[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]






 
                       A FAILURE OF SUPERVISION:


                         BANK FAILURES AND THE


                     SAN FRANCISCO FEDERAL RESERVE

=======================================================================

                                HEARING

                               before the

                      SUBCOMMITTEE ON HEALTH CARE
                         AND FINANCIAL SERVICES

                                 of the

                         COMMITTEE ON OVERSIGHT
                           AND ACCOUNTABILITY

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2023

                               __________

                           Serial No. 118-38

                               __________

  Printed for the use of the Committee on Oversight and Accountability
  
  
  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
  
  


                       Available on: govinfo.gov
                         oversight.house.gov or
                             docs.house.gov
                             
                             
                             
                      ______

             U.S. GOVERNMENT PUBLISHING OFFICE 
 52-572              WASHINGTON : 2023           
                             
                             
                             
                             
                             
               COMMITTEE ON OVERSIGHT AND ACCOUNTABILITY

                    JAMES COMER, Kentucky, Chairman

Jim Jordan, Ohio                     Jamie Raskin, Maryland, Ranking 
Mike Turner, Ohio                        Minority Member
Paul Gosar, Arizona                  Eleanor Holmes Norton, District of 
Virginia Foxx, North Carolina            Columbia
Glenn Grothman, Wisconsin            Stephen F. Lynch, Massachusetts
Gary Palmer, Alabama                 Gerald E. Connolly, Virginia
Clay Higgins, Louisiana              Raja Krishnamoorthi, Illinois
Pete Sessions, Texas                 Ro Khanna, California
Andy Biggs, Arizona                  Kweisi Mfume, Maryland
Nancy Mace, South Carolina           Alexandria Ocasio-Cortez, New York
Jake LaTurner, Kansas                Katie Porter, California
Pat Fallon, Texas                    Cori Bush, Missouri
Byron Donalds, Florida               Jimmy Gomez, California
Kelly Armstrong, North Dakota        Shontel Brown, Ohio
Scott Perry, Pennsylvania            Melanie Stansbury, New Mexico
William Timmons, South Carolina      Robert Garcia, California
Tim Burchett, Tennessee              Maxwell Frost, Florida
Marjorie Taylor Greene, Georgia      Becca Balint, Vermont
Lisa McClain, Michigan               Summer Lee, Pennsylvania
Lauren Boebert, Colorado             Greg Casar, Texas
Russell Fry, South Carolina          Jasmine Crockett, Texas
Anna Paulina Luna, Florida           Dan Goldman, New York
Chuck Edwards, North Carolina        Jared Moskowitz, Florida
Nick Langworthy, New York
Eric Burlison, Missouri

                       Mark Marin, Staff Director
       Jessica Donlon, Deputy Staff Director and General Counsel
                     Alan Brubaker, Senior Advisor
      Mallory Cogar, Deputy Director of Operations and Chief Clerk

                      Contact Number: 202-225-5074

                  Julie Tagen, Minority Staff Director

                      Contact Number: 202-225-5051
                                 ------                                

           Subcommittee on Health Care and Financial Services

                   Lisa McClain, Michigan, Chairwoman
Paul Gosar, Arizona                  Katie Porter, California Ranking 
Virginia Foxx, North Carolina            Minority Member
Glenn Grothman, Wisconsin            Alexandria Ocasio-Cortez, New York
Russell Fry, South Carolina          Jimmy Gomez, California
Anna Paulina Luna, Florida           Greg Casar, Texas
Nick Langworthy, New York            Becca Balint, Vermont
Eric Burlison, Missouri              Summer Lee, Pennsylvania
                                     Jasmine Crockett, Texas
                         C  O  N  T  E  N  T  S

                              ----------                              
                                                                   Page

Hearing held on May 24, 2023.....................................     1

                               Witnesses

                              ----------                              

Mr. Michael E. Clements, Director, Financial Markets and 
  Community Investment, U.S. Government Accountability Office
Oral Statement...................................................     5
Mr. Jeremy Newell, Senior Fellow, Bank Policy Institute & Founder 
  and Principal, Newell Law Office, PLLC
Oral Statement...................................................     6
Ms. Kathryn Judge, Harvey J. Goldschmid Professor of Law, 
  Columbia Law School
Oral Statement...................................................     8

Written opening statements and statements for the witnesses are 
  available on the U.S. House of Representatives Document 
  Repository at: docs.house.gov.

                           Index of Documents

                              ----------                              

  * Article, New York Times, ``No, `Wokeness' Did Not Cause 
  Silicon Valley Bank's Collapse''; submitted by Rep. Crockett.

  * Report, Board of Governors of the Federal Reserve System; 
  submitted by Rep. Porter.

Documents are available at: docs.house.gov.


                       A FAILURE OF SUPERVISION:



                         BANK FAILURES AND THE



                     SAN FRANCISCO FEDERAL RESERVE

                              ----------                              


                        Wednesday, May 24, 2023

                        House of Representatives

               Committee on Oversight and Accountability

           Subcommittee on Health Care And Financial Services

                                                   Washington, D.C.

    The Subcommittee met, pursuant to notice, at 2:02 p.m., in 
room 2154, Rayburn House Office Building, Hon. Lisa C. McClain 
[Chairwoman of the Subcommittee] presiding.
    Present: Representatives McClain, Gosar, Foxx, Grothman, 
Fry, Burlison, Porter, Balint, Lee of Pennsylvania, and 
Crockett.
    Mrs. McClain. The Subcommittee on Healthcare and Financial 
Services will come to order. Welcome, everyone, on this nice, 
bright, sunshiny day. Without objection, the Chair may declare 
a recess at any time. I recognize myself for the purpose of 
making an opening statement.
    Banks fail. That is a fact. But on March 10, Silicon Valley 
Bank failed nearly overnight. The speed that it failed raised 
immediate concerns, not only of poor management at the bank, 
but of a failure of oversight as well.
    Evidence that has surfaced since then has shown exactly 
that. Absolutely, there was incompetence at the top of the 
bank. Management, the board, they all failed. But the people we 
have entrusted and empowered to protect the taxpayer and our 
financial system had as much to do with Silicon Valley Bank's 
failure as the bankers themselves. Even the Federal Reserve has 
publicly taken some blame.
    In my first few years in Washington, one thing has been 
clear, government agencies are not good at taking 
accountability for their failures. And I always say this, we 
cannot fix a problem that we first cannot admit that there is a 
problem. When crises and failures happen, there is always more 
to the story, and everyone's got one.
    Silicon Valley Bank was the second largest bank failure in 
U.S. history. I want to just make note. Second largest bank 
failure in U.S. history. So, you might expect the causes were 
complicated. But in fact, it was one of the least complicated 
bank failures in history. The bank was invested in some of the 
safest securities available: U.S. Treasuries and agencies 
securities. The credit risk, minimal. The only real risk to 
these securities was high inflation risk. Then came the rampant 
inflation brought on by President Biden's unnecessary spending, 
injecting trillions upon trillions into an economy already 
flush with cash.
    In response, the Fed spent months tightening to try and 
extinguish the rampant inflation. Instead of mitigating the 
risk of rising inflation by hedging with other financial tools, 
Silicon Valley Bank did nothing, did nothing, despite knowing 
these risks. Now, we are forced to be hedged by the regulators. 
Despite knowing that most of Silicon Valley's bank deposits 
were in excess of $250,000 of the insured deposit limit, anyone 
could see that the ingredients for a run on the bank were in 
place. Regulators should have seen it coming from a mile away. 
At the end of the day, that is their job to regulate.
    The combination of an unstable deposit base and a 
plummeting bond portfolio contributed to the evaporation of the 
$212 billion bank nearly overnight. All of these raised serious 
questions. Who was overseeing the bank? And I want an emphasis 
on ``who'' was overseeing this bank? What were they focused on 
instead of risk management? So, what were they taking a look 
at? Their job was the management of risk at that bank. Clearly, 
they were not doing that. What else were they focused on? And 
why didn't they intervene.
    Did regulators get complacent and buy into the political 
narrative that Dodd-Frank solved all the problems? If so, I 
would argue that if they bought into that narrative, why do we 
need regulation upon regulation and regulator and agency upon 
agency?
    Were the regulators communicating clearly with the bank 
managers on matters that needed addressing? Or did regulators 
flood management with process questions instead of focusing on 
the fundamental issues that mattered.
    Today, we are going to try and get some answers on where 
and why regulatory supervision failed. But we are not stopping 
there. We are going to take a deeper look into the steps 
regulators took in recent years asking questions. Did the Fed 
use all the tools available to prevent this failure?
    Did the Federal Deposit Insurance Corporation, or FDIC have 
the proper early warning signs system in place? Has the FDIC 
been transparent about the process around the seizure of the 
Silicon Valley Bank? Or is there more to the story? Did the 
Feds post-moratorium evaluation to pursue a political 
objective, or was it truly a self-reflective exercise to 
uncover the truth? This Committee is named Oversight and 
Accountability, and that is exactly what we are pursuing. If 
government officials are to blame and have not been 
forthcoming, we will hold them accountable.
    I am pleased to introduce our witness who are here to 
discuss the Federal Reserve's oversight of bank risk management 
amid recent bank failures. Mr. Michael Clements is a director 
of the Financial Markets and Community Investment, at 
Government Accountability Office----
    Staff. Recognize the Ranking Member first.
    Mrs. McClain. Oh, my heavenly days. My bad. My story got 
away from me, Ms. Porter. See. My bad. I now recognize my dear 
friend, Ranking Member Porter, for her opening statement.
    Ms. Porter. Thank you very much, Chairwoman McClain. Anyone 
who knows my style knows that I love hearings. Hearings let 
Congress hold powerful people accountable. They let us secure 
commitments from important officials, and most importantly, 
they let us get to the heart of problems so that we can write 
good legislation. As much as I love hearings, I do not love 
Congress holding hearings on the same things, year after year, 
because we keep making the same mistakes.
    I wish that I could say this is Congress' first hearing to 
dig into the causes of bank failure. It is not. That is because 
when it comes to regulating our banks, Congress has a short-
term memory on what works and what does not. The lessons from 
events like the 2008 financial crisis should not be hard to 
remember. Bank stability happens when we have strong clear 
rules in place, and bank failures increase when we take these 
rules away.
    Unfortunately, Congress just is not learning. Let me tell 
you how things work around here instead. Every so often our 
country has a bank failure. If just enough legislators decide 
to grow a spine, or find some other part of their anatomy, 
Congress passes legislation to more effectively regulate our 
banks, it starts to work, and we all start to get comfortable. 
Then the bank lobbyists come around Capitol Hill, and they ask 
Members of both parties to deregulate. Democrats and 
Republicans get convinced that a little bit of deregulation is 
an easy way to appear pro-business. Why not ease a few 
regulations?
    What these Members of Congress seem to forget is that there 
is nothing pro-business about a bank failure. But if history is 
any lesson, the bank failure is coming when we take away the 
rules that keep the banks in check. And just as predictably 
when that bank failure comes, the government will swoop in to 
save the financial system, and Members of Congress will yell 
about how terrible the failure is.
    You would think that would spark reregulation. Not 
necessarily. The problem is that the Members of Congress who 
are loudest about the failure are often the ones most terrified 
of legislating to address it.
    After the failure of Silicon Valley Bank, I introduced two 
bills. One reverses the most damaging regulatory rollbacks from 
the last time Congress listened to lobbyists. The other 
bipartisan bill claws back unjust compensation from bank 
executives when their bank fails.
    To be sure, I have had great partners on both sides of the 
aisle. But what I have noticed is the voices here in Congress 
that spoke the loudest about how terrible bank failures all of 
a sudden, then urge caution about considering legislation. They 
say, we need time to look at all the facts before we act.
    What is there to look at? The problem is that we repeatedly 
regulate, then deregulate, and then take too much time deciding 
whether to reregulate. Along the way, it is the Members who get 
taken in by lobbyists or are too afraid to act that get us 
trapped in this vicious cycle. There is a better way. Let us 
keep rules in place that help us have a stable and growing 
economy. Every fellow capitalist in this room should want that. 
We should all want to address the issues outlined in the 
Federal Reserve's report on the failure of Silicon Valley Bank. 
If you have not read this report yourself, I encourage you to.
    Unsurprisingly, this report calls out S2155, the big 2018 
bank deregulatory bill as one of the key causes of the Silicon 
Valley Bank failures. They say it reduced supervisory 
standards.
    I bet you will not hear a time of Republicans or Democrats 
who supported 2155 admitting that today. But at the same time, 
Republicans will make a very important point today. Bank 
failures do not only come down to the rules we put in place; 
they also come down to the watchdogs who we have to enforce 
those rules. And the Federal Reserve's report also called out 
failures of Silicon Valley Bank's management and the bank 
supervisors who oversaw them.
    It is not anyone's job to defend the Fed today. And I sure 
as heck will not be doing it. We have to take their failures 
just as seriously as we take deregulation. All in all, we need 
to let this year's bank failures be our last hard lesson. From 
the regulations to the regulators, we cannot let anyone off the 
hook for the vicious cycle in our banking system. I yield back.
    Mrs. McClain. Thank you, Ms. Porter. I'm now pleased to 
introduce the witnesses who are here to discuss the Federal 
Reserve's oversight of bank risk management amid the recent 
bank failures.
    Mr. Michael Clements is a director in the Financial Markets 
and Community Investment team at the Government of 
Accountability Office, GAO. In this position, he has led the 
GAO'S work overseeing in regulation of financial institutions 
and markets. Welcome.
    Mr. Jeremy Newell is a senior fellow at the Bank Policy 
Institute and the founder and principal of Newell Law Office. 
He is a recognized expert in banking law and financial services 
regulatory policy matters. Welcome.
    And Ms. Kathryn Judge is a Harvey J. Goldschmid professor 
of law and Vice-Dean for Intellectual Life at Columbia Law 
School. She is an expert on banking, financial innovation, 
financial crisis, and regulatory architecture. Welcome.
    Pursuant to Committee Rule 9, the witnesses will please 
stand and raise their right hand.
    Do you solemnly swear or affirm that the testimony that you 
are about to give is the truth, the whole truth, and nothing 
but the truth, so help you God?
    Let the record show that the witnesses all have answered in 
the affirmative. Thank you.
    We appreciate all of you being here today and look forward 
to your testimony. Let me remind the witnesses that we have 
read your written statements, and they will appear in full in 
the hearing record. Please limit your oral statements to five 
minutes.
    As a reminder, please press the button on the microphone in 
front of you so that it is on, and the Members can hear you. 
When you begin to speak, the light in front of you will turn 
green. After four minutes, the light will turn yellow. When the 
red light comes up, your five minutes have expired, and we 
would ask you to please wrap it up.
    I will now recognize the first witness, Mr. Clements, for 
five minutes for your opening statement.

               STATEMENT OF MICHAEL E. CLEMENTS, DIRECTOR

               FINANCIAL MARKETS AND COMMUNITY INVESTMENT

                 U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Clements. Chairwoman McClain, Ranking Member Porter, 
and Members of the Subcommittee, I am pleased to be here today 
to discuss GAO's preliminary work on the March 2023 bank 
failures, as reflected in our April 28 report.
    At the time of their failure, Silicon Valley Bank, or SVB, 
and Signature Bank were the 16th and 29th largest banks 
respectively in the country. Their failures could impose a $22 
billion cost on the Deposit Insurance Fund. While not part of 
our work, First Republic's recent bank failures could impose 
another $13 billion cost on the fund.
    For today's hearing, I will focus on one, bank-specific 
failure that contributed to the failures, and, two, supervisory 
actions regulators took leading up to the failures with a focus 
on SVB and the Federal Reserve's supervision.
    First, the bank's failures. We found that risky business 
strategies and weak liquidity and risk management contributed 
to the failures of SVB and Signature Bank. SVB and Signature 
both experienced rapid growth, far exceeding a group of 19 peer 
banks. For example, SVB's assets more than tripled in the three 
years prior to its failure. SVB and Signature also relied 
heavily on uninsured deposits, which are prone to run risk. SVB 
funded 80 percent of its assets with uninsured deposits. SVB 
and Signature also exhibited weak liquidity in risk management. 
When confronted with external pressures in the case of SVB, 
rising interest rates, the risky business strategies, combined 
with weak liquidity and risk management controls contributed to 
the bank's failure.
    Second, the regulators' supervisory actions. We found that 
the regulators identified problems at both SVB and Signature 
Bank, but the regulators did not escalate their supervisory 
actions in time to mitigate the risk. The Federal Reserve staff 
who supervised SVB identified problems at the bank. Between 
2018 and 2022, the Fed issued ten matters requiring attention 
to SVB for liquidity and risk management problems. For example, 
the Fed found that despite liquidity appearing strong, funding 
sources were concentrated and potentially volatile on short 
notice. However, we found the Fed did not adequately escalate 
its supervisory actions. The Federal Reserve was generally 
positive of SVB from 2018 through June 2022, rating SVB's 
overall condition as satisfactory.
    Despite the MRAs, the Fed assigned the highest ratings to 
SVB's liquidity and second highest ratings to its management. 
Staff also accepted SVB's planned actions to address the 
problems.
    When SVB moved to the Federal Reserve's regional banking 
organization from its large and foreign banking organization, 
examiners did begin downgrades. Yet, despite the consistent and 
serious liquidity and management problems, the Fed did not 
issue an enforcement action before the bank failed.
    While the Fed began a memorandum of understanding in August 
2022, it kept the MOU open; it did not complete the MOU before 
SVB failed. GAO has reported similar findings in the past. In 
2015, we have reported that, although regulators often 
identified risky practices, the regulatory process was not 
always effective or timely in correcting the underlying 
problems before banks failed.
    In 2011, following the financial crisis, we recommended 
that regulators consider noncapital triggers to their prompt 
corrective action framework to help give more advanced warning 
of deteriorating conditions.
    And in 1991, following the savings and loan crisis, we 
found that regulators did not always use the most forceful 
action available to them to correct unsafe and unsound 
practices.
    We continue to believe that taking early actions would give 
regulators and banks time to address deteriorating conditions. 
Chairwoman McClain, Ranking Member Porter, Members of the 
Subcommittee, this completes my prepared statement. I would be 
pleased to respond to any questions you may have. Thank you.
    Mrs. McClain. Thank you, Mr. Clements. The Chair now 
recognizes Mr. Newell for his opening statement.

                       STATEMENT OF JEREMY NEWELL

                 SENIOR FELLOW, BANK POLICY INSTITUTE &

                         FOUNDER AND PRINCIPAL

                        NEWELL LAW OFFICE, PLLC

    Mr. Newell. Thank you. Chairwoman McClain, Ranking Member 
Porter, and Members of the Subcommittee, thanks for the 
opportunity to be here today. This hearing presents a rare 
opportunity to examine an activity that is important and 
consequential, but almost always occurs in secret: Bank 
supervision. Because banks play such a crucial role in 
supporting businesses and consumers, and enjoy the privilege of 
Federal deposit insurance, they are subject to an arrangement 
that is quite unique within our Federal administrative state.
    They are subject not only to statutes, rules, and law 
enforcement, but also to a standing work force of Federal 
employees whose principal job it is to examine whether they 
operate in a manner that is safe, sound, and compliant with 
law. These examiners play an important role.
    While ultimately it is up to bankers to properly manager 
their own banks, and it is not the job of supervisors to 
prevent every bank from failing, good supervision enables the 
banking agencies to identify and seek correction of unsafe and 
unsound practices before they lead to a bank's failure. 
Reflecting that goal, the best bank supervision is supervision 
that is grounded in clear rules, focused on material risks that 
might lead to a bank's failure, and informed by an independent 
view of risk among examiners. When supervision is effective, it 
generally succeeds quietly. When it is not, its failures are 
public, often spectacularly so. Today, you consider such a 
latter case.
    While responsibility for Silicon Valley Bank's failure 
rests first and foremost with its management, understanding 
where the Fed supervision of SVB may have gone wrong is a rare 
and important chance to publicly assess the Fed supervisory 
practices and identify future potential improvements. We are 
aided in this regard by the initial reports prepared by both 
the GAO and the Fed concerning how SVB was supervised, and by 
the Fed's release of some, most certainly not all the relevant 
supervisory materials.
    While these are helpful first steps, much more is needed if 
we are going to gain a definitive view of whether SVB was 
supervised appropriately and to understand how best to improve 
supervision in the future. Simply put, we do not have a full 
picture, because what the Fed has provided to date is both 
selective and incomplete.
    Further analysis is especially important because what 
information the Fed has made public suggest several serious 
problems in supervision worth greater scrutiny. The Fed report 
concludes that examiners did not fully appreciate SVB's 
weaknesses and did not take sufficient steps to demand that 
they be fixed, but cast blame for those failures on decisions 
made by former Fed leaders that it alleges reduce standards, 
increase complexity, promoted a less assertive supervisory 
approach.
    The underlying evidence suggests strongly that that is the 
wrong diagnosis. Rather that evidence paints a different 
picture; one in which supervisors were principally focused on 
the wrong issues, occupied with processes rather than material 
risks, and were plenty assertive, just not about the risks that 
prove to be SVB's downfall.
    I would offer three particular observations here: First, 
supervision of SVB was heavily focused on compliance processes 
and governance and not on material risk to SVB's financial 
integrity.
    There was no shortage of intense supervisory activity 
around SVB, but much of it, nearly all of it, in fact, 
reflected concerns over processes and policies that may have 
distracted examiners from focusing on the serious risks 
building on SVB's balance sheet over time. Second, examiners 
largely relied on a system of issuing examiner directives, so-
called matters requiring attention or MRAs, that themselves 
were not appropriately directed at SVB's growing financial 
risks.
    Perhaps the best example of this is to consider the 31 
supervisory directives that were outstanding at SVB when it 
failed. Of those 31, only a small portion related to the 
liquidity and interest rate risk problems that led to SVB's 
failure, and even that small portion was largely directed at 
risk processes and not actual risk exposures.
    Third, supervisors failed to enforce important enhanced 
prudential standards in the areas of liquidity and risk 
management that were applicable to SVB, even though they 
understood SVB was not meeting them. This fact, I think, is 
especially important because it demonstrates that SVB is a case 
of failed supervision, not failed regulation.
    While some, including the Fed, have suggested that changes 
to the rules applicable to SVB in 2018 and 2019 were 
responsible for its failure, I believe the evidence points the 
other way. Those changes, in fact, left in place liquidity 
stress testing and risk management requirement, that went to 
the core of SVB's problems, in which SVB did not comply with, 
yet on which examiners did not act. This suggests that the 
rules were fit for purpose; its supervision that was not.
    Taken together, the picture that we have today strongly 
suggest that the Fed supervision of SVB may reflect a larger 
culture of bank supervision that has increasingly lost its way 
and become distracted from its core mission of scrutinizing 
bank safety and soundness.
    It also suggests that the reforms that are needed do not 
simply involve tougher supervision or more rules, but instead 
broader structural reform to the supervisory approach that 
allow examiners to better direct their attention and 
considerable supervisory tools to the kinds of core safety and 
soundness risks that led to SVB's demise. Thank you, and I look 
forward to your questions.
    Mrs. McClain. Thank you, Mr. Newell. Now, the Chair now 
recognizes Ms. Judge for five minutes.

                           (MINORITY WITNESS)

                       STATEMENT OF KATHRYN JUDGE

                 HARVEY J. GOLDSCHMID PROFESSOR OF LAW

                          COLUMBIA LAW SCHOOL

    Ms. Judge. Chairwoman McClain, Ranking Member Porter, and 
Members of the Subcommittee, thank you for the opportunity to 
be here today.
    On April 13, 2012, JPMorgan CEO, Jamie Dimon, was asked 
about reports that the bank's chief investment office may be 
facing significant losses because of bets it made using credit 
derivatives. Dimon downplayed the concerns described in the 
bank as conservative, and the situation as a complete tempest 
in teapot. That supposedly teapot-sized tempest ultimately 
caused JPMorgan more than $6 billion and inspired the Senate 
Permanent Subcommittee on Investigations, under the leadership 
of Chairman Senator Levin and Ranking Member Senator McCain to 
examine just what had gone on wrong inside the bank and why the 
OCC, the bank's primary supervisor, had not done more to 
prevent the losses.
    The bipartisan report expressed significant deficiencies 
internal to JPMorgan Chase. It revealed that internal risk 
amendments had been breached more than 300 times, and that the 
bank had changed how it calculated certain risk amendments, 
rather than addressing the underlying problem.
    The report showed that Chase had mischaracterized the 
portfolio producing the losses as a risk mitigating hedge when 
it was on. And it further showed that Chase had dodged 
regulatory oversight by omitting data in its reports to the OCC 
and failing to respond appropriately to information requests.
    The report also found meaningful shortcomings at the OCC's 
supervision of the bank. A real pattern of inconsistent and 
insufficiently robust follow-up when problems are flagged, and 
it would further reveal that supervisors were often too 
hesitant to challenge the bank. Yet, the report recognizes the 
primary responsibility for the losses lie with JPMorgan.
    This is just one of many examples of Congress usefully 
using its oversight authority to hold banks, bank executives, 
and bank supervisors accountable. Following the 2008 financial 
crisis, the Permanent Investigation Subcommittee also undertook 
a deep, bipartisan dive into the causes of the crisis.
    The final report showed how high-risk lending by banks, 
inflated credit ratings, investment bank abuses, and a 
troubling tendency by the Office of Thrift Supervision to treat 
banks as its clients had contributed to the crisis that caused 
so many to suffer.
    After the Stock Market Crash of 1929, the Senate Banking 
and Currency Committee launched an investigation into the 
securities industry with Ferdinand Pecora as lead counsel. And 
the hearings and report provided valuable insights into 
troubling Wall Street practices--from undisclosed loans, to 
senior officers, to conflict of interests between commercial 
banks and their affiliated securities dealers.
    Following the 1907 financial panic, the House Committee on 
Banking and Currency under Congressman Pujo undertook an 
extensive investigation on the ways financial and economic 
power had grown more concentrated in the hands of JPMorgan and 
a small network of other Wall Street firms.
    In revealing troubling practices by large financial firms 
and showing how often other people suffer, these reports helped 
to spur legislative and regulatory change. The Pujo hearings 
contributed to the adoption of the Clayton Antitrust Act of 
1914, and the creation of the FTC. The McCord hearings helped 
to motivate and inform the Securities Act of 1933, the Exchange 
Act of 1934, ushering in a new era of investor protection.
    The Levin McCain report and the Levin Covern report helped 
motivate robust implementation of the reforms mandated by Dodd-
Frank and served as a powerful reminder of the need for ongoing 
diligence in the regulation and oversight of the financial 
industry.
    In short, Congress has an illustrious history of using its 
oversight authority to expose troubling behavior and bringing 
about needed reforms. This has been enabled in part by asking 
the right questions and learning the right lessons. 
Shortcomings in bank supervision at four different supervisor 
bodies, played a meaningful role contributing to the recent 
bank failures.
    As the GAO and other reports made plain, many of these 
shortcomings are not new. Recent events should spur close 
examination of how to encourage bank supervisors to ask hard 
questions, spot troubles in a timely way, and follow through 
with diligence, and rigor.
    In my written remarks, I explore how to use escalation 
frameworks and other tools to enhance both bank supervision and 
oversight of bank supervisors. Yet the success of supervision 
depends not only on how well supervisors do their job, but also 
in the magnitude of the tasks set before them.
    Strengthening the regulations governing large regional 
banks is the most important step Congress and regulators can 
take to make the supervisory task manageable. Limiting the 
ability of bank executives to walk away while compensated for 
running their banks into the ground is also important.
    Bank supervision is a critical component of bank oversight. 
And it is most likely to go well when supervisors are set up 
for success. I look forward to your questions.
    Mrs. McClain. Thank you, Ms. Judge. I now recognize myself 
for five minutes.
    What I think is important here is there is already been a 
lot of reporting about what brought down Silicon Valley Bank. 
But really what I want to focus on is how the regulators were 
complacent in helping this to happen.
    See, we have a certain set of rules out there for private 
business, right? Heads roll, people get fired, stock prices go 
down, and that ugly word ``profit'' goes down as well. There is 
a consequence to one's actions, as there should be.
    However, I am amazed in my short two and a half years here 
in Congress to see we have government agency on top of 
government agency with regulator upon regulator, with more 
regulation than we know what to do with, whose head is going to 
roll? Whoever gets fired.
    What is the consequence to the action? And I think that is 
what we need to focus on. We do not need to have more law, then 
rescind, then have more law, then rescind it. We need to first 
start with--we have laws on the book. We have regulators who 
are supposed to enforce those laws. They need to do their job 
and enforce the laws that are on the books, before we even 
consider giving them more power, more money, period.
    So, with that said, Mr. Newell, I would like to start with 
you. Is there more the Fed could have done to prevent this 
failure from happening.
    Mr. Newell. Certainly, and I, unfortunately maybe caveat my 
remarks with--I can only give you a tentative answer to that 
question because you have to answer it based on the public 
record which is to say the information that the Fed has 
released so far--and although, certainly, there is a lot of 
useful information in that preliminary Federal Reserve report, 
and some useful supervisory materials that they had provided, 
you certainly do not get a complete picture. I'm happy to talk 
a little bit more about how you might close some of those gaps.
    With that said, to the extent that we do have public 
information. One of the things that I think that you see kind 
of consistently throughout the process, as I noted in my 
opening remarks, again, is a focus on process and risk controls 
rather than actual risks that were----
    Mrs. McClain. Can you give us a specific example.
    Mr. Newell. Certainly, so, again, I think if you step 
back--for example, the perfect picture is painted by the 31 
supervisory directives that were outstanding when Silicon 
Valley Bank failed. If you look at those 31, six had to do with 
liquidity, which was a major problem in SVB's failure. One had 
to do with interest rate risk, which is probably the single 
most important cause. And the rest were other areas. For 
example, 13 of them dealt with information technology.
    If you dig in further, for example, look at the six 
liquidity MRAs that existed at that time. Again, most of them 
deal with processes--calling for project plans, various 
controls. You know, none of them go to the sort of the core key 
question of do you have enough liquidity? So, again, I think 
that is a useful example.
    Another, also on the question of liquidity. The Fed report, 
you know, reveals that after the Fed issued those supervisory 
directives on liquidity, I believe, late 2021, it was pretty 
quickly revealed in 2022 that SVB was running internal 
liquidity's stress test, which was required under the Federal 
Reserve's rules, which showed that they did not have the buffer 
of liquid assets that they needed to survive a 30-day period of 
stress.
    That is not something that the Fed had followed up on, 
issued MRA or MRI aids. Instead, the Fed report admits they did 
not do that because they were focused on remediation of the 
sort of the more procedural MRAs that were issued on liquidity 
earlier the prior year.
    Mrs. McClain. Thank you. Mr. Clements, were there actions 
regulators could have taken prior to these failures? And what 
would you change to keep this from happening again?
    Mr. Clements. Yes, I would say our work has shown, both for 
these 2023 failures as well as earlier ones, that there needs 
to be more timely and forceful actions when problems arise. 
Having policies and processes are good. Those are internal 
controls to prevent risk from arising. But once the risk has 
arisen, we need forcible action.
    We have recommended, on multiple occasions, that there be 
some type of trigger mechanism, that if the bank passed some 
trigger, that action would be taken, rather than simply 
allowing the problem to persist.
    Mrs. McClain. And you said earlier in your opening 
statement that they did not escalate the concerns. Why do you 
think that was the case?
    Mr. Clements. There has been a variety of instances that we 
have reported on, that regulators favor an informal, 
collaborative approach, which we do not necessarily disagree 
with. But at some point, you need to take action. Sometimes it 
is challenging when a bank is profitable and has adequate----
    Mrs. McClain. That is their job, correct?
    Mr. Clements. It is their job, but it is challenging when 
the bank profitable.
    Mrs. McClain. I do not want to take up too much of my time. 
Thank you, sir. The Chair now recognizes Ranking Member Porter 
for five minutes.
    Ms. Porter. There's no question that Congress bowed to 
political pressure and pursued a deregulatory agenda when it 
passed Dodd Frank rollbacks in 2018. Congress put profits over 
people.
    What we hear a lot less about is how the Federal Reserve 
also helped push us off the cliff by deregulating. In fact, in 
my, maybe third, hearing in Congress, in the early spring of 
2019, I asked Chairman Jerome Powell about the weakening of the 
capital liquidity risk requirements, and he claimed that there, 
in fact, was no weakening of those requirements.
    Which I found interesting given that the Federal Reserve's 
report about Silicon Valley Bank takes ownership at the Federal 
Reserve for, in fact, having weakened those very regulatory 
requirements. But, unfortunately, Chairman Powell isn't here 
today for me to ask him about his testimony.
    So, I want to talk about how the Federal Reserve did, in 
fact, deregulate, despite what Mr. Powell told this Congress 
and what the consequences of that are.
    So, let us look at what motivates the Federal Reserve's 
regulatory decisions. The Federal Reserve is an independent 
body. Ms. Judge, who does the Federal Reserve work for; the 
bank it regulates or the American people.
    Ms. Judge. The American people.
    Ms. Porter. So, the Federal Reserve has a duty to the 
American people. Let us look at what that duty is. Is that duty 
to provide a stable financial system, or is that duty to 
maximize bank profits?
    Ms. Judge. To provide a stable financial system.
    Ms. Porter. Great. We agree. So, let us see what the 
Federal Reserve has been up to in meeting its duty to the 
American people to provide a stable financial system.
    Under Chairman Powell, as acknowledged, not by him, but by 
the Federal Reserve's report about Silicon Valley Bank's 
failures, the Federal Reserve relaxed banks capital and 
liquidity standards.
    For example, removing the liquidity coverage ratio that 
would have applied. Ms. Judge, how did this change make the 
banking system more stable.
    Ms. Judge. It did not.
    Ms. Porter. And, Ms. Judge, how would that have changed, 
this deregulation have changed bank's profits?
    Ms. Judge. It would have allowed them to be more profitable 
and also enable them to grow quite quickly without being 
subject to the enhanced financial standards that would have 
been appropriate in light of that growth.
    Ms. Porter. Hmm, it does not sound like this change was 
aimed at creating a more stable financial system. It sounds 
like it was maybe more geared at maximizing bank profits.
    Let us try something else. In 2019, the Federal Reserve 
made it easier for banks to pass stress tests that assess their 
resiliency. For example, moving from monthly stress tests to 
annual ones. Ms. Judge, how did this change make the banking 
system more stable?
    Ms. Judge. It did not.
    Ms. Porter. How did that change affect bank profits?
    Ms. Judge. It would probably reduce their costs and 
increase their profits.
    Ms. Porter. Yikes. Bank profits win again. But we agreed 
the Fed's obligation is to the American people, not to banks. 
But here we are--banks, two, American people, zero--with regard 
to the Fed's behavior.
    Let us try one more. The Federal Reserve signed off on 
mergers by large, super regional banks. Ms. Judge, how did this 
change make the banking system more stable.
    Ms. Judge. It did not.
    Ms. Porter. And how did that change affect the acquiring 
banks' profits?
    Ms. Judge. It boosted those profits.
    Ms. Porter. Three in a row. Or should I say three strikes 
and you are out? Whether it is intentional or not, the Federal 
Reserve has a pattern here of prioritizing banks' profits. If 
the Federal Reserve consistently prioritizes banks' profits 
over the stability of the banking system--if that is, in fact, 
what they do, who does it seem like they are working for? The 
banks or the American people?
    Ms. Judge. It does not make it appear that they are working 
for the American people.
    Ms. Porter. It sounds like Congress is not the only entity 
bowing to pressure from big banks. Until the Federal Reserve 
and Congress truly work for the American people, the stability 
of the banking system won't be the priority. I yield back.
    Mrs. McClain. Thank you, Ranking Member Porter. The Chair 
now recognizes Ms. Foxx for five minutes.
    Ms. Foxx. Thank you, Madam Chair. And I want to associate 
myself with the remarks the Chairwoman made at the beginning 
about the need to hold people responsible for regulations.
    And, Mr. Newell, you said the regulators were focused on 
process. Well, I'm not in favor of adding new regulations, 
because I think that is a waste of time and money, but is there 
anything that can be done to get the regulators to stop 
focusing on process and start looked at deficiencies, 
noncompliance, and other risks in a bank's operations, so we 
stop the failures that are occurring?
    Mr. Newell. Certainly, Congresswoman. I think again, first 
and foremost, what would be useful here is a general and a more 
structural change to the way that the banking agencies, 
including the Federal Reserve, approach supervision. Again, I 
think small changes are probably not ultimately going to 
suffice--it is going to require some deep thinking and a much 
broader change in terms of the culture of supervision and the 
overall program of supervision.
    Again, that ultimately results in very clear direction to 
examiners; that, although, certainly processes and procedures 
can be important, especially in the area of risk management 
because what ultimately gives rise to the risk that matter 
most.
    Ms. Foxx. OK. Well, let me interrupt you there. So, it is 
not our job to put out those instructions to them. Should we 
say to this Federal Reserve, write the instructions, and hold 
your bank examiners accountable, and give us a report on 
whether they are being held accountable?
    Mr. Newell. Yes. I think that certainly that would be a 
constructive step. Again, I think there is relatively limited 
articulation at the regulators in terms of what their overall 
supervisory objectives are and what their directives to the 
examiners are.
    So certainly, that can be a step. Again, I would just sort 
of return to what I think is, again, the single most important 
point, which is making those kinds of reforms, again, to get 
examiners focused on real core safety and soundness, really the 
core questions of what are the material risk to the financial 
integrity of firms so that they do not necessarily get 
distracted by----
    Ms. Foxx. So, you are saying we have to tell the Federal 
Reserve how to do its job? I mean, is that what you are saying?
    Mr. Newell. Well, it certainly could be the case. I would 
like to defer to the Committee in terms of exactly how they 
would want to go about that. But I do think--I would say that 
this, I think the need is clear for our, again, real structural 
reform to the way that the Fed and the other banking agencies 
do supervision.
    Ms. Foxx. So, let me move it along just quickly. The 
matters requiring attention or matters requiring immediate 
attention were the methods which the San Francisco Fed 
preferred in communicating with the SVB. Do either MRAs or 
MIRAs include teeth to enforce compliance, or are they usually 
more subjective?
    Mr. Newell. Well, I think it can vary depending on the 
precise MRA or MRIA. They tend to be somewhat formal, but they 
are not, for example, an enforcement action. They are typically 
included in exam reports or supervisory letters. And they are 
typically a predicate step where if, over time, the bank does 
not actually respond to those MRAs or MIRAs, then more serious 
actions could occur.
    Ms. Foxx. Thank you. Mr. Clements, in the report released 
by GAO regarding the March 2023 bank failures, was any evidence 
found that could attribute any of these failures solely to past 
efforts to relax Dodd-Frank regulations on midsize and smaller 
banks?
    Mr. Clements. Financial Services asked us to address that. 
We have not gotten to the question of enhanced prudential 
standards in our report.
    Ms. Foxx. OK. Well, what discretionary authorities did 
those efforts permit Fed regulators to take regarding banks 
with 100 billion in annual assets like SVB?
    Mr. Clements. In the case of SVB, it would still have been 
subject to a variety of prudential standards at category 4 
institution. Again, it moved up in level of supervision to the 
large and foreign bank organization, which increased the number 
of examiners, also increased some of the requirements for the 
bank.
    Ms. Foxx. Well, we know that SVB did not have a person to 
occupy the role of Chief Risk Officer for nearly eight months. 
Should SVB's lack of a CRO raise red flags for regulators at 
the Feds? Should they have said, put somebody in that job and 
keep them there?
    Mr. Clements. We are certainly aware that there was not a 
Chief Risk Officer for a period of time.
    Ms. Foxx. And that did not raise a red flag with anybody?
    Mr. Clements. I'm not aware that there was an MRA related 
to that, but we can check.
    Ms. Foxx. Thank you, Madam Chair, I yield back.
    Mrs. McClain. Thank you, Ms. Foxx. The Chair now recognizes 
the gentlelady from Vermont, Ms. Balint.
    Ms. Balint. Thank you, Madam Chair. Good afternoon, all. 
Thank you so much for being here with us. When I listen to my 
constituents reflect on Silicon Valley Bank and its collapse, 
they really remember feeling worried not just about SVB, but 
really about their local banks, their community banks, or 
whether this contagion would affect them at the local level in 
Vermont. And I'm grateful that regulators took decisive action 
following the collapse of SVB.
    But I want Vermonters who have their money at local and 
community banks to understand the specific choices that were 
made by SVB executives that put their customers' money at risk. 
It will help them feel better about the situation that they are 
in back home. So, I'm wondering, Ms. Judge, can you help us 
understand, in layman's terms, the risk that SVB was taking 
that led to its collapse?
    Ms. Judge. Yes, and I think it is incredibly important to 
distinguish the health and stability right now of the small 
banking organization, which was held up remarkably well and 
appropriately so during this period. And a bank like SVB, which 
more than doubled in size and incredibly rapid and short period 
of time, did not institute the risk management that you need 
to, to handle that growth, and instead sought to search for 
yield by loading up on instruments that had very little credit 
risk, but lots of interest rate risks.
    And we saw, as the Fed signaled, that we were facing more 
inflation as it was happening globally at the time. They needed 
to tighten for purposes of promoting financial stability. They 
signaled this. And yet we didn't see SVB unloading those 
instruments or hedging appropriately.
    So, what we saw was some very aggressive risk-taking, poor 
risk management practices, incredibly rapid growth, and reliant 
on flighty deposits, as opposed to being focused on providing 
real services to real people.
    Ms. Balint. Thank you. I appreciate that. Is it fair to say 
that they were gambling with their investors' money?
    Ms. Judge. That is accurate.
    Ms. Balint. Thank you, Ms. Judge.
    Mr. Clements, your report was critical of SVB's risk-
taking. I want to know if you have anything additional to add 
to what Ms. Judge said about the risk that they were taking?
    Mr. Clements. I think our findings were consistent with 
what she had mentioned. Again long-dated securities funded 
through uninsured deposits.
    Ms. Balint. Thank you, Mr. Clements.
    Ms. Judge, in your view, is it preferable to prevent this 
type of behavior, or it is better to clean it up after the 
fact?
    Ms. Judge. Much, much better to prevent it.
    Ms. Balint. I appreciate that. Ms. Judge, what actions 
should the San Francisco Fed have taken to address the many 
flags that arose at SVB in the lead-up to its collapse?
    Ms. Judge. The Fed did a decent job identifying some of the 
issues, but they failed to appreciate the magnitude of the 
issues. They were not creative in appreciating the fragility 
that existed. And what you really wanted to see is an 
escalation framework in place in advance, so that when issues 
were not addressed, they already had a plan in place for how 
they were going to escalate.
    And then follow through on escalation as the new team came 
in. And the new team saw weaknesses that the previous 
supervisory team had not fully appreciated to respond quickly, 
forcefully, and appropriately in light of the weaknesses they 
identified.
    Ms. Balint. So, the escalation framework or formula was not 
adequate?
    Ms. Judge. I do not believe there was a structured 
escalation framework placed. There was a general idea that once 
there were a few problems that you would escalate, but they had 
not committed to an escalation framework. That really might 
have helped.
    Ms. Balint. OK. So, one of the most important things that 
we can do within Committee is, obviously, to figure out what 
went wrong and make sure we put whatever things in place so we 
can to prevent it going forward.
    So, what do you think are the key takeaways that we, you 
know, should take from this hearing and from the lessons from 
SVB, so that we can do our jobs and make sure this does not 
happen again.
    Ms. Judge. The biggest one is appropriate regulation. If 
there is not appropriate regulation, banks are going to game 
the system that they have. You want to think about executive 
compensation, really trying to make sure that they cannot walk 
away incredibly well compensated when a bank fails. And then 
you really want to make sure that supervisors are empowered and 
pushed to ask hard questions and to follow through with vigor.
    So, you want a bigger supervisory teams, you want to make 
sure they've adequate resources, and then you really want to 
make sure they are asking the hard questions and are encouraged 
to ask the hard questions, and to follow through with backbone 
and in a structured way when they see weaknesses.
    Ms. Balint. Just to follow up on something you said. So, 
tell me about executive compensation in light of what happened. 
Give me some idea of what went down and how it should have gone 
down.
    Ms. Judge. Yes, I mean, I think one of the keys is just 
introducing some things. We already have some structures in 
place for claw backs for banking organizations, but they should 
be more robust, and they should be able to be used in a far 
broader set of circumstances.
    Particularly in situations where banks fail. In situations 
like this where banks fail and have a huge hit to the Deposit 
Insurance Fund, it is incredibly important both for purposes of 
incentives and fairness that the executive not walk away very 
well compensated while others bear such significant losses.
    Ms. Balint. I really appreciate that. I yield back.
    Mrs. McClain. The Chair now recognizes Mr. Gosar for five 
minutes.
    Mr. Gosar. Thank you, Madam Chair. Excessive spending has 
consequences. Both Republican and Democratic administrations 
are guilty. However, the devastating effects of inflation 
caused by Uncle Sam not spending within his means has only now 
caught up with American people in the last few years. The 
reason: Trillions of dollars given to the public through 
stimulus checks, enhanced benefits, and forgiveness business 
loans during the COVID response created an excess of dollars in 
the market in a way that the previous zero interest rate era, 
where printed money just sat in the banks, does not resemble. 
But inflation is not the only evil that the fiat money system 
engenders.
    The downside of being the world's reserve currency, and 
therefore the strongest currency, is that foreigners cannot 
afford goods priced in the strongest currency. And the reverse 
is true.
    Foreign goods priced and cheap currencies are easily 
affordable to Americans who wield the mighty dollar. That is 
why manufacturing close to countries with weaker currencies 
like China, India, and Mexico, goods are cheaper if they are 
sold to weak currencies.
    And who pays for this? Not the big banks. Like Silicon 
Valley Bank who are close to the money printing spigots, but 
the middle-class working Americans whose jobs have been 
literally transplanted by China.
    That is why I'm a strong supporter of the Gold Standard 
Registration Act introduced by Alex Mooney who had solved the 
double problem with inflation and job off-shoring. Going back 
to the gold standard would be the single biggest thing Congress 
could do to help the middle class in America.
    That question is for both Mr. Clements and Mr. Newell. Has 
the Fed's decision to raise its policy rate by 450 basis points 
between January 2022 and March 2023 created a national banking 
crisis?
    Mr. Clements. We had not done the work to be able to 
justify that. Clearly, the increase in interest rates caused a 
decline in the value of the portfolio at Silicon Valley Bank.
    Mr. Gosar. That was to Mr. Newell.
    Mr. Newell. Yes, sir, I would say, I'm a bank regulatory 
expert, not an expert in monetary policy, or a financial 
analyst. I guess I would say, I think if you look across the 
banking system, I think the vast mortgage of banks have done an 
admirable job of managing interest rate risk. Obviously, 
Silicon Valley Bank did not. But I'm afraid that is the most 
insight I can offer you.
    Mr. Gosar. So now, why would anyone keep their money in a 
bank if they can make a return of 5.6 percent on one month's 
Treasuries? Mr. Clements, can you answer that?
    Mr. Clements. You know, I would probably go to Mr. Newell. 
I'm not an expert on----
    Mr. Gosar. I mean, 5.6 percent is a pretty good yield, 
isn't it?
    Mr. Clements. It is better than what you can get in a 
typical bank account.
    Mr. Gosar. Mr. Newell, do you have any answers?
    Mr. Newell. Apologies, I did not come prepared to provide a 
full assessment of the merits of Treasuries relative to bank 
deposits. I would say that bank deposits have a variety of 
other advantages, including transactional capabilities and so 
on. But I'm afraid other than that, I cannot offer any real 
insights for you.
    Mr. Gosar. So, would you say that the Fed acted recklessly 
by this action? Yes or no, Mr. Clements.
    Mr. Clements. I'm just not qualified to discuss that.
    Mr. Gosar. I guess, Mr. Newell, you are not qualified 
either. How about you, Ms. Judge?
    Ms. Judge. I think the Fed was pursuing price stability 
which is an important mandate. And I think banks have the 
obligation and should be able to, as most banks have, to be 
able to handle changes in the interest rate environment as a 
result of inflation that is global at the moment.
    Mr. Gosar. Now, granted, the Committee has uncovered 
concerning practices by Silicon Valley Bank, but I'm afraid 
that the problem is deeper than the simple mismanagement of 
just one or a couple of particular banks. It is the Federal 
Reserve's unprecedented tightening in response to unprecedented 
COVID-19 response spending that has caused a stock bond and 
overall banking crisis. Would you agree with that, Mr. 
Clements? Yes or no?
    Mr. Clements. I cannot. I'm not qualified to.
    Mr. Gosar. Above your paid grade. Yes or no, Mr. Newell?
    Mr. Newell. Again, I do not think I have the expertise.
    Mr. Gosar. Above your pay grade? Ms. Judge, you seem to 
have the pay grade.
    Ms. Judge. Qualified or not, I mean the Fed has a number of 
different mandates. The core of those is managing to control 
inflation. I think they are prioritizing that. That does put a 
pressure on bank regulators and financial regulation for 
stability.
    Mr. Gosar. I hear you. I have got one other thing. In a 
recent Senate hearing, Janet Yellen said the quiet part out 
loud. Systemically important banks aka big ones with political 
conditions will always be bailed out by the government, but not 
smaller community banks. Yes, investors will lose their money 
in most cases, like those who invested in Silicon Valley Bank, 
but the depositors will always be safe. Is having bailout for 
the big guys but not the small guys a fair policy? No, it 
should not be. But we have already set the precedent now.
    Does it make banks less likely or more likely to engage in 
risky behavior, knowing that the depositors will never lose any 
money? Hell, yes. Is this why community banks are disappearing? 
People know big brother will swoop in to only save the big 
guys, but leave the little guys all alone. There is something 
more to this story, and the American public needs to be 
protected. I yield back.
    Mrs. McClain. Thank you, Gosar. The Chair now recognizes 
Ms. Lee for five minutes.
    Ms. Lee of Pennsylvania. Thank you, Madam Chair. You know, 
sitting through this hearing, I cannot help but wonder where is 
the leadership of Silicon Valley Bank? Are we really going to 
let another corrupt and greedy financial executive sneak away 
unscathed like in the aftermath of the 2008 financial crisis? 
Our Republican colleagues seem to be blaming the government for 
this bank collapse, but you cannot take away the teeth from the 
regulatory agency and then cry foul when it does not function 
properly.
    We do remember that President Trump, along with the 
Republican-controlled Congress gutted Dodd-Frank's financial 
stability protection rules. No? Quick recap. In 2018, the Trump 
Administration signed into law the Economic Growth Regulatory 
Relief and Consumer Protection Act, rolling back key Dodd-Frank 
reforms designed to protect Americans from a financial crisis 
like in 2008.
    In 2019, President Trump's regulators issued rules that 
further undercut Dodd-Frank's protected standards. These same 
Trump era reforms relax requirements for banks under a certain 
size, allowing risks to run rampant at midsized banks like 
Silicon Valley Bank.
    Ms. Judge, how did the Trump era rollbacks of these 
critical Dodd-Frank provisions create an opportunity for 
excessive risk-tanking at SVB?
    Ms. Judge. One of the greatest ways they did that was by 
facilitating growth. Prior to that, you paid significant costs 
in terms of heightened regulatory standards as you grew. We saw 
that they managed to grow incredibly rapidly. They were subject 
to modestly enhanced standards, but that was at an incredibly 
slow rate. So, it enabled rapid growth and inadequate attention 
to both the credit risk and the liquidity risk associated with 
that growth.
    Ms. Lee of Pennsylvania. Thank you. The Trump 
Administration gutted the oversight of midsized banks, 
encouraging the rapid, reckless business practices. Under Dodd-
Frank, banks with more than 50 million in assets were subject 
to enhanced standards to ensure financial stability. Under 
Trump, the threshold skyrocketed to 250 billion in assets, 
leaving midsized banks room to play fast and loose with 
people's money and prioritize their own profits.
    In 2015, Greg Becker, CEO of SVB, testified to the Senate 
Banking Committee to urge increasing the threshold. Beaker or 
Becker, I apologize for the mispronunciation of the name, 
emphasized that midsized banks like Silicon Valley Bank do not 
present systemic risk. He then reaped the rewards of those 
relaxed regulations. He took risks with people's funds and 
prioritized his personal bottom line while leading his bank 
toward collapse, threatening our entire financial system in the 
process.
    Ms. Judge, what are the most important safeguards to ensure 
that the interest of banks and bankers are aligned with the 
interest of the public?
    Ms. Judge. I think we know a lot of the toolset--and a lot 
of it was the toolset that was previously in place. We need to 
have the full set of prudential requirements, enhance 
prudential requirements applicable to all large regional banks. 
We need to be honest by the fact that any bank with more than a 
$1 billion in assets is a very large bank, and that we now 
know, unanimous, both Republican and Democratic members of the 
FDIC board and the Federal Reserve Board of Governors, 
recognize that they pose a potential threat to stability.
    I also think we need to go forward and figure out how to 
strengthen trust in us and otherwise make sure that there is 
ongoing diligence to the regulatory standards and the 
supervision of these institutions.
    Ms. Lee of Pennsylvania. Could you describe how the 
collapse of midsized banks such as Silicon Valley Bank can 
destabilize the entire sector?
    Ms. Judge. One of the things that I think was actually 
unexpected for most of us was the destabilization risk, and yet 
it was nonetheless broadly recognized. And I think largely it 
is through both contagion. The possibility of failure of one 
bank creating fears at other banks, particularly, because these 
were, as was previously noted, the 16th largest and 29th 
largest banks at the time they failed. So, you are talking 
about incredibly, incredibly large banks. They also both had 
incredible numbers of uninsured depositors. And once you have 
depositors potentially losing money, you create fear. The 
banking system is dependent on trust.
    Ms. Lee of Pennsylvania. Thank you. Really quickly. When 
Mr. Clements submitted testimony for today's hearing, he 
stated, and I quote: From December 2018 to December 2022, SVB's 
total assets more than tripled from 56 billion to 209 billion.
    Mr. Clements, is it correct that despite this rapid growth, 
the bank still did not meet the new higher threshold for 
heightened oversight?
    Mr. Clements. The prudential standards had been reduced. 
So, the standards that would apply to a category 4 firm would 
certainly have been less than for higher level firms.
    Ms. Lee of Pennsylvania. So as a result, Silicon Valley 
Bank avoided much of the rigorous stress testing that would 
have been required under Dodd-Frank rules.
    Ms. Judge, is it likely that earlier stress testing would 
have flagged some of the warning signs that the bank was headed 
toward collapse? Really quickly, since I'm running out of time.
    Ms. Judge. It's hard to know, but more rigorous stress 
testing would have potentially revealed the weaknesses in their 
ability to foresee how they would fair under adverse 
circumstances.
    Ms. Lee of Pennsylvania. Thank you.
    SVB aggressively and successfully lobbied for loosening of 
Dodd-Frank. The bank then took advantage of the new lax 
environment to engage in excessive risk-taking, which did 
nothing but pad the pockets of greedy execs.
    If we are going to conduct meaningful oversight over what 
happened at SVB, we need to bring the bank's leadership in for 
questioning as other Committees have.
    Thank you to the panel. And I yield back.
    Mrs. McClain. Thank you.
    The Chair now recognizes Mr. Grothman for five minutes.
    Mr. Grothman. Thank you.
    I'm old enough to remember, like, the 2006 housing bubble, 
and I think it is always important for those of us who have 
control, or not direct regulatory authority over America's 
business to remember that it is their property, not our 
property, and we should not be abusing our position to self-
righteously have fun in other people's expenses.
    I thought of that because housing bubble was caused by the 
leadership class or the government class, weighing in on 
businesses and encouraging banks, other financial institutions 
to make loans that they never would have made normally. And a 
lot of people lost a lot of money, lost their jobs because 
people felt it was their business to, like I said, self-
righteously tell financial institutions to make loans they 
would not have normally made that resulted in that crisis.
    We have some of the same type of feeling going out now in 
which the government is kind of weighing in to say that it 
should make it easier for people to get loans who maybe will 
have a hard time paying them off.
    But we will start with Mr. Newell today. In your opinion, 
when I see Mary Daly, the head of the San Francisco Fed, and 
Greg Becker, the head of Silicon Bank, they both seem the type 
of people who maybe are bored with banking and bored with 
making money and like to take other people's money and play 
around with equity or play around with climate initiatives.
    In your opinion, has leadership of the San Francisco Fed 
focused too much of its resources on these issues, maybe too 
much of their time on ESG or equity and inclusion initiatives? 
And, if so, does this focus distract the exam team and bank 
management from what should be their primary goal, safety and 
soundness?
    Mr. Newell. Thank you, Congressman.
    I think I would start by noting, as I did in my testimony, 
it does seem the case that one of the core problems in the 
supervision of SVB that is the supervisors were not properly 
focused on the real material risks to the safety and soundness 
of SVB. And so, I think understanding exactly why that was the 
case is very, very important.
    As to your specific question, I think it is hard to say at 
this point exactly what they were distracted by. We do not have 
from the Fed report a clear picture of what all the supervisory 
priorities were at the Federal Reserve Board, at the San 
Francisco Fed, at the exam team itself. And so, I actually 
think, you know, one of the important things here is gathering 
a much more complete picture so that we can fill in those 
blanks.
    And we know that their attention was not on identifying all 
the right issues, but I do not think we have a full picture in 
terms of why that was the case and all the things that were 
necessarily distracting.
    Mr. Grothman. I think it must be a psychological thing, and 
I think I can guess. You know, socially it is more fun to say 
at the cocktail party, I'm dealing--at my job with a bank, I'm 
dealing with global warming. I'm dealing with racial equity. 
It's more fun than saying, you know, I'm just doing what 
bankers should do and maintaining a sound bank here.
    But in any event, San Francisco Fed chief, Mary Daly, 
openly touted her efforts to spearhead left-wing initiatives 
and ESG policies through her work. Do you think--and she was 
certainly a champion of this sort of thing among the Fed 
chiefs.
    Do you think these initiatives may have distracted the San 
Francisco's--the Fed, itself, from what should be its 
overarching mission?
    Mr. Newell. Again, Congressman, I think, unfortunately, it 
is hard to just give a definitive answer to that question just 
because we do not have a complete picture, again, of where the 
supervisors were focused and what may have been distracting 
them. Again, I do think it is clear that they were not 
appropriately focused on the core material risk to SVB's 
financial integrity, but I do not think we have a full picture 
of what the drivers of that were necessarily.
    Mr. Grothman. What is--I know this Greg Becker here guy. He 
was focused on combating racial inequities. What does he do? 
What does that do? I mean, he took pride in it. How does he run 
your bank differently if you want to focus on racial 
inequities?
    Mr. Newell. My apologies, Congressman. I'm not sure I can 
speak to that question of what he may or may not have had in 
mind.
    Mr. Grothman. Why don't you--do the other two of you know 
what you would be doing differently if that was one of your 
focuses?
    Mr. Clements. We focused on the liquidity and the risk 
management, not the other aspects of the Fed supervision. So, I 
cannot really comment on that.
    Mr. Grothman. OK. He must have been doing something 
different.
    OK. Next thing, as far as climate change, do you know what 
you would be doing if you were heading a bank and focusing on 
climate change, which he seemed to think was important as well? 
Do you have any idea?
    I will ask another question because, obviously, we have got 
to focus on this Mr. Becker character. How much money was he 
making a year, do you know?
    No idea. OK.
    Any idea what any of the management team over there was 
making?
    Ms. Judge. We know it went up over 30 percent in just the 
last couple of years, and it was in excess, I believe, of at 
least $1 million, I think potentially more. It is in my written 
testimony. But they were quite well-compensated, and their 
compensation grew as the bank grew.
    Mr. Grothman. Like what? Can you guess wildly?
    I think it is something that is interesting for society.
    But, in any event, thanks for giving me another half 
minute.
    Mrs. McClain. Thank you.
    The Chair now recognizes Ms. Crockett from Texas for five 
minutes.
    Ms. Crockett. Thank you, Madam Chair.
    The irony of today's hearing is not lost on me. A key 
talking point of my Republican colleagues has always been heavy 
deregulation and significantly less oversight of banks without 
proper safeguards in place. It seems, however, that my 
Republican colleagues have now seen the light, and I'm excited 
about this. Nevertheless, today's hearing lets us have an 
important and necessary conversation on oversight and the role 
of regional and small banks in our communities.
    Arguably, the most important responsibility of the Fed is 
the ensuring of the financial stability of our banks and 
upholding consumer confidence in the system. When SVB crashed, 
it left customers at our banks worried about their money. 
Herein lies the problem. Failing to oversee the actions of one 
bank led to an avalanche of people wanting to pull their money 
out of other banks.
    What is the result? A catastrophic effect on small and 
regional banks. Many people do not think about small regional 
banks like Comerica and Amegy in my district and the vital role 
they play in our communities. These banks provide locally 
informed investments that enable small businesses and startups 
to thrive in a challenging economy. Amegy, for example, has 
2,764 small business customers in the Dallas area alone. They 
provide loans and services to groups that have been 
historically overlooked. For instance, Comerica provided a $1 
million investment in the Dallas Small Business Diversity Fund 
that supports women-and minority-owned businesses in Dallas 
County.
    Blaming SVB's collapse on environmental social governance 
investing or diversity equity and inclusion initiatives is 
nonsense. To quote experts from Harvard Business School, not 
exactly a liberal bastion, blaming ESG of DEI or SVB's failure 
reflects either, quote, ``a complete lack of understanding of 
how banks work or the intentional misattribution of the cause 
of the bank's failure.''
    My Republican colleagues' continued focus on wokeness in 
banking also suggests that they see improving economic 
opportunities for people of color and investing in minority-
owned businesses as a bad thing, and that is truly a shame.
    I ask unanimous consent to introduce a New York Times 
article titled ``No, `Wokeness' Did Not Cause Silicon Valley 
Bank's Collapse.''
    Mrs. McClain. Without objection.
    Ms. Crockett. Thank you so much.
    Now I would like to ask--well, small businesses and 
everyday folk need to trust that their local bank is making 
smart investment choices that are in their business interests. 
So, when something like SVB happens, even if it is a different 
bank entity, and even if it is in a different state, that has 
enormous ripple effects.
    And, to be honest, the first thing that I did the next 
day--or the next business day after the collapse, was check to 
see what the numbers looked like for the banks in my area 
because I have a large banking industry. In fact, the regional 
Fed is located in my district in Dallas County. And guess what? 
I saw a 25 percent drop in the stock of Comerica alone that 
first Monday when they opened, even though they had nothing to 
do with SVB.
    So, with that, Ms. Judge, how can the Fed work to restore 
and buildup consumer confidence in regional and small banks, 
given the reputational damage they have received from SVB?
    Ms. Judge. I think it is one of the most important things 
that they should be focused on. One of the things that have 
actually been really comforting is that community banks, those 
with less than $10 billion in assets, have come through 
remarkably well. New research from the New York Fed shows that 
they really have not lost any deposits, despite the interest 
rate and despite the recent fears.
    For regional banks, I think it has to mean appropriate 
regulation. I think we did not just have one regional bank 
fail, we had four regional banks fail. Three of them failed in 
ways that resulted in significant losses to the Deposit 
Insurance Fund, two required the systemic risk exception.
    So, I think knowing that they are appropriately regulated 
is the key first step to rebuilding that trust.
    Ms. Crockett. Thank you so much.
    Now, the final part of this is where I'm going to get a 
little spicy here. I cannot help but to sit here and be 
frustrated, because we are saying that we are concerned about 
SVB and what banks are doing and what they are not doing. But 
the big elephant in the room is the fact that we have this debt 
ceiling issue that is looming over our heads right now. And 
somehow, Democrats--I was not here, but what I hear happened 
when Trump was President is that Democrats agreed to raise the 
debt ceiling three times under his leadership, three times. In 
my mind, I feel like that may be a record number of times.
    I am curious to know how is it--if it will affect banking 
if we fail to pass a clean debt ceiling limit? Are we concerned 
that banks may end up suffering failing if we fail to do our 
jobs in Congress? Anybody?
    Nobody? Nobody wants to--I'm just going to tell you all the 
answer. The answer is yes. And so, we need to focus on our work 
here in Congress. Right now, we need to pass a clean debt 
ceiling if we really care about the stability of banking in 
this country and Americans.
    Thank you so much for being here.
    Mrs. McClain. Thank you, Ms. Crockett.
    The Chair now recognizes Mr. Fry for five minutes.
    Mr. Fry. Thank you, Madam Chair.
    And just as a sort aside, I think it is important to note 
that the American people spoke very clearly in the last 
election about cutting spending in Washington. According to a 
CNN poll recently, 60 percent of Americans want a debt ceiling 
increased paired with cutting spending, to my colleague.
    Thank you to our witness for being here today. I believe 
that the collapse of SVB and others can in part be attributed 
to a lack of confidence in our financial system. These three 
banks all exhibited serious faults in oversight, senior 
management, and risk management. Certainly, these banks were 
outliers in a broader banking landscape as they catered 
primarily to wealthy clients and startups and had unusually 
high percentages of uninsured deposits, 94 percent to be exact.
    But in the backdrop of all of the cast and characters of 
these failures, rising inflation rates and exuberant spending 
have an obvious role to play as well from the government side. 
Just like every other bank, SVB and others were caught in the 
whirlwind of an ever-increasing government spending and the 
Fed's battle with interest rates and rising inflation.
    The sheer amount of money that was pumped into the U.S. 
economy since 2020, allowed for many banks to bolster their 
investments and focus them on loans, technology, new branches, 
and other assets. SVB, for an example, included in its 
strategy, the massive acquisition of government bonds with 
longer times of maturity. You talked about this in your 
testimony. Normally, a bank keeps enough cash on hand for the 
everyday ebbs and flows of incoming and outgoing deposits. But 
it is important to highlight that any bank would have 
tremendous difficulty withstanding a run on deposits the way 
that these banks experienced.
    With that, I want to start out with just kind of a premise 
question. You talked about this. What forces within the bank, 
with management, contributed to SVB's failures?
    Mr. Clements, I'll start with you.
    Mr. Clements. The challenges we saw were with liquidity and 
risk management. Again, from the documents, from the San 
Francisco Fed's documents, there were weak liquidity, weak risk 
management. There were attempts by the bank to resolve the 
challenges, but they were not successful.
    Mr. Fry. Mr. Newell, anything to add to that, sir?
    Mr. Newell. Yes. I think maybe what I would just 
underscore, again, I think when you try to diagnose what went 
wrong at SVB, first and foremost, you know, it is a function of 
the interest rate risk that they took. They had a large 
portfolio of government securities that, as folks have noted, 
are very low credit risk but had very high interest rate risk 
and, therefore, were exposed to serious losses once interest 
rates increased rapidly, and then, once those losses did occur, 
undermined public confidence in the bank and then very quickly 
led to a run of the bank, which was difficult to stem, given 
the overwhelming reliance on uninsured deposits at the bank.
    So, I think it is really the combination of those two 
factors, first and foremost, that was the case here.
    Mr. Fry. All right. And what forces outside the bank's 
control, right, so macro forces, regulatory forces contributed 
to their demise?
    Mr. Clements?
    Mr. Clements. As Mr. Newell noted, the rising interest 
rates had a negative implication for the portfolio. SVB did not 
hedge that. You know, interest rates have gone up for all 
banks. Most banks have not failed. SVB did not adequately hedge 
those risks that it was facing.
    Mr. Fry. Right. In looking at this, we have heard a lot 
from the other side that there was no regulations, that people 
could not oversee what was going on. But the Fed did have the 
ability to look under the hood, so to speak, of SVB, did they 
not?
    Mr. Clements. The supervisory team, once SVB moved to the 
large and foreign banking organization, was approximately 20 
individuals. We certainly saw matters requiring attention. 
Regulators were aware of the problem. You know, our point is 
that they did not escalate, perhaps, to either in a formal or 
informal enforcement action in time to address the problems.
    Mr. Fry. Would you offer the same answer, sir?
    Mr. Newell. Yes. I mean, I think the thing I would 
particularly underscore, again, in terms of what the 
regulators' tools were, because there has been a lot of debate 
in terms of what the rules were, were any of them changed. Most 
importantly, we have had, in our U.S. banking law, since 1966, 
I believe, a core prohibition on engaging in unsafe and unsound 
practices, along with a corresponding authority of the 
regulators to order banks to cease and desist from unsafe and 
unsound practices.
    I think if you just look at the simple facts and the 
interest rate risks that accrued at SVB's balance sheet, I 
think in retrospect, it certainly looks to everyone like an 
unsafe and unsound practice. So, I think it is unquestionably 
true that they had that long-standing authority and could have 
acted, but it just is not in the record.
    Mr. Fry. Mr. Clements, just real quickly, obviously, there 
were MRAs and others that were kind of flagged toward the bank. 
They were given to the bank. At what pace do regulators receive 
financial monitoring information from banks?
    Mr. Clements. It will vary by the size of the institution.
    Mr. Fry. And beyond that, is there anything that can be 
done----
    Madam Chair, with that I look like I'm out of time, but I 
would yield back.
    Mrs. McClain. Thank you, Mr. Fry.
    The Chair now recognizes Mr. Burlison for five minutes.
    Mr. Burlison. Thank you, Madam Chair.
    We all kind of now know, you know, after the fact, what the 
reasons for the banks' failures are. It is pretty easy to do 
Monday morning quarterbacking, right?
    But my question to you, Mr. Clements, is are there 
similarities between the failures of Silicon Valley, and what 
happened at Signature Bank, and at First Republic Bank?
    Mr. Clements. We looked at detail at both SVB and Signature 
Bank. I think the problems were similar. In both instances, the 
regulators identified challenges, had MRIAs, MRAs, MRBAs in the 
case of FDIC at Signature Bank. The concern was just the 
escalation, when problems were not being resolved, once a 
serious risk was identified and not taking enforcement action 
on a timely and forceful-enough manner.
    Mr. Burlison. Outside of those banks mentioned, what 
other--how often do banks fail in the United States?
    Mr. Clements. It is quite infrequent.
    Mr. Burlison. Quite infrequent, but it does happen?
    Mr. Clements. Within prior post-financial crisis, it 
happens occasionally.
    Mr. Burlison. And in those times, were the individual bank 
holders, were they paid above the $250,000 limit? Were they 
insured beyond that? Did the Fed ensure them beyond?
    Mr. Clements. We have not done work to look at all of those 
bank failures. In many instances, the FDIC will resolve an 
institution to a purchase and assumption, and in that instance 
the deposits will simply move to the new institution.
    Mr. Burlison. OK. So, this is--I do not know if you can 
answer this question. What message do you think this sends, 
what the actions of the Fed, sends to the small banks across 
America who pay these fees so that their clients are insured? 
What message does--the events that happened, what does that 
send?
    Mr. Clements. I believe in the instance of SVB and 
Signature failure, there was a systemic risk exception. So, the 
FDIC needs to collect those funds through a special assessment. 
We have not looked at the methodology that the Fed--or I'm 
sorry--that the FDIC is using to gather that special 
assessment. It does have the ability to target it to the 
institutions that would benefit from the systemic risk 
exception.
    Mr. Burlison. Thank you.
    Mr. Newell, during the Fed's postmortem report, it 
considered all of the relevant factors. They tried to include 
everything. Was there anything that they did not consider that 
they should have been including?
    Mr. Newell. I think if you look across the Fed report, 
again, consistent with my comments to start, I do not think 
they really appropriately consider the extent to which 
examiners focus on processes and governance and issues that did 
not really go to the sort of core material risk to SVB's 
financial integrity that were the problem here. I do not think 
there is a real assessment to the extent to which they were 
focused in the wrong place.
    Again, I think if you look across the Fed report, at least 
the information that we have at this point, and the exam 
materials, it pretty consistently points out, to me at least, 
that, generally speaking, they were not identifying the real 
problems. They were principally focused on other things. And 
so, I think that is certainly an area that----
    Mr. Burlison. And what were those other things they were 
primarily focused on?
    Mr. Newell. Well, again, I think if you look at the 31 MRAs 
that existed when SVB failed, that is a good example. Again, 
only seven of those had anything to do with the liquidity or 
interest rate risks that really--that led to SVB's failure. 
They were otherwise focused on information technology. I think 
there's some BSAML, vendor risk management, trust management. 
Again, we are not saying that these are areas that are 
unimportant, but certainly relative to what we now know were 
very clear interest rate liquidity risks, certainly second-
order questions.
    So, again, I think one of the gaps in the Fed Report is the 
failure to really consider the extent to which that distraction 
from core safety and soundness in terms of the supervisory 
activities was part of the problem.
    Mr. Burlison. OK. Thank you.
    I yield back.
    Mrs. McClain. Thank you.
    I now recognize myself for five minutes.
    There seems to be a lot of blame and back and forth, the 
blame game going about what prevented the Fed from doing their 
job. The Federal Reserve's autopsy lays a lot of blame at 
Congress' feet because of changes that were enacted to Dodd-
Frank in 2018.
    Mr. Newell, can you help me understand what tools the 2018 
law took actually away from the Fed?
    Mr. Newell. Sure, I would be happy to do that, particularly 
as I think there has been a lot of talk about, you know, these 
enhanced prudential standards that were adjusted in the 2018 
law, sort of a monolithic animal, when, in fact, it is a 
toolkit. And the best way to talk about that, maybe, is to talk 
about what changed in the aftermath of the 2018 law and what 
did not.
    Mrs. McClain. But were there any specific tools that said: 
If you are under $250, you cannot do X?
    Mr. Newell. No, absolutely not.
    Mrs. McClain. OK. I just----
    Mr. Newell. The 2155 was extraordinarily clear in terms of 
granting the Fed with wide discretion.
    Mrs. McClain. In fact, am I to understand it correctly, 
that it moved it from $250, but at $250 it was mandated that 
you do X. But if you were from $100 to $250, you still had all 
of the tools in your tool belt, and it was up to you, the 
regulator, depending on what the report--which from the report 
I saw was, like, a lot, could have still used those same tools. 
The regulators just chose not to do it.
    So, we, technically, did not take away any tools. Am I 
understanding that correctly?
    Mr. Newell. Yes, that is exactly right. The----
    Mrs. McClain. OK. Thank you.
    Let me just go on.
    Mr. Newell. Of course.
    Mrs. McClain. Are there other tools available to the 
examiners that would have allowed them to see this train wreck 
coming? So, were there other tools that they could have used?
    Mr. Newell. Certainly, I would maybe just start by pointing 
to two. So, first, one of the enhanced prudential standards 
that was left in place after the 2018 and 2019 changes was a 
requirement that banks like SVB conduct internal liquidity 
stress tests, and then the basis of the results of those tests 
hold a sufficient buffer of liquid assets to survive a 30-day 
period of stress.
    As it turns out--and the Fed Report is quite clear--in 
2022, SVB was running those tests, and they were failing those 
tests. And sort of one of the----
    Mrs. McClain. And what did the regulators do?
    Mr. Newell. The regulators--again, none of the 31 MRAs or 
MRIAs cite SVB for a violation of, again, that actual hard-
coded requirement under Regulation YY. And, in fact, the Fed 
explains the reason that they didn't do that is because they 
were more focused on the MRAs they had issued the prior year 
that were focused on, sort of, processes and procedures and 
policies.
    Mrs. McClain. So, on top of, right? Because I'm in 
agreement with you on SVB Bank has a lot of ownership, right?
    And I think, Ms. Judge, you even said, we need to hold 
executives accountable. They need to not be able to walk away.
    I'm actually the weird one that thinks we should actually 
hold the regulators and the government agencies to the same 
standards that we hold the businesses to. Yet, my god, we 
cannot talk about that. And that, I think, lies the 
frustration.
    The regulators had the same tools. They just chose not to 
use them and hide behind the Dodd-Frank rule, right? How about 
we just do the job that you are getting paid to do.
    So let me--I have one more question. A simple reading of 
the Barr report implies Federal examiners felt the former head 
of supervision wanted them to go lightly on the banks they were 
charged to oversee.
    We do not have access to the evidence that supposedly 
supports this assertion. So, Mr. Newell, is it your opinion 
that the Fed examiners are hindered from the former Vice 
Chair's alleged lax regulatory oversight culture?
    Mr. Newell. Yes. You point to a very interesting and 
curious part of the Fed Report. It certainly makes that 
assertion. It does not really support any evidence for that 
assertion other than, I think, interview notes with some of the 
staff involved. I think it is one of the things that absolutely 
merits looking into further. It is sort of one of the places 
where there are gaps in the Fed Report that could be filled.
    But, again, I personally think it is very unlikely that 
some unwritten sort of supervisory vibe for a more lax 
environment was ultimately the downfall. I think there 
certainly are unexplained delays and inactions over the 
supervisory timeline. My suspicion is if one were to further 
investigate it and do more digging, there are probably 
alternative, more plausible explanations in terms of 
dysfunctions within the Federal Reserve System.
    Mrs. McClain. I appreciate that. I'm running out of time.
    Mr. Clements, I'll direct my same question to you. Have you 
observed that the Fed examiners are hindered by the former 
Chair's allegedly lax regulatory oversight culture?
    Mr. Clements. We had a single meeting with the Federal 
Reserve. The issue of culture did not come up.
    Mrs. McClain. Interesting.
    With that, the Chair now recognizes Ms. Porter for five 
minutes.
    Ms. Porter. I'm going to read from the Federal Reserve's 
report.
    It says that SVB FG became subject to liquidity risk 
management and internal liquidity stress testing requirements 
that apply to category 4 firms starting in the third quarter of 
2022.
    But before that, before the third quarter of 2022, is where 
the problem really got cooking, right? By the time we were into 
the third and fourth quarter, and then they have time that they 
have to comply with these requirements, by then the bank has 
failed.
    So, I want to step back and read from earlier. It says--and 
I'm quoting from the Federal Reserve's report--The changes due 
to EGRRCPA, which I will call S. 2155, the deregulation of 
Dodd-Frank, the 2019 tailoring rule which was promulgated by 
the Federal Reserve, they claim that Congress, quote, ``made 
them do it,'' but that was up to them, and related rulemakings, 
which to be clear were also the Fed's decisions, had a 
significant impact on the level of requirements to which SVB FG 
was subject in 2018 and beyond.
    Had these changes not been made to the framework, SVB FG 
would have been subject to enhanced liquidity risk management 
requirements, full standardized liquidity requirements, like 
LCR, enhanced capital requirements, company run stress testing, 
supervisory stress testing at an earlier date, and tailored 
resolution claiming requirements.
    There is, in fact, in this report an entire table, table 
12--which I would like to introduce into the record, Madam 
Chair--that lists all of the requirements that they used to be 
subject to, would have been subject to, and then, were no 
longer subject to.
    Ms. Porter. So, it seems to me, while there is no doubt 
that the Federal Reserve may not have used the tools in the 
toolkit, it is true that they just made very clear to--or that 
SVB may not have used all the tools, the Fed told them that 
they did not need to. The Fed told them, You do not need to 
look at your LCR, that 70 percent is good enough. You do not 
need to get to 100.
    So, my question is, Mr. Clements, why does the Federal 
Reserve not bear responsibility for not--for creating 
requirements that led to the bank's failure? I mean, SVB would 
not have met the LCR ratio, point-blank.
    Mr. Clements. At this point, we have not looked at the 
enhanced prudential standards. Again, what I would suggest is 
that there were problems at the bank with the internal 
liquidity stress testing that a trigger mechanism would have 
forced action much quicker.
    Ms. Porter. Mr. Newell?
    Mr. Newell. Certainly. So, maybe, let us take a couple of 
those items each in turn, because I just disagree with the 
conclusion in the Fed Report that these changes of enhanced 
prudential standards made a huge difference in the case of SVB.
    So first, throughout the process, SVB was subject to the 
requirement that it conduct internal liquidity stress tests, 
which again, in 2022, it was not in compliance with. So, this 
was a clear enhanced prudential standard----
    Ms. Porter. But, Mr. Newell, reclaiming my time. The 
Federal Reserve Board's own report says that they were not 
subject to the internal liquidity test.
    Are you saying the Feds were wrong about the regulation?
    Mr. Newell. Yes, I do not believe that is the case. I'm 
reasonably certain that they were----
    Ms. Porter. I mean, I'm going to read to you from table 12: 
``Silicon Valley Bank's requirements as a category 4 firm as of 
March 1, 2023.'' Bullet point: ``No company run stress testing 
requirement.''
    Mr. Newell. Yes. So, that refers to the capital stress 
testing exercise. It is very different than the internal 
liquidity stress test.
    Ms. Porter. Great. So, let us take liquidity. No LCR 
requirement.
    Mr. Newell. Yes, so that is right. Again, I think you have 
to look at the enhanced prudential standards under 165 in their 
totality. There was a liquidity requirement that applied to 
SVB----
    Ms. Porter. But it is 70 percent.
    Mr. Newell. No, no. I'm actually not talking about the LCR. 
This is an internal liquidity stress testing requirement----
    Ms. Porter. OK.
    Mr. Newell [continuing]. That requires the bank to run the 
test and, after the test, to hold a sufficient buffer of liquid 
assets to survive a 30-day period of stress. SVB was subject--
--
    Ms. Porter. So, did SVB do that?
    Mr. Newell. They were subject to the requirement. They did 
that. The results showed that they did not have enough 
liquidity.
    So, here we have directly on point an enhanced prudential 
standard that was left in place about liquidity that SVB 
remained subject to, did not comply with, and the supervisors 
did not act.
    Ms. Porter. OK. So, I just want to wrap up.
    So, the rules were lousy, the regulators were lousy at 
enforcing them, and the banks did not step up and take care of 
it all by themselves. That seems like the takeaway. I do not 
think it is a choice between these things. I think all three of 
these things seem true.
    I yield back.
    Mrs. McClain. Thank you, Ms. Porter.
    The Chair now recognizes Mr. Fry for five minutes.
    Mr. Fry. Thank you, Madam Chair.
    Round two, we are back at it again.
    Mr. Newell, I was on this subject before I ran out of time 
before. But we were talking about liquidity risks and the fact 
that regulators were not aware until two days prior of the bank 
ultimately failing. At what pace do regulators receive 
financial monitoring information from banks?
    Mr. Newell. Of course, thank you, Congressman.
    That varies quite widely, depending on the size of the bank 
and the particular bank involved. Certainly, with larger banks, 
there are, you know, quarterly reports, monthly reports, in 
some cases, daily reports. You know, I think I would have to 
dig in to give you a precise answer in terms of exactly what 
the cadence of information was in the case of SVB.
    In addition to that, for a large bank like SVB that was 
subject to what they called continuous monitoring, which is a 
dedicated exam team always on the case, you know, there are 
kind of routinely back-and-forth requests for information. So 
there typically is a very steady cadence of information and 
certainly a lot of ability for examiners on an ad hoc basis to 
request more information.
    Mr. Fry. Would the existing regulatory framework benefit 
from real-time monitoring of these issues?
    Mr. Newell. Certainly, more information and data is always 
better. You know, I think to give you a fair answer, I would 
need to think about it a little bit more. I'm happy to do that 
and work with your office and get back to you. But certainly, 
you know, more real-time information is better all things 
equal.
    Mr. Fry. What actions can regulators take if they identify 
deficiencies or noncompliance in bank operations?
    Mr. Newell. Certainly. So, they have a very broad toolkit, 
and it sort of runs a spectrum of less informal activities to 
all the way to sort of formal enforcement orders. At one end of 
the spectrum, you have sort of just informal conversations. 
Again, exam teams talk with banks all the time, you know, raise 
issues in conversation all the time.
    When there is a more serious issue, there is typically an 
issuance of an MRA or MRIA, which is a sort of examiner 
directing you, saying you need to fix the following problem by 
the following date.
    And then, when concerns are more serious or where there are 
MRAs or MRIAs that have not been addressed for a long period of 
time, there is a whole suite of various types of enforcement 
actions and similar orders that regulators can take to demand 
action.
    Mr. Fry. Thank you.
    Mr. Clements, in the GAO report that you were talking about 
earlier from March 2023 related to the bank failure, in the 
review, did you find that regulators failed to escalate 
supervisory actions at their disposal in time to mitigate SVB's 
failure?
    Mr. Clements. That is correct, we certainly found that they 
identified problems. But given the severity and long-term 
nature of the problems, we did not think the escalation was 
adequate.
    Mr. Fry. Throughout the years, has GAO observed a pattern 
of issues in supervisory action?
    Mr. Clements. This pattern goes back to the savings and 
loan crisis in 1991 of--the supervisors are good at identifying 
problems. There appears to be a problem of using the full suite 
of tools and especially the most forceful tools available to 
them.
    Mr. Fry. Thank you.
    And, finally, does FDIC have the proper early warning 
systems in place to detect high rates of uninsured deposits?
    Mr. Clements. That I'm not sure. I would need to get back 
to you on that.
    Mr. Fry. Mr. Newell, are you aware of that at all?
    Mr. Newell. I'm not sure about early warning system, but 
certainly, I think the FDIC has access to lots and lots of data 
in terms of what the composition of the deposit base in insured 
banks is. And, you know, to what extent those are insured or 
not insured, I think those are part of the typical call 
reports.
    Mr. Fry. Thank you, Madam Chair. And with that, I yield 
back.
    Mrs. McClain. Thank you, Mr. Fry.
    The Chair now recognizes Ranking Member Porter for her 
closing statement.
    Ms. Porter. Thank you, Madam Chairwoman, for addressing 
recent bank failures in this Subcommittee. This is an 
incredibly important topic, and I wish I could say that this 
was my first rodeo with bank failures, but this is actually my 
third.
    I hope you won't take it personally, Madam Chairwoman, when 
I say that I'm tired of talking about what can be done to stop 
bank failures. Back in 2018, when I was first running for 
Congress, I publicly warned my future congressional colleagues 
not to pass S. 2155, a bill that rolled back Dodd-Frank 
regulations. I knew that deregulation would set our country up 
for bank failure, and Republicans and too many Democrats didn't 
listen.
    When I got to Congress in 2019, I pushed Mr. Powell from 
the dais to not reduce the regulatory standards, not reduce the 
testing. And he assured me that, in fact, there was no such 
reduction in regulatory tests.
    Now here I am in my third term in Congress, and we have had 
a string of bank failures, all starting with Silicon Valley 
Bank. The Fed has affirmed one of the main contributing factors 
to this failure was the lower supervisory standards that came 
from passing S. 1255, their 2019 tailoring rule and their 
related rulemakings. Surprise, surprise. We regulated after the 
2008 financial crisis. We deregulated with bipartisan support 
under President Trump, and now we are back at bank failure. 
What is even worse is that we have too many members in both 
parties who claim we do not know what to do to break this 
vicious cycle.
    I'm glad and grateful that there has been bipartisan 
agreement that bank supervisors need to do a better job. I 
might even say do their jobs. That is clear.
    Bank regulators needed to better manage Silicon Valley 
Bank's vulnerability and hold their management accountable more 
quickly. In the future, bank regulators need to be more active 
supervisors for all banks under their purview. But effective 
supervision requires both good regulators and good regulations.
    We do not have the right regulations. First, let us roll 
back the worst part of the bank lobbyist bill that Congress 
passed in 2018. Title IV of that law raised the asset threshold 
at which a bank is considered and regulated as a systemically 
important financial institution, exempting Silicon Valley Bank 
and other similarly sized banks from enhanced liquidity and 
other requirements. Because of the elusive restrictions, when 
push came to shove, Silicon Valley Bank had not kept enough 
liquid assets to pay out the dollars being drawn out. If Dodd-
Frank had been kept intact for banks of this size, Silicon 
Valley Bank would not have had the choice to choose to 
prioritize its profits over stability.
    I do not want to give banks this choice again. I urge all 
of my colleagues to cosponsor my Secure Viable Banking, SVB 
Act, and to roll back Title IV of S. 2155.
    Second, let us stop bank executives from unjustly earning 
millions in stock sales and bonuses while they mismanage their 
banks into failure. That is exactly what my bipartisan Failed 
Bank Executives Clawback Act would do.
    Again, it is bipartisan, folks. I've got Representatives 
Spartz, Gallego, Buck, Gluesenkamp Perez leading this bill with 
me. I think everyone here can identify with at least one of 
those members. This bill is something we can do now across 
party lines.
    Oversight is my bread and butter. It is important to hold 
regulators to account, and I'm grateful for the Chairwoman's 
partnership in that regard. But unless we can take what we 
learn from oversight and translate it into effective policy, 
regulations will continue to swing with the political tides. 
Let us put regulations and regulators in place that keep our 
economy growing and stable.
    I yield back.
    Mrs. McClain. Thank you, Ranking Member Porter.
    I now recognize myself for a closing statement.
    Thank you all for being here. Thank you for your testimony.
    Today's hearing was very helpful in the first step in 
understanding the many failures that led to Silicon Valley 
Bank's collapse. The executives and the board at Silicon Valley 
Bank clearly dropped the ball. I do not--I have not heard 
anyone argue that different. Their incompetence has not been 
questioned, and the markets have held them accountable.
    But yet again, Federal bureaucrats fail at their jobs and 
escape any accountability. What is their consequence to their 
action? The fact that there have not been any resignations or 
any firings at the top of the Fed and the FDIC is unfortunate, 
but it is not surprising for this Administration. I mean, not a 
single resignation or firing or reprimand. I mean, SVB was, 
what, number 19? And no one's head is going to roll? Really? 
Tell me how that would play out in the private sector. It does 
not.
    The lack of self-awareness or accountability knows no 
bounds with this crew, but we were sent to Congress to hold 
people accountable, especially on this Committee, and that is 
what we are going to do through our investigations, our future 
hearings, and our future legislation.
    In closing, I want to thank our panelists once again for 
their important testimony today.
    And without objection, the Members will have five 
legislative days to submit materials and submit additional 
written questions for the witnesses, which will be forwarded to 
the witnesses for their response.
    If there is no further business, without objection, the 
Subcommittee stands adjourned.
    [Whereupon, at 3:42 p.m., the Subcommittee was adjourned.]