement
actions. And to me, it seems that supervisors kicked the can
down the road and didn't consider the full consequences of
their inaction.
But I want to ask the next question. In February, the Fed
reported in its January Senior Loan Officer Opinion Survey that
it was seeing tighter credit conditions, so it seems to me that
SVB's failure will only serve to exacerbate the tighter credit
conditions. I am worried that entrepreneurs will soon find it
more difficult to get a loan or credit to expand their
businesses and hire workers due to tighter credit conditions.
So Mr. Barr, I want to ask you, how will you consider
tighter credit conditions as part of your holistic capital
review and Basel III Endgame reforms?
Mr. Michael Barr. We are looking to review our capital
requirements not for the current situation, but for the long
term. Any capital requirements that we consider would go
through notice-and-comment rulemaking and have a transition
period, so they would not apply to the current economic
circumstances that we are in now. We are thinking about the
long-term effects. We are, of course, paying attention to
tightening credit conditions as part of our monetary policy
decisions. This factors into our forecasts for the economy and,
therefore, into our interest rate decisions.
Mrs. Kim. I am asking you to please pause and keep the
current market volatility and uncertainty in mind as you do
that.
Mr. Gruenberg, let me ask you a question. Yesterday, you
stated that you received two private bids to purchase SVB. This
is after the FDIC was appointed as a receiver, and you said one
was invalid because it did not get the approval of the Board,
and the second one indicated it was more expensive than
liquidation. And in your prepared statement, you mentioned that
the cost to the Deposit Insurance Fund of resolving SVB will be
about $20 billion. Can you tell us why the FDIC Board decided
to deny the first bid, and did you see the second bid as more
expensive than the $20 billion incurred by the insurance fund?
Mr. Gruenberg. I think the point is that neither bid was
less-expensive than liquidation, so liquidation would have been
a less-costly alternative than either acquisition at that
point. And, frankly, the limited bids and the quality of the
bids we received was a function of the very-compressed
timeframe, because we just taken over the institution Friday
morning, and this was Sunday afternoon. And we thought it was
in the interest of the Deposit Insurance Fund to place the
institution into a bridge so that we could manage it for a
brief period of time and then organize an open bidding process
so that interested parties would have a fair opportunity to bid
on the institution. That is ultimately what happened, and if it
would be helpful, I would be glad to respond more fully in
writing.
Chairman McHenry. That would be fantastic.
Mrs. Kim. Thank you.
Chairman McHenry. And with that, we will recognize Ms.
Pettersen of Colorado for 5 minutes.
Ms. Pettersen. Thank you, Mr. Chairman. I am the last on
the list, I believe. I always am, so I just want to thank you
all for being here today.
Chairman McHenry. We are Members of Congress. We don't rate
it that way. We can restart your time. I am sorry to interrupt.
I apologize.
Ms. Pettersen. Thank you, Mr. Chairman, and I really
appreciate this incredibly-important discussion. There are
numerous areas that need to be examined to better understand
the failure of Silicon Valley Bank and Signature Bank. But
first, I want to thank you, and the boards of the FDIC and the
Federal Reserve, and the Treasury Secretary, for your
leadership in ultimately bringing the resolution needed to
stabilize the banking system and protect depositors.
I had text messages, and emails, and phone calls from
constituents and from people across Colorado who were
absolutely terrified that they were going to lose everything
and that they were going to be unable to make payroll. So while
the response took some time, and I think it did foster a lot of
misinformation being spread, ultimately, thank you so much for
doing what was necessary to protect our economy.
But we are, of course, here today because we want to make
sure that we are learning from what could have been done better
and evaluating what we need to do in changing times. And I
think that one of the most-challenging issues that each of us
face in this committee and for all of you is how we adjust our
regulations and responses in a time when information spreads
like wildfire, and, in this case, created a panic across our
system and threatened our entire economy. Previously, a bank
run would take days. In 2008, Washington Mutual saw over $16
billion in withdrawals over 10 days. With SVB, the bank run
happened in a matter of hours, with a record $42 billion being
withdrawn in a single day. And while SVB clearly wasn't
managing their risks, and was not listening to the warnings
from the FDIC, I don't think any bank could have survived a run
like this.
And so, Mr. Gruenberg, knowing that this panic occurred
through social media, in response to the suggestion that not
all depositors would be protected when the FDIC took over SVB,
what lessons can regulators take from this to improve their
public communication when a future bank fails, knowing how
quickly depositors can immediately move their money in this new
technological age? I know you are going to take time, and we
will hear a lot more about this in the future. What do you
think is needed to expedite the responses necessary to mitigate
something like this from happening again?
Mr. Gruenberg. To prevent it from happening again really
raises all of those supervisory and regulatory issues we have
been talking about this morning. I do think in regard to
deposit insurance, we should do more and perhaps a better job
of explaining to the public how deposit insurance works, what
is covered, what is not covered, and what are the options
available to people when they open a bank account. And I think
that would also be one of the reasons to undertake this overall
review of the deposit insurance system, to see what changes
might be considered that would be helpful to the public.
Ms. Pettersen. Great, thank you for that. And last, Vice
Chair Barr, in just a couple of weeks we have seen these two
bank failures. We have seen efforts to prop up First Republic
Bank, and we have also seen issues with Credit Suisse and the
Deutsche Bank in Germany. I am still getting questions from
people in my district who are concerned. So, what message do
you have for them, for our constituents and small businesses,
to reassure them that our financial system is stable and that
their money is secure?
Mr. Michael Barr. I think that is an excellent point. I
know when many of you talk to banks in your own districts, they
are telling you the same thing, which is that the banks are
sound and resilient. I think if you look at the actions we took
a couple of weeks ago, those actions demonstrate that we are
committed to ensuring that all deposits are safe. We are
prepared to use those tools for any size institution as needed,
if appropriate, to keep the system safe and sound. So, the
basic message is that the banking system is sound and
resilient.
Ms. Pettersen. Great. Thank you. I really appreciate it,
and I yield back, and congratulations since I am the last one.
Chairman McHenry. The gentlelady yields back. The last one
on the Democratic side.
Ms. Waters. We have two.
Chairman McHenry. I'm sorry. I will now recognize the
gentleman from Florida, Mr. Donalds, for 5 minutes.
Mr. Donalds. Thank you, Mr. Chairman. Panelists, I know it
has already been an interesting day. Thanks for being here.
Vice Chair Barr, it says here you were confirmed on July
19, 2022. So you came in kind of in the middle, according to
your own testimony, of when the San Francisco Fed was having
examiner issues at SVB. Is that fair?
Mr. Michael Barr. The examiner report with respect to the
whole firm as a whole was done in July 2022, and that is when I
arrived.
Mr. Donalds. Okay. According to your testimony, you say
here at the end of 2021, supervisors at the San Francisco Fed
found deficiencies with bank liquidity risk, resulting in 6
supervisory findings in May of 2022. There were three
additional findings associated with ineffective border
management, et cetera. In October 2022, supervisors met with
the bank's senior management to express concerns about the
interest rate profile. On February 23, 2023, your staff alerted
you to these issues, and then we know the rest of the story. Is
it your assessment that there are serious supervisory issues at
the San Francisco Fed?
Mr. Michael Barr. We are doing the review of that now, and
I don't want to prejudge the outcome of it. There were clearly
supervisory--
Mr. Donalds. Mr. Barr, I am not going to ask you to
prejudge. I am going to prejudge, as an American citizen, and
as a Member of Congress. Didn't you think it is unnecessary, it
is a rational judgment, that with all the supervisory findings
that existed for the last 2 years, this still resulted in
finding that there are supervisory issues at the San Francisco
Fed?
Mr. Michael Barr. Sorry. That was your question?
Mr. Donalds. Yes. Do you think it is a good assumption to
make?
Mr. Michael Barr. I don't want to assume. I want to go look
at the facts. We are going to look at the facts in this review.
I think that, overall, at the Federal Reserve, without pointing
any figures in any direction, there were significant
supervisory failings. I said at the outset of the hearing that
if you have a bank like this that is failing, there are serious
management issues, there are supervisory failings, there are
regulatory failings, and we are committed to looking at all of
it.
Mr. Donalds. Okay. That is fair.
Mr. Chairman, I ask unanimous consent to put into the
record a Wall Street Journal article dated November 11, 2022,
``Rising Interest Rate Hikes Hit Bank Bond Holdings.''
Chairman McHenry. Without objection, is is so ordered.
Mr. Donalds. In this article, there is actually a comment
by Thomas Hoenig, former President of the Federal Reserve Bank
of Kansas City, and former Vice Chair of the FDIC, and he says
if they go high enough, you can actually be losing money on
those assets. He was speaking about banks generally but not
specific banks. This is highlighting that his concern as
somebody who was, in part, in your shoes and Mr. Gruenberg
shoes, was concerned about rising interest rates on bank
portfolios writ large. Do you agree with that statement?
Mr. Michael Barr. Yes, I think interest rate risks, again,
is a core risk. We look at it across the system and banks are
supervised for that, and it is absolutely essential they manage
that risk.
Mr. Donalds. Mr. Barr, let me ask you a question. Do you
think that this committee should be talking to San Francisco
Fed President Mary Daly? Do you think that she would have some
input on these issues that happened in Silicon Valley Bank?
Mr. Michael Barr. I think the committee's decisions about
witnesses is far outside my expertise.
Mr. Donalds. Let me ask you this question, because we have
been talking a lot about concerns from a supervisory
perspective. You have a speech dated March 9, 2023, at the
Peterson Institute for International Economics here in D.C.--
March 9th is an interesting day; that is the day that SVB blew
up. And in your speech, you say, ``The banks we regulate, in
contrast to stablecoins and crypto markets, are well-protected
from bank runs through a robust array of supervisory
requirements.'' Do you still stand by that statement?
Mr. Michael Barr. As I said earlier in the hearing, I think
that it demonstrates the need for humility about our ability to
understand the causes and consequences of financial difficulty.
So of course, that statement, in this context, has turned out
to be incorrect.
Mr. Donalds. Okay. That is fair.
Mr. Chairman, for the record, I also have another article I
want to submit, ``The U.S. Needs a New Bank Supervisory
System,'' written by Peter Wallison, who is at the American
Enterprise Institute.
Chairman McHenry. Without objection, it is so ordered.
Mr. Donalds. And in part, it talks about some of the
shortcomings of the current supervisory system. In short, I
will say this in the final 22 seconds of my testimony.
For the last 14 years in Congress, we viewed Dodd-Frank as
the holy grail for safe and sound banking. And if we are going
to be honest with ourselves, what has been the holy grail for,
``safe and sound banking,'' is cheap or free money for balance
sheets to look good. But when rates rise, not all balance
sheets look good, and that is not just banking. That is in a
lot of places. So, maybe we should take a look at our
supervisory system overall. I yield back.
Chairman McHenry. The gentleman's time has expired. The
gentleman from Nevada, Mr. Horsford, is now recognized for 5
minutes.
Mr. Horsford. Thank you to the chairman and the ranking
member, and to the regulators for appearing before the
committee. I want to start by saying the work that was done to
address the Silicon Valley and Signature Bank collapses and
ensure the health and resiliency of the U.S. banking system is
vital. And I want to commend those who were involved in the
swift action and the decisive steps that were taken to protect
businesses' payroll, particularly small businesses and their
employees whom we heard from at that time. Now, while
depositors were protected, shareholders and bondholders need to
bear the costs for any potential mismanagement, and I am
eagerly awaiting the full examination of these bank reviews and
the upcoming reports that you will be providing.
While the collapses of Silicon Valley Bank and Signature
Bank may have occurred due to unique and isolated factors, the
panic that their failures caused quickly became a private
sector-wide issue. And I am glad to say that the original
crisis of competence was subsided, and cooler heads did
prevail. I fear that the consequences will continue to
materialize as we go on. For example, consolidation of deposits
within the largest systemically-important banks will only
continue if the sense of risk within the financial system
persists.
Uninsured depositors are leaving our mid-sized banks
because they feel that their money is safer elsewhere, even as
these banks showed continued strength and sound financial
footing. Deposit insurance is crucial for many of my
constituents to get a sense of peace of mind, and we cannot
have the perception of a two-tiered banking system in this
country where only the largest banks are protected.
Chairman Gruenberg, as we look to increase competence in
the banking system with a particular focus on small and medium
banks, how would an increase in the FDIC insurance limit
prevent further consolidation of deposits at the largest banks?
Mr. Gruenberg. Congressman, I think that question is raised
by this episode. The decision to guarantee the uninsured
deposits of these two institutions really has implications for
the entire deposit insurance system and we need to consider it.
And I would like to do it comprehensively, looking at all of
the aspects of our deposit insurance regime, and then come back
by May 1st with a report that the FDIC will put out, which will
also provide some policy options for consideration.
Mr. Horsford. Okay. One other area that I am concerned
about is that I have already heard that multiple development
projects, particularly housing projects in my district, are
struggling to get financing due to a pull-back of credit from
community banks. While I understand the need to review capital
requirements, I think you would agree, Vice Chair Barr, that no
bank can meet $40 billion-plus in depositor demands from
capital alone.
So, Vice Chair Barr, I would really urge you to consider
the effects of increased capital requirements on the lending of
healthy community banks. However, I do believe that action must
be taken. Would you be able to discuss any additional
strategies the Fed would be able to pursue to address the
problems that we have seen at Silicon Valley and Signature
Banks without reducing credit industry-wide?
Mr. Michael Barr. Thank you very much. First of all, the
capital review that we are doing does not apply to community
banks. We are not intending to increase capital requirements on
community banks. My understanding from looking at the community
banking system is that it is well-capitalized and stable and is
serving its communities. We are looking at larger institutions.
If we do that, we are going to do it through a notice-and-
comment rulemaking process that takes a good bit of time in
their transition rules. So, we are not talking about capital
rules that in any way that would apply now. We are talking
about how to make sure that the capital and liquidity rules in
the future are appropriate.
Mr. Horsford. Okay. And then finally, there were reports
that after Silicon Valley went into receivership, they
literally advertised that they are FDIC-guaranteed as a way to
attract depositors. Is that true, and if so, what has been
done? They cannot now benefit from the policy after we help
save them.
Mr. Michael Barr. That is a fair question, Congressman. We
placed Silicon Valley into a bridge institution. There may have
been some communications of the kind you describe. When we
heard about it, we put an end to it.
Mr. Horsford. Thank you. And thank you, Mr. Chairman. I
yield back.
Chairman McHenry. The gentleman from Nebraska, Mr. Flood,
is now recognized for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman. Vice Chair Barr, you
have disclosed that Silicon Valley Bank's composite CAMELS
rating was a 3 out of 5. In response to Ranking Member Waters'
question earlier, you disclosed that their liquidity rating was
a much stronger, 2 out of 5. Furthermore, you testified that
the Federal Reserve examiners cited Silicon Valley Bank seven
separate times, and you testified that examiners were aware of
Silicon Valley Bank's interest rate risk last year. Why wasn't
that risk reflected in Silicon Valley bank's liquidity rating?
Mr. Michael Barr. I think that is an excellent point. One
of the things we are looking at in the review is, given the
extent of difficulties, the problems the firm was having, how
did the regulators come up with this particular, the supervisor
come up with this particular approach? Its composite rating was
not well-managed, and its holding company rating was deficient.
That is also not well-managed, but it has a 2 for liquidity,
and a, ``conditionally meets expectations,'' for liquidity. And
we are trying to understand how that is consistent with the
other material.
I mentioned earlier, too, that I am highlighting the
liquidity and governance and interest rate risk findings. But
there were many other findings at the firm that had not been
addressed at the time they failed. And so the question is, why
wasn't that escalated and why wasn't further action taken? I
think it is a legitimate and fair question.
Mr. Flood. Was that composite score, that composite CAMELS
rating ever downgraded in 2021 following the examiners'
citations?
Mr. Michael Barr. I don't know the answer to what happened
in 2021. The 2022 rating was the first time the firm had a
composite rating for all of its activities as it entered the
large and foreign banking organization group.
Mr. Flood. Vice Chair Barr, was Silicon Valley Bank's
liquidity rating ever downgraded following the examiners'
citations in 2022, or is it the same issue you just described
with the large bank status, their liquidity rating?
Mr. Michael Barr. The overall rating for the firm, of which
this would be a part, was done that summer. There was a process
after that of looking at both liquidity risk and interest rate
risk. And my understanding is that as part of the horizontal
review that was being conducted at the beginning of 2023, the
examiners were looking at what was the appropriate level.
Mr. Flood. Okay. Every quarter, the FDIC releases its
quarterly banking profile. This profile includes a public
disclosure of the total assets of FDIC-insured institutions
that are deemed, ``problem banks.'' In December of 2022, the
FDIC's problem bank list included total assets of only $47.5
billion. Although the banks and the FDIC's problem list are not
public, given the size of Silicon Valley Bank, it is reasonable
for me to conclude that Silicon Valley Bank was not on the
FDIC's problem bank list released just 3 months before its
collapse.
Chairman Gruenberg, given the several supervisory findings,
identifying various issues with Silicon Valley Bank's practices
since 2021, including the issuance of matters requiring
immediate attention from those supervisors, were those findings
communicated to the FDIC?
Mr. Gruenberg. I can tell you, Congressman, that the
criteria to get on the problem bank list is to be rated a 4 or
5 on the CAMELS rating scale of 1 to 5. And at that time,
Silicon Valley was not rated a 4 or 5, so we wouldn't have been
in a position to put it on the problem bank list.
Mr. Flood. Vice Chairman Barr, why wasn't this information
shared for the purposes of the FDIC's problem bank list?
Mr. Michael Barr. As Chairman Gruenberg just indicated, the
FDIC makes an independent judgment with respect to its list
based on the ratings of the firm, and the firm was not rated
lower than a 3.
Mr. Flood. Chairman Gruenberg, has Silicon Valley Bank ever
previously been on the FDIC's list of problem banks?
Mr. Gruenberg. The reason I hesitate is we put the
aggregate assets of the institutions on the problem list. We do
not indicate the individual institutions--
Mr. Flood. You can't do that?
Mr. Gruenberg. And now, I take your point--
Mr. Flood. And this is a question from Congress.
Mr. Gruenberg. Yes, I believe I can get back to you, and
answer your question, if I may follow up for the record. We
will be glad to do that. I just want to check. But yes, the
answer is, we will get back to you with an answer.
Mr. Flood. The answer is, yes?
Mr. Gruenberg. We will come back with an answer for you, if
that is okay.
Mr. Flood. Okay. Thank you for your testimony. I still
think there are lots of questions regarding what happened here,
especially with Silicon Valley Bank, but I appreciate your
time. And I yield back.
Chairman McHenry. The gentleman from New York, Mr. Meeks,
is recognized for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman. And let me thank all of
you for your responsibilities and the duties and what you have
done. It's funny when you have been here for a while, a lot of
folks are here talking about how Dodd-Frank shouldn't be the
holy grail. But if you were here in 2008, when there was no
Dodd-Frank, that was a crisis. That was something. This is
nothing. For some of my colleagues who are here now, who were
not here then, we are a long way away from where we were in
2008, and the banking system is much stronger now than it was
in 2008. I say, thank God that we had Dodd-Frank at that
particular time, so I want to thank you for that.
But as a result, let me just ask maybe, Vice Chair Barr, as
part of your internal review, you have indicated that you plan
to evaluate whether the application of more-stringent standards
would have prompted SVB to better manage risks. So as part of
that, do you expect to look into whether more-frequent stress
testing for a bank of SVB's size would be appropriate?
Mr. Michael Barr. Yes, Representative Meeks, we will look
at stress tests. We will look at really all of the enhanced
prudential standards, liquidity standards, capital standards,
stress testing. All of that will be part of our review with
respect to SVB, and it will help inform broader questions we
have been working on since I arrived in July about what the
capital framework for the system should look like.
Mr. Meeks. Now, stress test results for our largest banks,
those that are above $250 billion, are available to the public.
Is that correct?
Mr. Michael Barr. Yes, stress testing results are available
annually to the public.
Mr. Meeks. And I understand that because of SVB's rapid
growth, and the timing of when the bank crossed the $100-
billion asset threshold, SVB would not have been subject to
stress testing until 2024. But when a bank with about $100
billion in assets size is subject to stress testing, who has
access to those results? Would, for example, an individual or
small-business client of the bank be able to see those results?
Mr. Michael Barr. Under the current framework, you
correctly describe that the Federal Reserve's rules established
in 2019 would provide that SVB would be subject for the first
time to stress testing in 2024. There is currently, under that
structure that was put in place in 2019, no stress testing for
firms below the $100-billion level. And that is part of the
framework.
Mr. Meeks. Could you expound a little bit more on how
helpful it might be for the positive, for example, to get to
see those results, especially depositors who are uninsured,
that have uninsured deposits?
Mr. Michael Barr. Stress testing results for the firms that
are in stress testing are published annually. For firms that
are below that level in the current framework, they are not
required for that kind of stress test. They do internal
liquidity stress test as a normal part of their requirements on
a quarterly basis. That is an internal proprietary action by
them, subject to supervisory review. In the case of SVB, they
conducted their liquidity stress test, but the supervisors
found that the stress tests essentially were not stressful
enough; they were not realistic.
Mr. Meeks. But I believe there is an issue that customers
and investors who bank with institutions that are large enough
to trigger a systemic risk exemption do not have the
transparency into the risk management and scenario plan that
their banks may have on the way. But in the limited time I
have, let me just follow up on a couple of questions that some
other people had asked. I am thinking about small banks and
community banks which are very important, and talking about
depository insurance. And I know someone is talking about that.
Now, to me, not a lot of people, especially in the
community banks, have $250,000 in the bank. But in trying to
help strengthen those banks, what I would like to see is some
of the small businesses may have more than $250,000 in the
bank, and they have to pay employees, and I would like them to
be given them some business. Do you think that when you look at
depository insurance, there should be a difference between
small businesses and personal, as far as that is concerned,
going forward?
Mr. Gruenberg. Congressman, that is a good question, and it
is one of the things we will be looking at in the report that
we are going to submit on May 1st, and laying out some policy
considerations to take into account here.
Mr. Meeks. Thank you. I am out of time, so I yield back.
Chairman McHenry. Another gentleman from New York, Mr.
Lawler, is now recognized.
Mr. Lawler. Thank you, Mr. Chairman.
Chairman Gruenberg, just a follow-up on that line of
questioning. Yes or no, should the FDIC insurance limit be
raised?
Mr. Gruenberg. Let us do the work on this, and then come
back to you with the report.
Mr. Lawler. In the 2008 collapse, we raised it from
$100,000 to $250,000. We made it permanent in 2010. It has not
been raised since then. Do you think it should be raised?
Mr. Gruenberg. I don't know the answer to that question
right now, Congressman.
Mr. Lawler. Okay. Did the Fed, the FDIC and the Treasury
have the tools needed to deal with this crisis when you were
made aware of the situation with SVB? Do you all believe, yes
or no, that you had the tools needed to deal with this?
Mr. Michael Barr. Yes, we have the tools we need.
Mr. Lawler. Yes?
Mr. Gruenberg. I agree. Yes.
Mr. Lawler. Yes?
Ms. Liang. I agree. We had the tools to prevent--
Mr. Lawler. Okay. Did the Fed, the FDIC and the Treasury
have the tools needed to prevent it? Yes or no?
Mr. Michael Barr. I think that is a very difficult question
to answer. I do not have a yes-or-no answer for it. I think we
can do better at supervision and regulation. But whether we
could have prevented the collapse in 24 hours of this
institution, I don't know the answer to that.
Mr. Gruenberg. I agree with Vice Chair Barr's point, but
from a supervisory basis, I think there was an opportunity.
Ms. Liang. I'm sorry, Congressman. Can you repeat your
question?
Mr. Lawler. Yes or no, do you think that Treasury had the
tools needed to prevent this from happening?
Ms. Liang. The Treasury had the tools to use the systemic
risks exception.
Mr. Lawler. And used it?
Ms. Liang. And recommendations to prevent a crisis.
Mr. Lawler. So, the FDIC and the Treasury do believe it,
but the Fed is not sure yet. In that case, do you think the
Federal Reserve failed here in its role?
Mr. Michael Barr. I think fundamentally, as I have said, it
is the responsibility of the bank management to run the bank.
The bank managers failed in basic risk management.
Mr. Lawler. Right. But you provided, the Federal Reserve
and the San Francisco Fed provided guidance, provided notices
and failed to follow up on that, correct?
Mr. Michael Barr. I would say that there was follow-up; the
question is whether the follow-up was stringent enough. And
that is part of the review we are doing.
Mr. Lawler. But, ``stringent enough,'' really means that
the individual people may or may not have done the job that
they were supposed to do, correct, because if you give the
notice and you reach out, isn't it incumbent on the individual
supervisors to actually follow up and make sure that the bank
is doing what it needs to do?
Mr. Michael Barr. It is incumbent on the bank to take the
actions that the supervisors are directing them to take. And it
is incumbent on the supervisors to check on that.
Mr. Lawler. And the supervisors failed to check on that?
Mr. Michael Barr. No, I didn't say that. What I said is
that it is incumbent on the supervisors to do that. I think it
is a legitimate--
Mr. Lawler. Did they do that?
Mr. Michael Barr. I think it is a legitimate and fair
question to ask whether they were stringent enough, whether
they used enough tools to force the bank manager do what was
obviously right.
Mr. Lawler. With respect, that is semantics. Did they do
the job they were supposed to do? Did they follow up?
Mr. Michael Barr. The reason I am having difficulty
answering the question is I believe they did follow up, but the
bank managers did not perform on the job, and that is why we
are--
Mr. Lawler. Okay. Were the California and New York
regulators equipped with the appropriate tools to handle this,
or should these banks, specifically SVB, given its size, been
federally-chartered instead of State-chartered?
Mr. Michael Barr. I think that our country benefits from
having a wide diversity of kinds and sizes of institutions and
the diversity of chartering authorities that we have. So, I am
not recommending that we change that.
Mr. Lawler. Okay. When did any of you first speak with
Superintendent Harris regarding Signature Bank? Just dates,
please.
Mr. Gruenberg. I would want to check the record on that, if
I may. I will get back to you. I just want to be sure we are
accurate.
Mr. Lawler. Okay. Do either of you know when you first
spoke to Superintendent Harris?
Mr. Michael Barr. I do not. Signature Bank is a New York
State-regulated institution, but I don't know when I first had
a conversation about it.
Mr. Lawler. Okay.
Chairman Gruenberg, when was the decision made to close
Signature Bank, and what criteria were used to determine
whether or not Signature Bank met the systemic risks exception?
Mr. Gruenberg. Those are two questions, Congressman. The
decision to close the bank is the authority for the State, and
the State made that decision on Sunday. What was the question
in regard to the systemic risk exception?
Mr. Lawler. What criteria was used to determine that?
Mr. Gruenberg. I think we had before us the failure of two
institutions, both Silicon Valley and Signature, and we also
had before us evidence of significant liquidity stress in other
institutions. And we had data in terms of deposit outflows, and
I think that was basically the data on which we relied.
Chairman McHenry. If the Chair will submit that data for
the record and answer this, would you be willing to do that,
the data related to systemic risk designation?
Mr. Gruenberg. Yes, of course.
Mr. Lawler. Okay. Thank you.
Chairman McHenry. Or systemic risk event.
We will now go to the gentleman from Iowa, Mr. Nunn, for 5
minutes.
Mr. Nunn. Thank you, Mr. Chairman. And to the witnesses,
thank you for being here today. If you would, just with a show
of hands, do you believe, as most Americans do, as I have said,
and as the President has said, that taxpayers should not be on
the hook for that? Would you agree with that statement?
Mr. Michael Barr. Yes.
Mr. Nunn. Further, would you agree with the statement that
we should have diversity within our banking system?
Mr. Michael Barr. Yes, I agree.
Mr. Nunn. Specifically, then, would you support our
regional banks, our small local banks, and recognize the undue
burden that they potentially are going to be saddled with as a
result of an FDI assessment because of these two banks?
Mr. Gruenberg. As you may know, Congressman, I responded to
that issue and the answer is the FDIC has authority under the
law to consider who benefits from the assistance provided and
we will take that into account with particular attention and
sensitivity to the impact on community banks.
Mr. Nunn. I appreciate that, Mr. Gruenberg.
I want to specifically talk to Mr. Barr about the diversity
in banks. When you do your holistic capital review of banks
under $10 billion, what would that look like?
Mr. Michael Barr. We are not anticipating in any way
raising capital requirements with respect to community banks.
It is not part of my holistic review.
Mr. Nunn. Good. I am glad to hear that. Second, I will
highlight here, $22 billion. As we say in Iowa, that is a lot
of money, and, in fact, it is 20 percent of the entire FDICs
fund for this. In order to make that up, special assessments
will inevitably have to be part of this. Do you see that being
passed along to the top banks primarily, or how will you
calibrate that?
Mr. Gruenberg. Congressman, it is relevant to my response
before, that we are required by law to pay for any cost to the
Deposit Insurance Fund caused by the coverage of the uninsured
deposits through a special assessment. We have to do that by
public notice and rulemaking, and we have authority under the
law to consider the types of entities that benefit from any
action taken or assistance provided.
Mr. Nunn. I understand that, but I just want to highlight
the difference here. We had two banks that had 90 percent of
their depositors uninsured at any level. Most banks across
America have 47 percent, but in my State of Iowa, in Des Moines
alone, it is 70 percent. Am I wrong? It is 70 percent. These
are farmers who are looking to plant this spring, who know that
they have a good deposit there. It is small businesses that are
supported by this. What they don't need is ultimately, to our
original question, an increase in their cost of living, and in
their cost of doing business by a special assessment that
disproportionately punishes those who are at the medium and
small size. Are you committed to making sure that is a priority
for you?
Mr. Gruenberg. Yes.
Mr. Nunn. Excellent. Last question. I want to be brief
here. Silicon Valley Bank did not have a chief risk officer,
Mr. Barr, for how many months?
Mr. Michael Barr. I believe was approximately 8 months.
Mr. Nunn. So, almost a year. During that time, they did
have four members who served on something called the Governance
and Corporate Responsibility Committee. And these four members
were actually on their risk committee, but as I understand it,
they had no actual experience in managing material risks. Were
these individuals focused on the wrong thing, and was there no
true risk management being taken at Silicon Valley Bank in the
lead-up to the failure?
Mr. Michael Barr. I can't speak to the particular
individuals. I can say that the supervisors told the board of
directors and the bank that the board oversight with respect to
risk management was deficient. That was one of the findings
that was made in the summer of 2022.
Mr. Nunn. So, did beginner risk management of interest rate
risk and liquidity risks cause this bank to fail, SVB
specifically?
Mr. Michael Barr. Yes. Ultimately, they mismanaged their
interest rate and their liquidity risk. And their very large
percentage of uninsured depositors had a massive and unexpected
run. As I said, $42 billion on a Thursday, and they expected
another $100 billion on Friday, and that was just a devastating
run for the institution.
Mr. Nunn. I would like to ask this question then, and I
hope that San Francisco Fed President Mary Daly has the
opportunity, Mr. Chairman, to testify in person before this
committee. But as you are overseeing this, why did she tell the
regional Fed to work on cataloging climate risks, even going so
far as to assemble a team to study how these risks are likely
to impact the Fed's future reserve mandates? And I will state
here that one of SVB's memos from their supervisory credit
group claims they have been working closely with the Fed to
inform its agenda priorities, namely fiscal risk to banks from
climate change. Were the regulators focused on the wrong risk
posed by this Administration? Yes or no?
Mr. Michael Barr. The supervisors were focused overall in
the system on interest rate risk, credit risk, and
cybersecurity risk, traditional risks in the banking system.
There are some supervisors who are focused on climate change.
Mr. Nunn. But there was no risk officer to look at the
actual dramatic over-interest they had at this.
Chairman McHenry. The gentleman's time has expired.
Mr. Nunn. Thank you, Mr. Chairman. I will submit the rest
of my questions in writing. And I yield back.
Chairman McHenry. The gentlewoman from Texas, Ms. De La
Cruz, is now recognized for 5 minutes.
Ms. De La Cruz. Thank you, Mr. Chairman, and thank you,
witnesses, for being here today. What we have learned in the
wake of the first run on a major U.S. bank since the Great
Recession, is that the management team of Silicon Valley Bank
took, quite frankly, foolish actions that no informed financial
institution should ever take, by taking on deposits from their
customers, which are short term in definition, and buying long-
term bonds when interest rates were low. Now, that was before
President Biden's inflation crisis. They chose to become
vulnerable. When inflation skyrocketed after enacting the
Democrats' partisan $2-trillion American Rescue Plan, the Fed
was late to determine that inflation wasn't transitory, forcing
a decision to spike interest rates, creating risk in the
banking system.
Now, if we backtrack for a second and look at what the
Federal Reserve was focusing on when they were hiking interest
rates, it wasn't the risks associated with those actions.
Instead, it was research papers on climate risks and social
issues, and you just acknowledged a second ago that some were
focused on climate change.
My question is to you, Mr. Barr. I realize you didn't come
into your role until July 2022, but isn't it correct that when
you did, you quickly announced your holistic view of Fed
regulations and your own Fed special scenario analysis for
weather and climate risks?
Mr. Michael Barr. Those are a few different items. I
announced that I was doing a holistic capital review, which was
looking at capital in the system, whether it was at appropriate
levels. We have been conducting that really since July. There
is a separate thing, which is that in the beginning of this
year, we piloted for the Global Systemically Important Banks
(G-SIBs), a pilot climate scenario analysis, to evaluate how
they were addressing climate risk in the system. That is
separate from basically what most supervisors are doing most of
the time--which is highlighted in our November 2022 supervision
report--which is looking at interest rate risk, credit risk,
liquidity risk and--
Ms. De La Cruz. We could both agree that interest rate risk
and liquidity risk are within your job scope. But is climate
risk really something that you should be focused on when we saw
all of the red flags on this bank? Now, correct me if I am
wrong, but isn't the role of the Vice Chair of Supervision to
focus on bank supervision and regulation? Yes or no?
Mr. Michael Barr. Yes, that is, in fact, what I am focused
on.
Ms. De La Cruz. So if that is the case, were you distracted
from the mission of your role, which, again, is supervision and
regulation, and instead focused on climate?
Mr. Michael Barr. No, I would respectfully disagree with
that. The way that we are looking at climate risk is about the
risks that climate change might pose to the financial system
and to individual banks. It is a very narrow role focused on
financial risks, not climate policy more generally. And I
think, as I was saying, before, we need to be humble about
regulators' ability or banks' ability to understand all the
risks in front of us. It is prudent to look at long-term risks
as well as really obvious and central risks right in front of
us, like interest rate risk and liquidity risks.
Ms. De La Cruz. I would say that what we saw with Silicon
Valley was obvious risk. It looks like the mismanagement was
flagged. There were fair warning signs. And while I appreciate
that you were able to focus some attention on the actual
supervision part of the bank regulation, we see a gap here. And
I think that we would like you to focus on your job as the Vice
Chair of Supervision in the wake of SVB's collapse, and I feel
like this was a little too late when you all finally stepped in
to look at it. So, thank you. With that, Mr. Chairman, I yield
back.
Chairman McHenry. We will now recognize the gentlewoman
from Indiana, Mrs. Houchin.
Mrs. Houchin. Thank you, Mr. Chairman. We are here today to
really determine who knew what, and when, and who did what, and
when. Is this a failure of Silicon Valley Bank? Is it a factor
of lack of adequate oversight or lack of regulation? I am happy
to hear many of you say today that it was largely a factor of
lack of oversight. We have heard discussion today about the
Financial Stability Oversight Council (FSOC).
Vice Chair Barr, what is the purpose of FSOC?
Mr. Michael Barr. I'm sorry. The question is, what is the
purpose of FSOC?
Mrs. Houchin. What is the purpose? What is the mission of
FSOC?
Mr. Michael Barr. The FSOC is an entity that brings
together regulators from around the financial system, market
regulators and bank regulators, to look at risks in the system
and to try and coordinate across those agencies.
Mrs. Houchin. Right. It was created by Dodd-Frank in 2010
to provide, according to FSOC's website, comprehensive
monitoring of the stability of our nation's financial system.
It is chaired by the Secretary of the Treasury, and it includes
the Fed, the OCC, the CFPB, the FDIC, and the CFTC. In fact,
all of our witnesses today take part in those meetings, do you
not? Yes or no?
Mr. Michael Barr. Yes. Each of the three of us participate
in FSOC as member agencies.
Mrs. Houchin. And is the function of FSOC also to identify
risks to the financial stability of the United States? Mr.
Barr, yes or no?
Mr. Michael Barr. Yes, that is among its functions.
Mrs. Houchin. Following an Executive Order by President
Biden in May of 2021, entitled, ``Climate-related Financial
Risk,'' FSOC now also evaluates climate-related financial risk.
Is that right, Mr. Barr?
Mr. Michael Barr. That predates my time, and we are not in
charge of running the FSOC. So, I don't know the sequence of
events, but that is the case.
Mrs. Houchin. But I assume that it is now part of FSOC's
charge to monitor and evaluate for systemic risk also?
Mr. Michael Barr. I'm sorry. I couldn't hear the last
sentence.
Mrs. Houchin. I assume it is also part of FSOC's charge to
monitor and evaluate for systemic risk?
Mr. Michael Barr. Yes. As I indicated previously, a core
function of FSOC is to look at risks across the financial
system.
Mrs. Houchin. In a quick review of the FSOC meeting minutes
dated December 16, 2022, five pages were devoted to, ``climate-
related financial risk.''
Mr. Barr, many of those comments came from you. I couldn't
find any pages devoted to market and news reports of the
apparent looming problem with Silicon Valley Bank and Signature
Bank. In fact, in December of 2022, Silicon Valley Bank was
listed on the S&P Global marketplace as the top U.S. bank by
proportion of uninsured deposits, at nearly 94 percent. Only 4
other banks were estimated to be above 80 percent, including
Signature Bank, but none of that was mentioned in your December
16th meeting. Are those factors not important to comprehensive
monitoring of the stability of our nation's financial system,
Mr. Barr?
Mr. Michael Barr. I was asked at the meeting you are
describing to discuss one risk to the financial system, and
that was with respect to climate risk.
Mrs. Houchin. Let me just ask that question one more time.
Are those factors not important to the comprehensive monitoring
of the stability of our nation's financial system? The debt
ratio, the uninsured ratio, is that not important?
Mr. Michael Barr. The standard factors we think about in
banking, among those factors are interest rate risk and
liquidity risk, those are core issues that we do in the bread-
and-butter supervision every day.
Mrs. Houchin. So, do you not consider the uninsured ratio
as one of the factors of systemic risk?
Mr. Michael Barr. We look with respect to microprudential
supervision of individual firms, we are looking at their
liquidity risk. And one element of their liquidity risk is the
extent to which they rely on uninsured deposits. That includes
uninsured deposits from financial entities, uninsured deposits
from operating businesses, and then, their insured deposit
base. So, it is a core part of what we think about when we
think about liquidity risks.
Mrs. Houchin. But none of that was discussed in the
December meeting relative to Signature Bank or Silicon Valley
Bank or any system gap?
Mr. Michael Barr. As I said, the specific request to me in
that meeting was to talk about this issue. We obviously talk
about broader issues all the time.
Mrs. Houchin. Any other issues, yes, I get that. Under
Secretary Liang, earlier, Chairman Huizenga was asking about
the minutes taken at the meetings for FSOC. You said the
meeting minutes are published after the next meeting. However,
it seems there is more detailed information than what is shared
publicly, and that the closed executive session meeting minutes
are not shared at all. Will you commit to providing this
committee with unredacted minutes from every FSOC meeting since
the March 10th meeting, including closed executive sessions?
Ms. Liang. Congresswoman, I am aware of two FSOC meetings
since these events, March 12th and March 24th.
Mrs. Houchin. Will you commit to providing the meeting
minutes for the executive sessions?
Ms. Liang. They were executive sessions, and we do produce
minutes, so we will release them.
Mrs. Houchin. Thank you. I yield back.
Chairman McHenry. We will now go to our final two
questioners. And the penultimate questioner, Mr. Ogles of
Tennessee, is now recognized for 5 minutes.
Mr. Ogles. Good afternoon, and thank you all for being
here. I know it has been a long day. I will try to be brief,
because I know you all have to be exhausted.
Mr. Barr, when you look at increasing interest rates,
especially in a rapid environment, you know that is going to
create risks when it comes to deposit structure for these or
really any bank, but certainly as it pertains to small and mid-
sized banks.
Mr. Michael Barr. As interest rates change, whether they go
up or down, they create risks for banks and the expectation is
that banks manage those risks, and most banks in the country do
manage those risks quite effectively.
Mr. Ogles. Now, the regulatory regime that is in place, do
they give specific guidance as it pertains to those risks in a
rapidly-changing environment?
Mr. Michael Barr. We do have standard guidelines that are
issued to banks about how they conduct their internal liquidity
stress tests. Those tests are designed or supposed to be
designed to stress-test stressful environments with significant
increases and decreases in interest rates. So, they are not
directionally-guided; they are supposed to test both up and
down.
Mr. Ogles. As far as some of the guidance that was given
specifically to SVB, I think my colleague from across the aisle
said that they blew you guys off. What types of guidance or
alerts were given to SVB?
Mr. Michael Barr. Silicon Valley Bank was required to
conduct internal liquidity stress tests on a quarterly basis,
once it reached a certain size. It conducted those tests and
the guidance back from the supervisors was that the tests were
inadequate.
Mr. Ogles. So, understanding that you have a bank that grew
rapidly in a very short period of time, and there was even a
Wall Street Journal article dating back to November 11, 2022,
singling out SVB's potential risks to the banking system, so
clearly, it was on people's radar. I think you stated earlier
that you need further regulatory action from this body to give
you more teeth, if you will, as you move forward. Did you ever
request a hearing on SVB from this committee of jurisdiction,
understanding that there was potential risk in the market?
Mr. Michael Barr. Representative, I haven't asked this body
for additional authority. I said we were conducting a review of
our existing authority to see where we could have done better
on supervision and regulation.
Mr. Ogles. When I think about this situation, and I think
about my district, which, although it includes part of
Nashville, it is predominantly suburban and rural, what is
going to end up happening is my small banks, my community banks
are going to end up bailing out a couple of banks that are too-
big-to-fail. I am curious, Mr. Gruenberg, if my banks receive
an assessment from the FDIC, and they decide to blow you guys
off, is there going to be some sort of regulatory action? Are
you going to send them a bill? Are you going to enforce that
assessment?
Mr. Gruenberg. Congressman, this has come up previously,
and we are required by law, to the extent there are losses to
the Deposit Insurance Fund as a result of the coverage of
uninsured deposits, to impose a special assessment on the
banking industry. And we are required to do that through a
notice-and-comment rulemaking process.
Mr. Ogles. Right.
Mr. Gruenberg. And as I indicated, we also have authority--
Mr. Ogles. I guess the heart of the question, though, is,
would you go to the bank and say, we want our money? Yes or no?
Mr. Gruenberg. The answer is, if they were subject to the
assessment, the answer would be, yes. We do have authority to
consider the types of entities that benefit from any action
taken or assistance provided.
Mr. Ogles. The thing that is important here, though, is I
have to go back to my district and tell my banks they are not
going to get screwed over in this process. And what I have
heard today is a bunch of tap dancing, and no assurances to my
district and my banks that they are not going to have to bail
out, basically, the failures of the regulatory bodies that were
empowered to do a job. And if you found yourself unable to do
that job, you could have come to the committee of jurisdiction
and asked for support, but I find no evidence that you did so.
Mr. Chairman, I yield back.
Chairman McHenry. The gentleman yields back. We will now go
to the final questioner, the gentleman from Wisconsin, Mr.
Fitzgerald, for 5 minutes.
Mr. Fitzgerald. Thank you, Mr. Chairman. Yes, I have heard
the same question asked 100 different ways over 2 days. The
thing that I am concerned about is, it seems like shutting down
a bank is messy. And I am not sure if we are nimble enough or
if the Fed or the FDIC is nimble enough, that if we have
multiple institutions that are all failing at the same time, as
to whether or not we could address this, because there seems
like a 3-day period in which everybody was kind of making
arbitrary, I will say, arbitrary decisions, not necessarily
guided by any specifics. And if there is a table of specifics
on what is the red flare that says, this bank is in trouble, we
need to act quickly. I am not convinced, after 2 days of
testimony, that it actually happened that way.
I would ask either one of you to first comment on, can you
instill more confidence that, in fact, we do know what we are
doing, and we can react quickly? And if it is multiple banks,
that we know we are going to be in a good place. And then, I
have one more question after that.
Mr. Gruenberg. I can say in regard to Signature, that they
basically ran out of money to meet their obligations, and that
was the reason the bank failed. As I indicated earlier, they
barely met their obligations at the end of the business day on
that Friday. And it was clear to the State regulator, New York
State, as well as to us that they could not open on Monday and
get to the end of the day based on the liquidity they had, and
that was the reason the bank was closed by the State. And
Chairman Barr speaks to Silicon Valley Bank, but it was a
pretty straightforward decision and a traditional one.
Mr. Michael Barr. Similarly, Silicon Valley Bank basically
was unable to meet its obligations in the ordinary course of
business. They suffered a devastating run, a $42-billion run on
Thursday. On Friday, they expected to face around $100 billion.
And they did not have the collateral sufficient to support
discount window letting, and so they were not able to meet
their obligations and they were closed.
Mr. Fitzgerald. And then the last question or comment, Ms.
Liang, when were you informed, first of all, that there was a
possibility of Silicon Valley Bank defaulting, and was the
President made aware of that? How much conversation was
happening within the White House, and were there conversations
with specific depositors or those that had an interest, like
Governor Gavin Newsom in California? And now, I learned that
the State makes a decision on actually shutting down the bank,
what were those conversations like, and could you characterize
them for me?
Ms. Liang. So Treasury learned, or I learned, I can speak
for myself here, of the issues at Silicon Valley, either
Wednesday evening or Thursday, after it issued its statement,
its earnings report, saying that it had a loss and was going to
raise capital. We heard certainly Thursday night of concerns at
the institution because of the very, very rapid deposit
withdrawals.
And then on Friday morning, we learned the California State
regulator had closed it, and the FDIC was appointed receiver.
That was our situation. Over the day of Friday and Saturday, we
heard from many, many people, institutions, and businesses,
wondering how they could access their deposits, and if they
could make payroll. And so, we were gathering information and
consulting regularly with the Federal Reserve and the FDIC.
Mr. Fitzgerald. Did you speak to California Governor Newsom
at any point?
Ms. Liang. I did not.
Mr. Fitzgerald. Did anybody at the White House talk to
Governor Newsom?
Ms. Liang. I do not know.
Mr. Fitzgerald. Okay. Thank you. I yield back.
Chairman McHenry. The gentleman yields back. With prior
agreement between the ranking member and the Chair, I will now
recognize the ranking member for such time as she may consume,
and then I will close.
Ms. Waters. Thank you very much, Mr. Chairman. Chairman
McHenry, I thank you for working with me on holding this
bipartisan hearing, and I look forward to additional hearings
on these bank failures. Importantly, we need to hear directly
from the CEOs of SVB and Signature Bank. I also want to thank
our witnesses and their staffs for the countless hours they
have spent since the failure of SVB and Signature Bank. The
economy is stronger today because of your decisive actions. I
look forward to hearing from you again when you have completed
your review of the bank failures, and I expect those reviews
will consider the various matters raised by myself and
committee members here today.
In listening to the concerns of members on both sides of
the aisle, I must say, I am heartened at how much agreement
there was. I heard Republicans argue for our bank regulators to
be more-aggressive in their bank supervision, to do more onsite
exams, escalate penalties more quickly, apply enhanced
prudential regulations for all banks over $100 billion, expand
deposit insurance, and protect community banks from bearing the
burden of these bank failures. I and my Democratic colleagues
couldn't agree more, and so I look forward to working with
Chair McHenry on legislative reforms to effectuate those
reforms quickly.
Again, I thank the witnesses for being here today and doing
everything that you could possibly do to respond to the
questions and the concerns that you were presented with today.
Thank you. I yield back.
Chairman McHenry. I want to thank the ranking member, and I
want to thank the ranking member on our joint call for this
hearing. The agreement that we had was to pursue this to find
out the facts, and I think that is the way the committee
comported itself today. I won't speak ill of the Senate, but
you had a hearing there yesterday, and today was just a
different hearing here. That was the expectation that the
ranking member and I both had, and I think it met those
expectations.
The bottom line for you as the panel is that there is
bipartisan frustration with many of your answers. There is a
question of accountability and the appearance of a lack of
accountability. I hope you hear this clearly, not as a partisan
act, but as a sincere concern. I think, furthermore, there is a
lack of transparency in the decision-making by those of you
sitting on this panel to answer for your decisions in that week
and that first weekend.
And while I think we are able to start painting a picture
of what happened, there is still much that we need to
understand, specifically timelines of what you knew, when, and
how you responded. I think those are very important things for
you three on this panel to answer fully for in the name of
transparency, but, frankly, in the name of building confidence.
There are still questions that somehow after 3 weeks, many
of you have answered here that, ``You are going to check with
staff,'' or, ``You are not sure.'' This was not a, ``gotcha,''
hearing. This was not a surprise thing. We expect a little more
detail than what you provided in many of your answers,
specifically the timeline, the data used, and the evidence for
your decision-making.
We needed leadership in that key moment of that week, and
we want to understand the decision-making. We put you in these
very powerful positions, all Senate-confirmed, in our
government. We want you to be capable of achieving good
outcomes for the American people and the American economy. We
want you to be competent in carrying that out and that is why
we have oversight. And over 5 hours in, you have certainly
submitted yourselves to oversight. We will have written
questions for the record. We ask that you respond in a timely
manner.
But the final point I will make is, at a time where there
may be a bit of a political divide in America, I don't think
you heard that here today. By and large, in this hearing, from
both sides of the aisle, you heard our sincere concerns. And we
know here on Capitol Hill that our work is not done, and we
will have oversight of this, independent of your actions and
your coordinated efforts on oversight with these reports.
I would like to thank Vice Chair Barr, Chairman Gruenberg,
and Under Secretary Liang. Thank you for being here today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.