[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
FEDERAL RESPONSES TO
RECENT BANK FAILURES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MAY 10, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-20
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-932 PDF WASHINGTON : 2023
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on Financial Institutions and Monetary Policy
ANDY BARR, Kentucky, Chairman
BILL POSEY, Florida BILL FOSTER, Illinois, Ranking
BLAINE LUETKEMEYER, Missouri Member
ROGER WILLIAMS, Texas NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Georgia BRAD SHERMAN, California
JOHN ROSE, Tennessee GREGORY W. MEEKS, New York
WILLIAM TIMMONS, South Carolina DAVID SCOTT, Georgia
RALPH NORMAN, South Carolina AL GREEN, Texas
SCOTT FITZGERALD, Wisconsin JOYCE BEATTY, Ohio
YOUNG KIM, California JUAN VARGAS, California
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MONICA DE LA CRUZ, Texas AYANNA PRESSLEY, Massachusetts
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
May 10, 2023................................................. 1
Appendix:
May 10, 2023................................................. 41
WITNESSES
Wednesday, May 10, 2023
Gould, Jonathan V., Partner, Jones Day........................... 6
Judge, Kathryn, Harvey J. Goldschmidt Professor of Law and Vice
Dean for Intellectual Life, Columbia Law School................ 9
Michaud, Thomas, President and Chief Executive Officer, Keefe,
Bruyette & Woods (KBW), a Stifel company....................... 7
Tahyar, Margaret E., Partner, Davis Polk & Wardwell LLP.......... 4
APPENDIX
Prepared statements:
Gould, Jonathan V............................................ 42
Judge, Kathryn............................................... 47
Michaud, Thomas.............................................. 55
Tahyar, Margaret E........................................... 64
Additional Material Submitted for the Record
Sherman, Hon. Brad:
Chart, ``Unrealized Gains (Losses) on Investment Securities'' 70
Waters, Hon. Maxine:
Written responses to questions for the record submitted to
Jonathan V. Gould.......................................... 71
Written responses to questions for the record submitted to
Thomas Michaud............................................. 72
Written responses to questions for the record submitted to
Kathryn Judge.............................................. 73
FEDERAL RESPONSES TO
RECENT BANK FAILURES
----------
Wednesday, May 10, 2023
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:04 p.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Members present: Representatives Barr, Posey, Luetkemeyer,
Williams of Texas, Loudermilk, Rose, Timmons, Norman,
Fitzgerald, Kim, De La Cruz, Ogles; Foster, Velazquez, Sherman,
Beatty, Vargas, and Casten.
Ex officio present: Representative Waters.
Also present: Representative Emmer.
Chairman Barr. The Subcommittee on Financial Institutions
and Monetary Policy will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``Federal Responses to Recent
Bank Failures.''
I now recognize myself for 5 minutes to give an opening
statement.
Thank you to our witnesses for appearing before us today.
Because of economic mismanagement under the Biden
Administration, and failures of bank supervision, we now face
increased odds of recession. Following the bipartisan CARES
Act, a partisan, reckless, nearly-$2 trillion American Rescue
Plan Act was enacted by the President, which fueled runaway
inflation. While the Administration and the Federal Reserve
tried to convince the American people that inflation was
transitory, it definitively was not.
Inflation skyrocketed and persisted, and Americans were
hammered by rising costs in grocery aisles and at the pump and
saw their wages rapidly eroding in real terms. Despite warnings
from my Republican colleagues and myself, the Federal Reserve
was late to the game in responding to inflation, and therefore
had to raise interest rates at one of the fastest paces in
modern history. The precipitous interest rate increases put
heightened interest rate risks into the system, and regulators
and supervisors at the Fed were, again, late to react. All of
the context in which these bank failures occurred has to be
looked at in the context of this historical set of facts.
These risks were not attended to by Federal or State
regulators and supervisors, but were recognized by depositors.
This led to bank runs and systemic stress. We now face
increasing odds of a credit crunch, as banks of all sizes
anticipate more-onerous regulations and market scrutiny. If
recent events are not dealt with productively, we also run a
risk of ending up with a banking system with a small number of
too-big-to-fail banks and a scattering of very small banks.
Such a barbell banking system is not good for communities
across the country.
The Vice Chair for Supervision at the Federal Reserve has
signaled his desire to go beyond reviewing supervisory failures
that contributed to the recent bank runs. He continues to
signal his desire to increase capital charges and impose more-
stringent regulations on already well-capitalized banks that
are not to blame for recent stresses in the system.
Following the failures of Silicon Valley Bank and Signature
Bank, which were caused by bank runs, key regulators decided to
issue their own self-referential, self-assessment reports on
those failures to set a narrative. The Chair of the FDIC
ordered a review of Signature Bank's failure, taking some blame
for inadequate supervision, but the review mostly blamed the
banks and internal FDIC vacancy issues. The full Board of the
FDIC did not adequately participate in the review. The FDIC
also issued a term paper on deposit insurance and what it
believes Congress should focus on before responding to multiple
inquiries from this committee for information, so Congress
could arrive at our own conclusions.
The Federal Reserve Vice Chair for Supervision, Michael
Barr, led his own self-serving politicized review of the
failure of Silicon Valley Bank and made regulatory
recommendations. The full Board of the Fed did not participate
in the review. The review, by the way, said nothing about the
monetary policy errors and the late-to-the-game of monetary
normalization that contributed mightily to the problem. In the
face of a need to inform Congress and respond to multiple
requests from this committee for timely information, the Fed
and the FDIC decided to devote resources to a hasty, self-
serving review of their own supervisory failures to set a
narrative.
To be clear, the Board of the Federal Reserve System and
the Board of the FDIC should not view their recent narratives
about the failures of Silicon Valley Bank and Signature Bank as
precedents for how Congress is informed in the future. Rather
than being responsive to Congress so that we may consider
potential legislative needs, Federal agencies and officials
have slow-walked us. Instead, they have spent their time
writing their own narratives to cover their mistakes and
injecting politicized calls for more regulation into the public
sphere. That is simply unacceptable. And it clearly shows why
we need to change emergency authorities for the Fed and the
FDIC, and Treasury to at least obtain accountability and
transparency.
We need to ensure that the full Boards at the Fed and the
FDIC are adequately consulted in important decision-making and
that a single regulatory actor cannot act unilaterally to
inject their political preferences into regulations. The bills
noticed today get at the heart of increasing accountability and
transparency at our Federal financial regulators and emergency
actions. The bills are not intended to be partisan, and their
provisions would apply independent of what party is in power.
They are simply about accountability to the American people and
Congress of financial regulatory actors who take actions that
affect trillions of dollars of resource flows. I look forward
to discussing these issues today.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Illinois, Dr. Foster, for 5
minutes for an opening statement.
Mr. Foster. Thank you, Mr. Chairman, and I will not use my
whole 5 minutes, as I think this is the time where Congress is
best served by and the people are best served by listening
instead of speaking.
There are a couple of new factors and old factors that we
see in this. The new factor is the internet-driven runs that,
when we had our first emergency Zoom meeting with the FDIC,
caused them to look kind of shell-shocked at the speed at which
these runs occurred. And that is a risk that everyone
recognizes, and we are going to have to understand what kind of
emergency liquidity support will be needed to defend against
those. And for anyone providing that emergency liquidity, they
will have to be able to tell at a glance that the entity they
are providing that liquidity to will ultimately become solvent.
And that is the difficulty with what we are going to be facing
here.
I see the value of both internal and external reviews, and
I think they were valuable. The reports produced were, in fact,
valuable as starting points to this. I also think we have much
to learn with a comparison of the Credit Suisse failure and the
recent effects of the bank failures of banks of the order of 1
percent of U.S. GDP, which were not in and of themselves
systemically crucial and they wouldn't have brought down the
economy if they, by themselves, failed.
In contrast, the Credit Suisse was over 100 percent of
Swiss GDP. It was truly too-big-to-fail. And when it failed, it
failed gracefully without really a whiff of contagion and
without leaving the Swiss taxpayer so far on the hook. I think
the difference there is contingent capital, the contingent
capital that was insisted upon by the Swiss banking regulators.
As Credit Suisse failed, they allowed a mechanism to have a
mandatory capital injection into the carcass of Credit Suisse
that made it something worth buying, and took the value of
Credit Suisse from roughly negative-$14 billion to plus-$3
billion and allowed a white knight to step in and take it over.
So, I think we should look hard at that as a model. And I know
I share with Chairman McHenry an enthusiasm for this general
approach on a contingent capitalism market-based approach to
have another set of eyes on the books of these banks, and at
the risk posture.
Anyway, I am eager to get on with this hearing, and with
that, I will yield back the rest of my time.
Chairman Barr. The gentleman yields back. We will now hear
from our witnesses.
First, Ms. Margaret Tahyar. Ms. Tahyar is a partner at
Davis Polk & Wardwell and a member of their fintech practice.
Her practice focuses on providing strategic bank and financial
regulatory advice. In addition to her full-time practice, she
teaches financial regulation as an adjunct lecturer in law at
Harvard Law School.
Second, Mr. Jonathan Gould. Mr. Gould is a partner at Jones
Day in Washington, D.C., where he provides bank and financial
regulatory and strategic advice to financial services providers
of all types. Previously, Mr. Gould served as the Senior Deputy
Comptroller and Chief Counsel of the Office of the Comptroller
of the Currency.
Third, Mr. Thomas Michaud. Mr. Michaud is president and CEO
of Keefe, Bruyette & Woods, an investment bank specializing in
the financial services sector, where he began his career in
1986. He was named chief executive officer in October of 2011
and is responsible for directing all of the firm's business
lines in both the United States and Europe.
And finally, Professor Kathryn Judge. Professor Judge is
the Harvey J. Goldschmidt Professor of Law and vice dean for
intellectual life at Columbia Law School. Ms. Judge currently
serves as an editor of the Journal of Financial Regulation and
a research member of the European Corporate Governance
Institute. She previously served on the Financial Stability
Task Force and the Financial Research Advisory Committee to the
Office of Financial Regulation.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, each of
your written statements will be made a part of the record.
Ms. Tahyar, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF MARGARET E. TAHYAR, PARTNER, DAVIS POLK & WARDWELL
LLP
Ms. Tahyar. Thank you, Chairman Barr, and Ranking Member
Foster. The banking crisis is like a burning house. Just
watching it, we know that mistakes were made, there are lessons
to be learned, and changes are coming. Think of it as three
stages. In the emergency stage, heroic firefighters are rushing
to the flames to save the house and the people. Dedicated
agency staff have been working around the clock. I have
personally received a message at 2:45 a.m., asking if I am
available to talk right then.
The reliance on firefighting is not a path to a better way.
Once the flames died down, it is the what-happened stage, the
time to think about the very different people who were living
in the house when it caught fire. That was management and the
supervisors, what did they do or not do to let this fire
happen? The final stage we need to ask is, did something in the
construction of the house cause the fire? If the problem was
the electricity, let's not focus on how people felt about the
plumbing.
For each stage, we need fact-based lessons learned and
policy changes that encourage a strong, multi-tiered banking
sector. So far, there are many suggestions based on political
priors, which assume regulatory changes without proof of any
links to the burning house. We also need much more
transparency. It is not possible for the firefighters to be
transparent in real time when the house is burning. But
afterwards, there needs to be a full accounting.
Here are some preliminary thoughts. There should be
independent reports by professional investigators. There are
many good elements in the report you have before you, but they
are drastically incomplete. They are only a first step in any
fact-based exercise. There should be a structurally-independent
investigation by trained professional investigators done on a
bipartisan basis.
There is a deep red flag in the reports that Congress
should not ignore. They point to severe resource challenges for
examiners, lacunae in the skill sets, weakness in the job
candidates, as well as heightened turnover. It is concerning
that new examiners resigned before completing their training
and that fully-funded posts cannot be filled. And there are
press reports of culture problems and low morale causing
experienced examiners to leave. The consequence is that at
critical times, examiners were slow to react, did not have
internal deadlines, and became distracted by process and
consensus.
The many media leaks from the supervisors complaining about
the culture or attempting to absolve themselves are also clues
that something is amiss. The Barr report hints at confusion
around internal governance, escalation roles and
responsibilities, and deadlines and accountability. It raises
the question of whether the supervisors were well-managed. It
is deeply unfair to blame overworked line examiners who were
not given fully-updated training and were suffering from poor
direction and management.
These red flags might be a more plausible cause, at least
in part, for the supervisory failures rather than an
unexplained shift in tone from the previous leadership, the
tailoring or the guidance on guidance. All of the agencies need
to engage in a holistic review of how the supervisory staff is
hired, trained, and managed. Virtually all of banking
supervision takes place in secret. The lack of transparency
sits uncomfortably with the securities laws and with
accountability to Congress in the public. It is impossible for
Congress, academics, and the public to judge the effectiveness
of the regulatory framework, supervision, or emergency actions
when what the public sees is only a very small tip of a very
large iceberg. We really need to ask, who is watching the
watchmen?
Finally, let's be careful out there. There is one big thing
where Congressional action as opposed to oversight is
necessary, a hard look at reforms to the deposit insurance
program. We have never seen a deposit run of such scale and
speed happening overnight and on a weekend. In a world with
social media, mobile banking, and when many companies and
consumers are multi-banked, uninsured deposits can flee with a
click. And the multi-banking is the point that hasn't gotten a
lot of attention. If you are going to flee with a click, you
have to have two bank accounts. And if you think about the
difference, there was a reference to a barbell banking system,
which we don't want. Many of the customers of regional banks
are sticky; they are not necessarily multi-banked. That is
something to look into.
Anyway, with instant payments, open banking, data
portability, or central bank digital currency, it is going to
make it worse or better. Absent deposit insurance reform and
solving the red flags, the regulatory changes being suggested
will be window dressing. It matters, because an impact on
banking is an impact on the economy and credit, which is
already fragile. For those of you who remember Hill Street
Blues, ``Let's be careful out there.'' Thank you.
[The prepared statement of Ms. Tahyar can be found on page
64 of the appendix.]
Chairman Barr. Thank you for your testimony.
Mr. Gould, you are now recognized for 5 minutes.
STATEMENT OF JONATHAN V. GOULD, PARTNER, JONES DAY
Mr. Gould. Chairman Barr, Ranking Member Foster, and
members of the subcommittee, thank you for the opportunity to
discuss the Federal responses to recent bank failures. My
testimony will focus on the recently-issued reports from the
Fed and the FDIC on their supervision of Silicon Valley Bank
and Signature Bank. My testimony is my own. I am speaking today
solely in my personal capacity. I am not speaking on behalf of
any clients or my law firm.
According to the Federal Reserve's Office of Inspector
General (OIG), ``Examiners identified key safety and soundness
risks, but did not take sufficient supervisory action in a
timely manner to compel the boards of directors and management
to mitigate those risks. In many instances, examiners
eventually concluded that a supervisory action was necessary,
but that conclusion came too late to reverse the bank's
deteriorating condition.'' This statement might well summarize
the report from the Fed and the FDIC, but it was actually
issued in 2011 in connection with the OIG's review of Fed
supervision of the 35 State member banks that failed in the
aftermath of the 2008 financial crisis.
In the years following this assessment, Congress has
enacted major banking reforms and the banking agencies have
promulgated a host of new regulations and revised their
supervisory approaches. And yet, we seem to have made little
progress in improving supervisory outcomes without recourse to
extraordinary interventions, like guaranteeing uninsured
deposits. Agency self-reflection is appropriate, but
supervisory transparency and Congressional accountability are
critical.
The Fed and FDIC reports offer a starting point for further
fundamental review by Congress. Supervision and regulation are
complementary, but worth distinguishing. Regulation is broadly
applicable and implements statutory imperatives. Supervision is
the practical art of applying that regulatory framework to
individual banks through the exercise of examiner judgment.
In the case of SVB, the Fed acknowledges that its
supervision failed to identify, much less address, some of the
most-basic safety and soundness risks applicable to a bank. It
is particularly hard to explain the Fed's failure to supervise
for interest rate risks when it created that risk through its
own monetary policy actions. Neither report explains the many
failures of supervision, and significant portions of the
reports are distractions. An independent review and disclosure
of internal agency communications about SVB and Signature Bank
about supervision would seem to be an obvious next step in any
credible investigation. Both reports raise questions about the
adequacy and allocation of resources at these agencies, but the
reports give us little information as to how the agencies
prioritize their resources.
Congress should request and review budgetary detail and
supervisory staffing models, including those for the San
Francisco Fed, to determine whether the agencies are giving
short shrift to their supervisory functions or if it disagrees
with their priorities. The Fed report does address changes in
regulation in May following the Economic Growth Act. Others
have addressed the lack of causal connection between that law
and the bank failures.
I will merely add that: one, the Federal Reserve did not
enforce regulations that did apply to SVB; two, the
proliferation of regulations since the 2008 crisis may have
reduced risk management and supervision to mirror compliance
exercises, damaging both in the process; and three,
overreliance on preferred regulatory tools may have blinded
supervisors to risks that do not appear when viewed through
that tools particular lens.
The Fed has an unique governance and structure that differ
from other bank supervisors. Congress should consider whether
and to what extent the Fed structure and governance is a
contributing factor to its supervisory failures. A clear
presentation from the Fed of roles and responsibilities within
this System and between the Board and Reserve Banks is a
prerequisite for basic accountability. The Fed report
identifies some potential conflicts of interest between the
Reserve Banks and the Board, and of even greater concern is the
inherent conflict of interest between the Fed's monetary policy
and bank supervision functions.
The Fed's rapid interest rate hikes are a source of
systemic risk to the banks it supervises and were a cause of
SVB's failure. Congress should explore how the Fed's monetary
policy decisions, including its macroeconomic outlook, affect
its supervisory strategies in general, and its supervision of
SVB in particular.
The business of banking is built on trust and confidence,
but that trust and confidence is currently in doubt. Competent
bank supervision is a prerequisite to restoring it.
Transparency into the supervisory strategies and priorities of
the Fed and the FDIC, particularly as they were applied to
these failed banks, is a critical first step in understanding
what went wrong. Given past failures at self-reform, Congress
can and should exercise its full oversight authorities to
ensure a different outcome this time.
Thank you again for the opportunity to testify. I look
forward to your questions.
[The prepared statement of Mr. Gould can be found on page
42 of the appendix.]
Chairman Barr. Thank you, Mr. Gould.
Mr. Michaud, you are now recognized for 5 minutes.
STATEMENT OF THOMAS MICHAUD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, KEEFE, BRUYETTE & WOODS (KBW), A STIFEL COMPANY
Mr. Michaud. Good afternoon, Chairman Barr, and Ranking
Member Foster. Thank you for having me here today, and thank
you to the rest of the members as well.
By way of background, my name is Tom Michaud, and I am
president and CEO of Keefe, Bruyette & Woods (KBW), a Stifel
Company. I have been with KBW for 36 years, and I have focused
my career on being part of a team that delivers high-quality
banking and financial services research advice, particularly to
mid-sized and regional banks. We also produce the Keefe Bank
Index and the Keefe Regional Bank Index, both of which are
standards upon which bank performance is rated.
The current banking crisis has been driven by fear.
Although each bank crisis is unique, they all have one thing in
common: depositors lose confidence that their money is safe and
they seek a safer haven. That is why the FDIC was created 90
years ago, and no insured deposit has ever lost value since.
FDIC insurance has allowed the U.S. to have a diverse banking
system of all sizes: global banks, regional banks, mid-sized
banks, and community banks.
The recent bank failures have illustrated two developments
since Congress last modified deposit insurance 13 years ago.
First, money now moves faster than ever before. The speed of
the run at Silicon Valley and Signature Banks was staggering.
Second, the market has embraced that the biggest banks are
likely too-big-to-fail, and that there is an implicit
government guarantee that stands behind them.
Those are the two key factors that have changed since
Congress last changed the rules. Left unaddressed, I believe
that there will be strong forces that will restructure the
banking industry, and current Fed data suggest that it is
underway right now.
Having banks of all sizes is critical to the success of our
economy. America's largest banks are global leaders and
standout amongst their international peers. While the biggest
banks have most of the deposits, they don't make most of the
small business loans in America. For America's economy to
prosper and benefit all Americans, not just in large financial
centers, regional banks are essential. That was demonstrated
when they provided 60 percent of the Paycheck Protection
Program (PPP) loans during the recent pandemic.
But there is an opportunity to level the playing field
since the deposit limits were last changed. I believe that the
big banks can continue to operate the way they do, but that the
mid-sized and smaller banks need more deposit insurance to
neutralize that too-big-to-fail guarantee. The modifications I
propose are on the belief that deposit insurance will continue
to be an industry expense, and in no way encompass taxpayer
support.
Therefore, I believe that Congress should address the
problem with three actions: one, raise the debt limits for
operating accounts so that small businesses and nonprofits can
keep their funds in a local bank and not worry; two, allow
banks to buy additional insurance directly from the debt; and
three, further tailor premiums for the systemic banks to
account for the too-big-to-fail implicit guarantee.
I would also encourage that, first, healthy bank mergers
and acquisitions (M&A) be allowed and accepted so that banks
can seek the same scale benefits that their larger competitors
have. Also, we need healthy bank M&As so that healthy banks can
acquire underperforming banks and save an ultimate loss
possibly to the Deposit Insurance Fund.
Second, regulators should modify held-to-maturity
accounting treatment, as well as modify treatment of other
comprehensive income (OCI) into other regulatory ratios. And
third, as a comment that was made recently during the
introduction, a review should be done to ensure that government
agencies have the proper systems in place to support the
financial system as real-time payments become a reality,
especially with the rollout of FedNow in July.
I believe that these steps would be sufficient in
addressing the current instability in banking. The stocks,
again, were very weak today. I also believe that the lack of
complexity of these changes reduces the risk of unintended
consequences and that this approach avoids the possibility of
additional regulations that could prove to be
counterproductive.
Thank you for the opportunity to be in front of you today,
and I look forward to hearing your questions.
[The prepared statement of Mr. Michaud can be found on page
55 of the appendix.]
Chairman Barr. Thank you, Mr. Michaud.
Professor Judge, you are now recognized for 5 minutes.
STATEMENT OF KATHRYN JUDGE, HARVEY J. GOLDSCHMIDT PROFESSOR OF
LAW AND VICE DEAN FOR INTELLECTUAL LIFE, COLUMBIA LAW SCHOOL
Ms. Judge. Thank you, Chairman Barr, Ranking Member Foster,
and members of the subcommittee. It is a pleasure to be here
today, and I appreciate the opportunity to discuss the recent
bank failures and the lessons that we can learn from those
failures.
I want to spend my time just setting the stage with two
broad points that hopefully cut across the range of different
issues at stake in today's deliberations. And I want to spend a
few moments just building on and responding to some of the
comments from my fellow witnesses.
First, the recent bank failures reveal fundamental
shortcomings in the regulation and supervision of large
regional banks. Since the beginning of March, four regional
banks have failed, and three of those banks failed in ways that
impose significant costs on the Deposit Insurance Fund. The
FDIC currently estimates the Deposit Insurance Fund will lose
$20 billion in connection with the failure of SVB, it will lose
$2.5 billion in connection with the failure of Signature Bank,
and it will lose $13 billion in connection with the failure of
First Republic.
Moreover, two of those banks failed in ways that pose such
a risk to systemic stability that all of the regulators
involved voted to approve the use of the systemic risk
exception (SRE) to the requirement that the FDIC otherwise
resolve the bank in a way that imposes the least cost on the
Deposit Insurance Fund. This was not a political decision. Both
the Board of Governors of the Federal Reserve and the FDIC
Board, [inaudible] bodies, and there was unanimity among these
bodies, that this was the correct course of action under the
circumstances. The imposition of such significant costs to the
Deposit Insurance Fund and the existence of such a widely-
recognized threat to the stability of the financial system
clearly demonstrate that the regulations currently governing
large financial institutions, large regional banks are not
adequate, and more needs to be done.
This episode is a powerful reminder of the ways that the
digitization of finance has and will continue to change the
nature of banking, the pressures that banks face, and the
structure of the financial system. It is a critical time for
regulators and for Congress to stay on top of recent
developments and to look broadly to identify emerging risks.
Although it might not seem directly relevant to today's
hearing, the new guidance proposed by the Financial Stability
Oversight Council (FSOC) for designating non-bank financial
institutions is systemically significant, and a proposed
analytical framework for systemic risks is a prime example of
the way regulators should be using the available tools to
address emerging risks before they pose a threat to the
financial system.
More work could also be done to consider how best to
protect the financial intermediaries and financial
infrastructure that provide critical credit and financial
services needed to promote a healthy and balanced economy. This
could include more efforts to promote the vitality of community
financial institutions, including community banks, Minority
Depository Institutions (MDIs), and Community Development
Financial Institutions (CDFIs), and helping to ensure that they
remain focused on serving the small businesses and the wide
array of families and individuals who need access to the
services that they can provide.
Finally, I want to comment quickly that I agree with my
fellow witnesses on the importance of supervision in the coming
era. Again, digitization means that a lot of things are moving
and they are moving quickly. It is often during periods of
higher inflation and higher interest rates that we end up with
more disruptive changes to the structure of the financial
system. So, it has never been so critical to have really
qualified supervisors on the ground who are willing to ask the
hard questions and are willing to think creatively about what
are the tail risks, what are the low-probability events that
could result in things happening that we haven't seen in the
past but could be incredibly destructive to the safety and
soundness of an individual bank, or to the health of the
broader financial system.
And I would encourage you, in trying to think about how we
create the right culture and environment to attract the type of
supervisors that we are going to need, that going forward, you
take time to consider what is the type of environment that is
going to allow those supervisors to ask hard questions and to
respond in a way that is appropriately responsive and at times,
when needed, aggressive in making sure the banks are attuned to
the ways their actions could undermine their own safety and
soundness, and even more disconcertingly, potentially undermine
the health of the broader financial system.
Thank you again for the opportunity to be here, and I look
forward to your questions.
[The prepared statement of Professor Judge can be found on
page 47 of the appendix.]
Chairman Barr. Thank you for your testimony, and the Chair
now recognizes himself for 5 minutes for questions.
Let me start with Ms. Tahyar. As I mentioned in my opening
statement, the Vice Chair for Supervision at the Fed and the
Chairman of the FDIC led self-assessments, self-referential
reviews. In your view, do these reports provide the impartial
accountability for the Fed and the FDIC to Congress?
Ms. Tahyar. No.
Chairman Barr. And I also alluded to the fact that we have
made multiple requests for more information, supervisory
information, information about the weekend of March 10th and
about the events leading up to the decisions to seize the
banks, and about FSOC meetings. We have nothing from the
regulators in terms of visibility into those deliberations.
What are the consequences of having opaque bank regulators that
block the information flow to Congress?
Ms. Tahyar. I guess I would start by having a little bit of
sympathy for the firefighters, who have been working virtually
24/7, which is why I am in three stages. But I think over time,
Congress, on both sides of the aisle, needs to get a lot more
information and a lot more transparency. And the consequences
are the consequences that we have seen here, which is we have
had a failure of supervision, a failure of management, and a
banking panic. There will always be banking panics, we can't
prevent them, but we can mitigate them.
Chairman Barr. Mr. Gould, let me talk about that
supervision piece. In the Fed's review that it just recently
published, it talks about the fact--I am drawing on memory
here, but I believe that Silicon Valley Bank surpassed the
$100-billion asset mark sometime in early 2021. The failure, of
course, was in March of 2023. There was some effort made to put
a new supervisory team in place, but am I correct in saying
that the bank was subject to enhanced prudential standards all
the way back to February, March of 2021?
Mr. Gould. Yes. That is correct. The bank was subject to
certain enhanced prudential standards.
Chairman Barr. And this is, by the way, the Dodd-Frank Act,
as amended by the bipartisan Regulatory Relief Act. So, it is
not as if Silicon Valley Bank wasn't subject to enhanced
standards under those regulatory regimes. Am I correct about
that?
Mr. Gould. That is correct. And some of the standards to
which they were subject such as the internal liquidity and
stress testing requirements, the Federal Reserve was not even
actually enforcing.
Chairman Barr. Yes. This excuse for supervisors, that
somehow they were psychologically impacted by the regulatory
relief law, doesn't really hold water when you consider they
had a charge under existing regulation, existing laws to apply
those enhanced supervisory standards to this institution for
well over a year before it failed.
Mr. Gould. They did, and beyond the regulatory framework to
which they were subject, the failings were so basic, so
fundamental to kind of risk management one-on-one as to be
glaringly obvious under any regulatory framework.
Chairman Barr. Yes. Let me just say, interest rate risk is
something that bank examiners have looked at long before Dodd-
Frank was ever enacted, right? You don't need Dodd-Frank to
supervise interest rate risk.
Mr. Gould. That is fundamental to the business of banking.
That is how banks make money.
Chairman Barr. Yes. So, this attempt to blame regulatory
tailoring or even an insufficiently-robust Dodd-Frank regime is
really missing the point here. This was a classic supervisory
failure; interest rate risk is the business of banking and the
supervision was a failure.
Mr. Gould, if Vice Chair Barr used Silicon Valley Bank and
Signature Bank failures as leverage to impose higher capital
charges on banks, even though SVB and Signature were
capitalized before the bank runs they experienced, would that
be good for the economy and for Americans who rely on bank
credit?
Mr. Gould. I think there are others who are better-equipped
to answer that question, but I don't think anyone has a
monopoly on common sense. So, I would merely add that there are
clear tradeoffs when you raise capital in terms of reduced
availability of credit.
Chairman Barr. Mr. Michaud, for the small regional to mid-
sized banks, if we were to eliminate regulatory tailoring, and
to the extent there are some stresses related to deposit
migration out of these mid-sized banks, should we be imposing a
one-size-fits-all regulatory capital liquidity requirement on
those smaller banks right now?
Mr. Michaud. I think it would permanently change the face
of the dynamics of banking forever if that happened. I think
that you would see the mid-sized banks be absorbed into the
bigger banks. You need to have that tremendous bar-belling that
we talked about, where there would be banks which only had
clients that were smaller than $250,000, and then all of the
other clients would end up in the bigger banks.
Chairman Barr. My time has expired. I wanted to get to
deposit insurance, but I am sure my colleagues will. I will now
recognize the ranking member of the subcommittee, Dr. Foster,
for 5 minutes.
Mr. Foster. Thank you. Mr. Michaud, you brought up
something that has been brought up by many people, which is the
idea of fully insuring transaction accounts, operating
accounts. Could you speak on what are the pros and cons of
that? Why isn't it a good idea at this point?
Mr. Michaud. Let me give you an illustration, because many
of us have been talking about this bar-belling of the industry.
I am just going to say, for instance, assume you are the CFO or
a treasurer, an employee, or a volunteer of a nonprofit in one
of your communities, and you have over $250,000 in your
operating account to run your nonprofit. The way things stand
now with the current limits, you have to do your own credit
analysis of your bank or go towards moving your money to a too-
big-to-fail bank, because you need this--
Mr. Foster. Correct. This is, I think, well understood by
many, but not all potential customers.
Mr. Michaud. But my view is that you need that support. I
don't know if it needs to be unlimited, but I do think it needs
to be raised considerably. I think it needs to be targeted,
because I think it is those small businesses that will choose
to be in a too-big-to-fail bank, regardless of the price of the
service or the relationship they have with their smaller bank.
And that trend will happen over time if deposit insurance isn't
changed, in my opinion.
Mr. Foster. Okay. Professor Judge, on your end?
Ms. Judge. I would agree that when it comes to the small
businesses, it is important that they have the peace of mind to
know that their transaction accounts at least are safe. And I
think the FDIC did a nice job laying out the different options
and showing how segmentation, a way of you saying that there is
something different for individual accounts and what the
appropriate cap is relative to the small and mid-sized
businesses that might need meaningfully more deposit insurance
in order to make things like payroll. So, trying to think about
how we responsibly institute a system of segmentation could be
incredibly helpful in promoting the health of community and
other small banks, and also helping to promote the stability of
the clients that they serve.
Mr. Foster. Mr. Michaud, you also mentioned using
differential FDIC insurance premiums as a way to sort of level
out the barbell. This strikes me as having a lot of elements of
a sort of a big banks tax and a redistribution of wealth, if
they are not based on actuarial risks. I was just wondering
what you think of that, which I am not necessarily opposed to,
but we have to sort of treat it for what it is.
Mr. Michaud. There is an implicit guarantee in this too-
big-to-fail position that these banks are in. They get the
benefit of paying less for deposits because of the tradeoff for
safety, so they are actually getting value in that aspect for
being too-big-to-fail. And the question is, can we have them
pay more for deposit insurance for some of that value they are
getting for being too-big-to-fail? That is the thinking.
Mr. Foster. One of the reasons that I think Chairman
McHenry and I are fans of contingent capital, is a mechanism
for making the big banks pay for the tail risk of their
continued existence in troubled times. Are there any lessons to
be learned about the market-to-market of losses due to interest
rate shifts, because that is something that we struggled with
during the Dodd-Frank time, with the market of mortgage-backed
security losses, whether you should immediately recognize those
or allow the fiction that these will be carried to maturity,
which may or may not turn out to be true. Are there lessons
learned there from any of the witnesses?
Mr. Michaud. I think there are, and actually, in my
proposal to you all, I did say that there should be some
adjustments and that you can put in place targets where there
could be limits to a degree of how those ratios come to bear.
But the market was very focused on these mark-to-market losses
of Silicon Valley Bank, for example, even though it wasn't
necessarily counted in certain regulatory ratios. And I think
there is an opportunity to amend some of that approach that
could build a safer and sounder system. Also, remember we have
had a 5 basis point move in 14 months, which is extraordinary,
but that is what the rules should be built for.
Mr. Foster. It was clear to all market participants that
there was an interest rate shift coming, that was telegraphed
in advance, and that it would be big, and many banks hedged
appropriately and some decided that they wanted to be more
profitable this quarter and not pay for the hedge. So, I
personally have sort of limited sympathy because I appreciate
the moral hazard effect of this. A lot of the customers who
went to Silicon Valley Bank went there because they were paying
higher interest rates than their competitors, and part of that
was that they had lots of uninsured deposits. So, we have to
think this through carefully so that we don't inadvertently
just start subsidizing the tail risk and allow those costs on
smaller and smaller banks.
My time is now up, and I yield back.
Chairman Barr. The gentleman's time has expired. The
gentleman from Florida, Mr. Posey, is now recognized for 5
minutes.
Mr. Posey. Thank you very much, Mr. Chairman. As I recall,
this committee was told there wouldn't be any bank failures
like this if we created the Consumer Financial Protection
Bureau (CFPB). I am kind of shocked we are here if the CFPB was
doing its job.
First, Ms. Tahyar, rates go up, capital values go down.
Barron estimated that the undeclared loss on Silicon Valley
Bank's bonds due to the rapid run up in interest rates,
starting in March 2022, would have wiped out nearly all of the
banks $16-billion equity capital base at year end 2022. Would
it be fair to say that capital was not the real problem here?
Ms. Tahyar. It was not. Capital was a lagging indicator and
the banks that failed were well-capitalized upon failure. We
saw the same thing with adequate capitalization during the
financial crisis.
Mr. Posey. Very good. Thank you.
Mr. Gould, is there any reasonable capital standard or
level that would have protected against the interest risks of
Silicon Valley Bank's asset base in the period after Fed rate
hikes began in March 2022?
Mr. Gould. No.
Mr. Posey. Thank you.
Mr. Michaud, wasn't the rapid and massive increase that the
Fed began in March 2022, to curtail our 40-year record
inflation, a contributing factor in Silicon Valley Bank's lack
of liquidity, given that its asset base was heavily invested in
fixed-rate mortgage-backed securities?
Mr. Michaud. That move was significant. Correct.
Mr. Posey. Thank you.
Professor Judge, to what extent did the Federal Open Market
Committee (FOMC) anticipate the kinds of interest rate impacts
we saw with Silicon Valley and prepare an alert or strategy for
regulators to prepare for such impacts?
Ms. Judge. The overarching aim of the FOMC is to fulfill a
dual mandate focusing on both employment and price stability in
a period where inflation was rising rapidly, not just in the
United States, but in countries around the world, and their
primary focus for the health of the economy, I believe, was
probably trying to make sure that we managed to promote price
stability, and get that inflation under control.
And precisely because of these environments, it has never
been more important to have sufficiently-robust regulatory
structures in place and to make sure going forward, that we
have supervisory structures that are responsive to a rapidly-
changing environment. And when there are not procedural hurdles
or perceptions of procedural hurdles that allow people to
respond quickly and appropriately in the face of such a
rapidly-changing environment.
Mr. Posey. My questions are answered, Mr. Chairman. I yield
back. Thank you.
Chairman Barr. The gentleman yields back. The gentlewoman
from New York, Ms. Velazquez, is now recognized.
Ms. Velazquez. Thank you, Mr. Chairman. Professor, Judge,
the rescue of depositors at Silicon Valley Bank and the
invocation of the systemic risk exception by Federal regulators
demonstrates that regulators think regional banks can pose a
systemic risk to the system. Do you think that these banks
should face the same rules as the gypsy banks?
Ms. Judge. There continues to be some differences between
large regional banks and the global systemically important
banks (G-SIBs). I think all of the proposals on the table
recognize some differences, but the question is the extent of
the magnitude of what those differences should look like.
And one of the things that we have learned over the course
of this episode is regardless of what might have seemed
reasonable at an earlier point in time, these banks are so
systemic that everybody involved, who was operating in real
time, felt like they posed a meaningful threat to the stability
of the financial system. The risks at Signature looked somewhat
different than the risk at Silicon Valley Bank. So, this was
not just one single bank or a whole variety of different bank
models that were under strain. And what we have further learned
is that the resolution of these banks is far from easy to do.
Even with respect to First Republic, where we did not
actually have to invoke the systemic risk exception, we saw a
$13-billion hit to the Deposit Insurance Fund, which suggests
that we have a long way to go to make sure that they are
regulated in a manner commensurate with the risk they pose.
Ms. Velazquez. Thank you. You note in your testimony that
bank leaders can seek to game the rules and take on additional
risks in order to seek higher profits. I recently wrote a
letter, with Senator Van Hollen, to Federal regulators
encouraging them to finalize their rulemaking under Section 956
of Dodd-Frank, which is supposed to prohibit incentive-based
compensation structures that encourage excessive risk-taking.
Wouldn't you agree that it is well past time for regulators to
finalize this important rule?
Ms. Judge. It is clearly past time for that rule to be
finalized. I think the letter is exactly what we need to create
the pressure to try to make sure the regulators are fully using
the suite of tools currently available to them, that Congress
has given them to address the incentive issues that continue to
arise. And that encourage bank management at times to take
risks from which they could profit, but where others bear the
loss.
Ms. Velazquez. Thank you. And you also note that the tools
that regulators have to penalize and remove bank officers and
hold them accountable remain inadequate. What additional
measures should we consider to hold bad actors accountable?
Ms. Judge. A more robust set of callback tools will also be
appropriate as the situation well demonstrates. Clawback tools
are a mechanism of responding when an executive has received
compensation because they appeared to be earning it, but where
we know with the benefit of hindsight that they were actually
making decisions that undermined the safety and soundness of
the institutions they were overseeing and imposing costs that
ultimately hit the Deposit Insurance Fund. We want to make sure
the bank executives, first of all, don't have the incentive to
take the types of risks that would undermine the health of
their institutions because they know they are going to have to
pay the money back, and where there is a greater sense of
fairness, that they are not profiting at the expense of others.
Ms. Velazquez. Thank you. In your testimony, you state that
in 2019, the Federal Reserve made a choice to implement the
Economic Growth, Regulatory Relief, and Consumer Protection Act
in a manner that was meaningfully more deregulatory than the
revised statutory scheme required. Can you further explain this
statement, and how do you think Congress, not regulators, can
address this issue?
Ms. Judge. Two points there, the first thing to note is
that Congress potentially appropriately at the time gave the
Fed discretion over what to do with banks of certain thresholds
with the idea that the Fed was closer to the ground, so they
might have better information over how risky banks, for
example, in the $100-billion to $250-billion range, actually
were and the appropriate suite of enhanced prudential
requirements to apply in light of that. And we saw that they
did not actually use that discretion in a manner that was
commensurate with the risk we now know that those banks were
assuming. For me, that suggests going forward, we have been
back on that discretion, understanding that there might be a
tendency towards excessive deregulation, because the costs are
only felt in the future, and really trying to potentially
hardwire standards that are more commensurate with what we have
learned recently is the nature of the threat that these banks
have the potential to pose.
Ms. Velazquez. In conclusion, Congress needs to act. Thank
you. I yield back.
Chairman Barr. The gentlelady yields back. The gentleman
from Missouri, Mr. Luetkemeyer, is now recognized.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and I thank our
witnesses for being here today.
I want to start out by going to Ms. Tahyar. You mentioned
in your initial remarks that the social media phenomenon of
being able to get out there and get a message out there that
caused, I think, in somebody's words here, a ``banking panic,''
is very concerning, not necessarily from a bank by bank basis,
but from a systemic situation. This is where I want to go with
my questions here, because some individual banks are going to
be well-run, and some not well-run. And in the situation we
have here, I think we have a lack of regulatory oversight
embankments management on the two, three banks we are talking
about, but the system is what I am concerned about.
The overall system can be played with. I sit on the House
China Select Committee as well, and it scares the dickens out
of me when I can see that we are playing games with our own
financial system now while the tweets are going on and their
social media is going on. And I just know the Chinese are
sitting there watching what is going on.
So, we have another tool in our toolbox to play around with
the United States economy, their banking system, and we are
doing nothing about it. And it is very concerning to me because
from a system standpoint, we have to be thinking in terms of
what the bad guys are going to be doing to us, and to be able
to prevent that from happening, or put a tool in toolbox for
the regulators to be able to manage the crisis.
Mr. Gould, I think you said that the system is built on
trust and confidence, and Mr. Michaud said it is driven by
fear, that people lose time or lose confidence in the system,
and things happen. My concern is also that we have real-time
payments coming around the corner here shortly. And we saw $42
billion went off the books of Silicon Valley in less than 48
hours. And real-time payments will take 48 minutes to do $42
billion if we are not careful, and we don't understand how the
system works and put some things in place to stop it.
I have a couple of ideas I want to run by you this
afternoon. One is to put in place the ability for the FDIC to
put--and they did this back in 2010--in place a 60-day ability
to protect the transactional accounts and deposits at these
institutions across the country. And now, they can do it on a
bank by bank basis, but if the risk is systemic enough that we
could have the whole system be under attack, I think it would
be worthwhile to be able to have them go at least on a 60-day
basis with just transactional accounts. What do you think about
that, Ms. Tahyar?
Ms. Tahyar. Thank you very much for those thoughts. I agree
with all of them, and they terrify me as well, and I think we
should all be terrified. Social media and bad state actors in
this panic is a new thing and we have to grapple with it.
My own view is that providing the FDIC the power with the
three keys of the systemic risk exception to temporarily
guarantee deposits up to whatever level the FDIC chooses, is an
important tool. Congress limited it, and Dodd-Frank was a
different time, and the house was burning for a different
reason. It feels to me like what Congress said is, thank you
very much for the firefighting, now we are going to defund the
firehouse. So, I hope that Congress really thinks about putting
that back in place.
Mr. Luetkemeyer. Mr. Michaud?
Mr. Michaud. I would agree. I think orderliness is
important, and I think that tool could create a more-orderly
moment to address the bigger picture and make important
corrections.
Mr. Luetkemeyer. I think it makes them calm, and the system
gives you 60 days to settle down to figure out if you really
have a threat or not.
Mr. Michaud. One hundred percent.
Mr. Luetkemeyer. Can you come to Congress to do something,
but you don't have a threat ticket off and off you go?
Mr. Michaud. What you will see is there is a lot of churn
in equity and fixed-income markets and bank securities, which
is a reinforcement for concern.
Mr. Luetkemeyer. Mr. Gould, what do you think of that?
Mr. Gould. I think you should just make sure you understand
the cost and the incentive of such a mechanism with the SEC
going forward. And I think as a prerequisite to informing
yourself as to whether that is appropriate, I think you need to
get more transparency from the Fed and the FDIC as to actually
what happened during that 3-day time period, which I think, as
yet, we still haven't seen. So in order for you all to make an
informed decision, I think you first and foremost need to get
more information from them.
Mr. Luetkemeyer. Very good. We had SEC Chairman Gensler
here a couple of weeks ago, and we asked him whether he had the
authority to stop the short-selling on an industry-wide basis.
In fact, today in The Wall Street, there is another article
with regards to short-selling banks.
Ms. Tahyar, do you think that he has the authority right
now to do it across-the-board? He kind of waffled on that.
Ms. Tahyar. Well, the Chair of the SEC did it in September
2008 and nobody questioned the authority at that time.
Mr. Luetkemeyer. Okay.
Ms. Tahyar. So, he clearly has it.
Mr. Luetkemeyer. Okay. Thank you very much. I yield back.
Chairman Barr. The gentleman's time has expired. The
gentleman from California, Mr. Sherman, is recognized for 5
minutes.
Mr. Sherman. Thank you. I don't think we can tell the bank
regulators that it is not their fault because we had different
monetary policies or fiscal policies over the last few years. I
am very old, and we have some other old people here. We have
some young people too, some younger than myself. But as old
people remember, we have had zero-percent interest rates, and
we have had 16-percent interest rates. Interest rates go up,
and interest rates go down. We have had fiscal budgetary
surpluses under Clinton, and we had enormous fiscal budgetary
deficits under Trump and others. Fiscal policy goes up, and
fiscal policy goes down. We need a banking system where banks
can survive not only the existing fiscal and monetary policy,
but changes as they may occur.
Mr. Gould, you are wise to have pointed out the governance
structure of the Fed and the whole system. First, we have forum
shopping. We don't allow that and you can't say, well, I don't
like this IRS; I want to go to the other IRS to audit my
returns. And we have a governance structure in which the banks
elect the people on their regional boards, who are then in
charge of auditing them. And if we had a system where only
billionaires subject to audits would determine who is running
the IRS, we would have a very different tax system.
Mr. Michaud, you bring up an interesting proposal on FDIC
insurance. We kind of have two proposals. One is for expanding
coverage of operating accounts. When you say operating
accounts, are you limiting that to non-interest bearing
checking accounts?
Mr. Michaud. Pretty much operating transaction accounts as
defined.
Mr. Sherman. Yes. How would you define that?
Mr. Michaud. Typically, I think it would be the operating
accounts that businesses and nonprofits and others use for
their daily business. And it could be--
Mr. Sherman. It is very hard to determine am I a business,
or am I just an individual? Do they have a definition?
Mr. Michaud. In their report, the FDIC laid it out and gave
you the bookends for what you could use for a definition.
Mr. Sherman. Okay. I would think that we would want to
limit that to non- or low-interest rate accounts if people have
more than a quarter million dollars to invest earned interest.
That is a different circumstance.
The other policy idea is having, on occasion, temporary,
system-wide unlimited insurance. And I am concerned that if we
did that, people would pull their money out during that
temporary period or we make it permanent and just have total
FDIC insurance, which comes very close to a bailout.
Mr. Michaud and Mr. Gould, do you see unlimited insurance
of all FDIC accounts either temporary or permanent as a way to
go?
Mr. Michaud. I have been a fan of the targeted approach,
which is you can pick certain types of accounts, but not
necessarily insuring all accounts.
Mr. Sherman. I want to put up this chart here. What we see
here is huge, unprecedented, unrealized losses on marketable
securities. We saw our 2018 law allow the Fed to not be tough
on these issues with regard to mid-sized banks.
Ms. Judge or Mr. Gould, is it standard practice as part of
regulating a bank to calculate how much the bank has lost
because of interest rate risk? You can do that, obviously, on
marketable securities, but on portfolio loans, you say, ah,
that is a 5-year loan, at the time the loan was extended rates
were at 2 percent for 5-year loans. Now, they are at 6 percent
for 5-year loans, so it's pretty easy to calculate back and
determine how much the bank has lost. And then, compare those
losses, unrealized losses, on loans and bonds to the bank's
capital. Is that a standard part of regulating a bank?
Ms. Judge. Clearly, it is for the largest banks.
Mr. Sherman. But we couldn't do it with all the banks,
could we?
Ms. Judge. As a regulatory matter going forward, we should
be clear--
Mr. Sherman. So, you are saying that preparing a schedule,
showing losses due to interest rate risk, is something we
didn't bother to do on mid-sized banks, not because it is hard,
but because we didn't want to know the answer?
Ms. Judge. I don't know what they were looking at, at the
time. I believe if I am going to provide any defense that there
was an expectation that you would have some type of offset, the
regional banks--
Mr. Sherman. What you do is you blind yourself to how much
money you have lost by believing your customers are willing to
subsidize you by leaving the money in. If you believe that, you
would probably run up a $35-billion cost to our system.
Ms. Judge. Which is exactly why, going forward, regardless
of what was true in the past, depositors have woken up and it
is very clear we need to--
Chairman Barr. The gentleman's time has expired. The
gentleman from Texas, Mr. Williams, is now recognized.
Mr. Williams of Texas. Thank you, Mr. Chairman, and thank
you all for being here today. Americans are struggling under
the weight of crippling inflation and families are being forced
to decide whether to put food on the table or pay the rent. The
Biden Administration's massive spending spree of Executive
Orders has fueled this crisis. The Democrats' partisan American
Rescue Plan injected $1.9 trillion into the economy, ignoring
the warnings that this plan would cause skyrocketing inflation.
And as a result, the Federal Reserve has continued to increase
interest rates to their highest levels since 2007.
Mr. Gould, in your testimony, you stated that the Federal
Reserve's rapid interest rate hikes are a source of systemic
risks to the banks. They supervise and were a cause of Silicon
Valley Bank's failure. So, can you elaborate on how interest
rate hikes caused these bank failures and how do you think the
Fed failed to supervise the banks they oversee for this risk?
Mr. Gould. Yes, sir. The rising interest rate risks caused
the bond portfolio, the investment portfolio of banks like SVB
to decrease and accrue all of these unrealized losses, which
investors began to pick up on and see that there were
significant unrealized losses on the bank's assets on their
balance sheet.
This is a phenomenon that was well-understood, and well-
known. In fact, as recently as a month before Silicon Valley
Bank's failure, the Fed Board made a statement on the impact of
rising interest rate risks, on banks, on their balance sheets
and their investment portfolios. And literally, the case study
was Silicon Valley Bank a month before it failed.
Mr. Williams of Texas. The Federal Reserve's report
reviewed the supervision of Silicon Valley Bank. Key findings
determined that Silicon Valley Bank's board of directors--you
just touched on that--failed to manage the risks. On top of
that, the key findings go on to say Fed supervisors did not
appreciate the extent of the bank's vulnerabilities. In 2022
alone, the Federal supervisor issued three findings on SVB's
ineffective board oversight, their weakness in risk management,
and the bank's flaws in their internal audit function.
So, it should raise major concerns that the Federal
Reserve, which is tasked with regulating and overseeing banks'
risky practices, identified vulnerabilities for more than a
year but failed to take corrective actions to ensure that SVB
fixed those problems. So despite there being two main causes of
the SVB failure, the Fed report stated this experience
emphasized why strong bank capital matters and goes on to
discuss the need for stronger bank capital.
So again, Mr. Gould, in your opinion, would you think about
requiring more regulatory capital above the current levels?
Would that have prevented the failures of Silicon Valley Bank
and Signature Bank, which were well-capitalized banks? Would
high capital levels have prevented SVB mismanagement or the Fed
supervisory failures?
Mr. Gould. Sir, even under higher capital standards, it
would seem that according the Fed report, Silicon Valley Bank
would have remained adequately capitalized. I think there are
questions around whether or how to treat unrealized losses in
certain investment portfolios, and whether or not that
volatility should flow through to regulatory capital. I think
those are questions that should be examined. But at least as I
understand it, regulatory capital levels at SVB, even had they
been higher, would have still been met.
Mr. Williams of Texas. Okay. As a result of the failures of
banks in California and New York, taxpayers in Texas, which is
where I am from, and across the United States could be left
footing the bill for these banks' mistakes and mismanagement.
And now, Texas banks face possible FDIC insurance assessments
for something they had no part in creating. The FDIC has an
obligation to get the best pricing at failed bank auctions and
to avoid having to use taxpayer funds to bail out these banks.
During the auctions of SVB and Signature, the FDIC did not move
fast enough to find a viable buyer, letting multiple days pass.
Well, there were reports of several offerings to these banks
before a bid was approved.
So finally, Mr. Gould again, could taxpayers have been
spared from paying for the failures of these banks if the
bidding process had moved more forcefully and swiftly, and did
the FDIC leave value on the table?
Mr. Gould. Congressman, it is certainly the case. A failed
bank is often likened to a melting ice cube in that you want to
move quickly to sell it, to preserve as much franchise value as
possible. I think the situation is simply that we don't have
all of the facts, or at least as I sit here, I don't have all
of the facts about what actually occurred over these weekends.
But you are not similarly limited. You can obtain from the FDIC
the facts since you are their overseer.
Mr. Williams of Texas. I am in the car business, and
sometimes we say, your first deal is the best deal. You want to
react and sell it. So with that in mind, Mr. Chairman, I yield
back. Thank you.
Chairman Barr. The gentleman yields back. The gentleman
from California, Mr. Vargas, is now recognized.
Mr. Vargas. First of all, thank you, Mr. Chairman. I
appreciate the opportunity to have this hearing. I want to also
thank the ranking member, of course, and the witnesses here
today.
I do have to say I want to challenge the premise that
somehow President Biden has created all this inflation in the
United States. In fact, it is interesting because it has been a
worldwide phenomenon. If we look at our peers across the ocean,
our European peers, they have been running harder than we are.
The U.K. inflation rate is over 10 percent. The EU is still at
8.8 percent or so. Some notion that somehow miraculously or
infamously, the Biden Administration created it--no, obviously
it was the pandemic, and a whole bunch of other problems that
we have had globally, and we have had international inflation.
It has been everywhere.
Anyway, I just had to get that off my chest because every
time I hear my colleagues say, I just don't think it is true.
Dodd-Frank, what is a good loan? Was it the right thing to do
at the right time, Dodd-Frank? Let me start with you, Professor
Judge.
Ms. Judge. I think it seemed like a reasonable move at the
time. And I think over time we are learning we probably should
have gone further when we had the opportunity. Clearly, that is
proven by the fact that we are sitting here, not that much
later, and we are facing the magnitude of the bank failures
that we are now facing and of the losses to the insurance fund
that we are now facing. Again, some of that was changes in
Dodd-Frank and regulatory changes that went even further than
the statutory changes. But I think Dodd-Frank brought about
much-needed changes. And I think there is always more work to
be done. It is the nature of financial regulation.
Mr. Vargas. Thank you.
Mr. Gould, I think that you said something like, we have
passed a bunch of laws, but they haven't done much, or
something of that sort. Would that include Dodd-Frank?
Mr. Gould. Sir, I think that expectations of what Dodd-
Frank could accomplish and what some of its proponents said it
would accomplish were overstated. As far as I can tell, it did
not end the era of boom and bust. At least based on the actions
of the regulators just a couple of months ago, it would seem
that at least under certain circumstances, there are banks that
can fail in ways that would have systemic impact. So at least
in two major areas, I think it came up short.
Mr. Vargas. Do you think it was a good law in general or do
you think we shouldn't have had a law?
Mr. Gould. No, sir, I do not think it was a good law in
general.
Mr. Vargas. Okay. Thank you.
Ms. Tahyar?
Ms. Tahyar. Dodd-Frank was what, 800 pages, with a dozen
titles? There are good parts of it. And there are parts of it
that, as Jonathan has said, were overstated. I think the
paradigm shift in macroprudential regulation was a good one. I
think time goes on and things change, and there is a need for
adjustments in some places.
Mr. Vargas. Okay. It would be unfair, Mr. Michaud, if I
didn't ask you. Go ahead, sir.
Mr. Michaud. Terrific. Thank you. I think that Dodd-Frank
succeeded in bringing more capital and liquidity regulation to
the industry, which has been well-served. But I think that
there are parts of it that might have gone a little bit too
far, and still might need adjusting, but I think the
preponderance of it was supported from capital and liquidity.
And I don't think the banks that failed, failed because of
capital or liquidity. I think they were overwhelmed by a bank
run at a moment in time.
Mr. Vargas. Let's get to that. In fact, that was one of the
points that I wanted to talk about. I do believe we should have
very large banks. I think that is good for the United States
and good internationally. I also think that regional banks are
very, very important. And of course, the smaller community
banks are important, but they always seem that they would be
susceptible, both the regional and the community banks to a
run, especially with the digitized ability to move money so
quickly, so won't they always strategically be vulnerable? Yes,
go ahead?
Mr. Michaud. And just to finish saying, I didn't want to
also not say that there were mistakes made about interest rate
management to that prior question. I am not absolving those big
banks that have failed.
Mr. Vargas. Right. Let's speak about this one.
Mr. Michaud. I think these companies are trying to build
themselves in a more diversified manner. As long as they manage
their concentrations and their capital well, look, there are
4,700 other banks that are doing it successfully right now. I
know that these three failures were spectacular and
unfortunate, but there are over 4,700 that are doing a really
good job, I believe.
Mr. Vargas. Yes. Thank you. My time has almost expired. But
I want to say it just seems that structurally, when you can
move $42 billion within a few days, it is always going to be
structurally problematic. Thank you.
Chairman Barr. The gentleman's time has expired. The
gentleman from Georgia, the Vice Chair of the Subcommittee, Mr.
Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you Mr. Chairman, and thank you for
holding hearings on this issue, hearings that are extremely
important with the things that are going on. So, it is great
that we are actually able to address these types of issues now.
Mr. Gould, in hindsight, the interest rate problem should
have been clear, not the least to the Federal Reserve in the
case of Silicon Valley. And in Vice Chairman Michael Barr's
report, he attributes the lack of concrete supervisory action
in the lead-up to SVB's failure to a myriad of causes including
supervisory culture under the previous Vice Chair for
Supervision. Do you think this is an accurate self-assessment
from the Fed or could this just be simply shifting the blame?
Mr. Gould. Sir, it is impossible to tell, since, for
example, we don't have the interview notes on which those kinds
of allegations are based. So for me sitting here, it is
impossible to tell, but it can certainly be the latter.
Mr. Loudermilk. Okay. Considering the Federal Reserve
supervisors failed to anticipate obvious systemic risks
directly related to their own response to rapid inflation, do
you believe it is appropriate that they continue pursuing other
major supervisory initiatives such as Basel Endgame or Vice
Chairman Barr's holistic capital review?
Mr. Gould. I think they should focus on their supervisory
failures and enforcing the regulations that are on the books
rather than pursuing additional regulations.
Mr. Loudermilk. Basically, do the job that you already have
appropriately before you start taking on more responsibilities
or you are just going to fail on those?
Mr. Gould. That is correct.
Mr. Loudermilk. I agree with you on that. Thank you. One of
the recommendations in Mr. Barr's report is that we work to
change supervisory behavior and promote faster, more decisive
supervisory action. My concern with this is that many of the
supervisory recommendations made in relation to SVB were
unrelated to the risks that caused the collapse. How would we
guarantee that unbridled supervision wouldn't create an
environment where supervisors dictate management decisions
unrelated to safety and soundness?
Mr. Gould. I think that is an excellent question, and one
which I think supervisors grapple with all the time. I think
internally, you obviously need to have a strong management
culture. Unlike regulation, if you are an examiner, your
training is on the ground, it is based on judgment acquired
over years of experience. All of the regulators will say that
they apply kind of a risk-based focus to how they think about
supervision and making sure that they are in fact, focused on
the risks that really matter versus kind of check-the-box
exercises on extraneous risks that don't actually matter, it is
really tough.
And frankly, there is also always a cost from the bank
management perspective, if you have several dozen MRAs, they
might be distracted, rather than focusing on the MRAs that
really matter. Understanding that, I think is really a function
of having good leadership and good training.
Mr. Loudermilk. But one thing just brought up is culture.
And one of the issues that I have seen with the culture of
regulators, as we have seen this transition from the idea that
originated in agencies is to work in partnership with industry
to come up with regulations that ensure safety and soundness.
But in many cases, we see a culture that is adversarial-based,
where regulators are the adversaries, or at least are viewed as
adversaries by the banks or financial institutions or the
businesses. Is that what we are seeing in a lot of these
financial regulators? Is it an adversarial relationship.
In other words, we see that a lot in management
supervision, which changes depending on who is in the White
House at the time. But when it comes to the regulators on the
ground, is that culture an issue? Is it is more of a,
``gotcha,'' environment, instead of, let's ensure the soundness
and safety of your bank.
Mr. Gould. I think that is a risk. The banking agencies'
prudential regulation is very different from say, the SEC and
the CFTC, which are market regulators and viewed more as
enforcement agencies. I think there is a potentially worrisome
trend of the banking agencies looking more and more like
enforcement agencies over time. I don't know if that serves the
larger policy interest of maintaining systemwide safety and
soundness, if they adopt kind of a more, ``gotcha,'' attitude.
Here though, at least, based on what the Fed report says
about Silicon Valley Bank, I don't think the issue was a
failure to be adversarial. I think there was just a lack of
follow-through and allowing these issues to linger and get
bigger and bigger and not be addressed.
Mr. Loudermilk. Thank you. That was part of the point is,
in some areas it is adversarial, and in some areas it is like,
let's turn our eye to this one. So thank you, Mr. Chairman, and
I yield back.
Chairman Barr. The gentleman yields back. The gentleman
from Illinois, Mr. Casten, is now recognized for 5 minutes.
Mr. Casten. Thank you to the gentleman from Kentucky and
all of our witnesses. I appreciate you being here on these
important issues. I also feel a little bit like that scene in
Planes, Trains, and Automobiles, where you know they are you
are going the wrong way, even know where we are going. Like
Neal and Del, there is a lot of bad stuff in the rearview
mirror, but what is coming down the pike is a lot worse right
now.
Professor Judge, I want to start with you. Treasury
Secretary Yellen has said that we are going to be unable to pay
our bills by June 1st, if we don't come to some agreement on
the debt ceiling. Do you have any sense of what is going to
happen to Treasury yields if we miss a payment?
Ms. Judge. Clearly, resolving the debt ceiling has to be a
top priority. The Biden Administration is making it a top
priority. They are looking for cooperation. We clearly are
going to see adverse consequences on the ability of the U.S.
Government.
Mr. Casten. I am asking just numerically, because I don't
have a Bloomberg terminal in front of me. When I looked 2 weeks
ago, there was about a 300 basis points spread between
Treasuries coming through before and after the default date. I
don't know if you all have seen--
Ms. Judge. I don't have a number off the top of my head.
There are various estimates that have been out there, none of
which look pretty.
Mr. Casten. Okay. We are talking about rapid interest rate
spikes that created mark-to-market problems where it was that
volume of an increase over 9 months. Do you have some sense of
how many banks are about to get, ``SVB'd,'' from a mark-to-
market perspective if all of a sudden there is a roughly 300-
percent increase in interest costs on Treasuries?
Ms. Judge. I expect a number of banks will face challenges
if there is a significant change in the Treasury rate. Again, I
think a lot of what banks hold are longer-term instruments that
are also keyed off of the risk-free rate. So it is interesting
and challenging to know, which is precisely why going back to
where you started, it is never been more important for
regulators and for supervisors to be engaging in these forward-
looking analyses and trying to understand, what are the tail
risks?
Mr. Casten. Second question. My colleague was talking about
Dodd-Frank. We don't require banks to hold capital for risk-
free assets. If Treasuries are about to not get risk-free,
there is something like an 8-percent capital charge. How much
capital do the nation's banks have to raise if the Treasuries
are suddenly deemed to be not risk-free assets?
Ms. Judge. It is a great question. I don't have the number
for you off the top of my head.
Mr. Casten. Does anybody on the panel know that? The
numbers I have heard are at the low end of that as $160 billion
overnight? I see heads nodding directionally. Okay.
Mr. Gould. It depends on the risk weight to which they
would be subjected.
Mr. Casten. Sure. But if you just look at like 8 percent of
what is out there right now, it is a big number.
Mr. Gould. Correct. It is a big number. I don't know the
number, but it is a big number.
Mr. Casten. Are you concerned about any banks that might
not be able to raise that volume of capital overnight?
Ms. Tahyar. I don't see how banks can raise capital in the
middle of a debt default.
Mr. Casten. Me, neither. What happens to repo markets, if
the Treasuries that are used as the swap on the risk-free
premium are no longer risk-free?
Mr. Michaud. This would be a new moment for the markets.
And I think there would be a lot of big concerns in a variety
of areas to deal with, if that happens.
Mr. Casten. Okay. If we allow the United States economy and
the global economy to go into freefall, what happens to long-
term U.S. structural deficits, as the American people are
looking for us to provide social services that the banks can no
longer lend money to provide up or down? Do tax revenues go up?
Can they go up?
Ms. Judge. A range of bad things can happen, which is why
it is all the more important that we are having this hearing
and really trying to figure out, how do we make sure the banks,
but also non-bank financial institutions, are prepared for the
range of risks that might hit at any point in time?
Mr. Casten. Okay. Last question. Moody's did an analysis of
the proposal that my colleagues across the aisle have put
forward, in exchange for not committing suicide, we would thank
the economy. Moody's analysis is that it would increase the
likelihood of recession and result in 780,000 fewer jobs. If we
go into recession and spike the unemployment rate, do long-term
structural deficits go up or go down? It is not a trick
question.
Ms. Tahyar. They go up.
Mr. Casten. Thank you. Like I said, we are going the wrong
way. And my colleagues across the aisle would have us believe
that the only choice before us is, how we would like to die?
There are more choices that we have. And I hope we can take
this issue seriously and move forward and not kill the entire
U.S. economy over some pettiness because somebody doesn't like
a prior tax vote or a prior spending vote.
I yield back.
Chairman Barr. The gentleman yields back. The gentleman
from Tennessee, Mr. Rose, is now recognized.
Mr. Rose. Thank you, Chairman Barr, and thank you Ranking
Member Foster, for holding the hearing, and thank you to our
witnesses for being here.
At the start, I want to respond quickly to Mr. Vargas'
opening comments about inflation and what I would call the
Biden inflation. Years ago, my professors at Tennessee taught
me that inflation is caused when you have too many dollars
chasing too few goods and services. So, I reflect back to a
couple of years ago when many of us in this room were sounding
the alarm, as the Biden Administration was kind of doubling
down on the COVID relief funds at a point when even people like
former Treasury Secretary Larry Summers was saying, ``This is
going to be inflationary.''
The fact that other countries made the same mistake does
not excuse the bad policy choices that the Administration put
in place, of not only putting too many dollars in the economy,
but also, at the same time, restricting production, which dealt
with the other side of that equation so that we ended up with
that classic situation that causes inflation. And we got it in
just as former Treasury Secretary Summers predicted. And
unfortunately, we oftentimes have to repeat the mistakes of the
past. I just wanted to answer that.
So, the Administration's own policies, I think, got us to
where we are today. I think that is important because then the
response, the policy response to that from the Fed has been to
dramatically raise interest rates in such a short period of
time as part of what has created the stresses that we see that
are leading to the bank failures that we have seen in recent
weeks.
Mr. Michaud, First Citizens Bank's stock has nearly doubled
since acquiring Silicon Valley Bank, but the FDIC kept its
potential gain, our gain on First Citizens stock at $500
million. In your opinion, do you think the FDIC got a raw deal?
Mr. Michaud. It is very hard for me to know all the
features that went into the bid that First Citizens made. And I
think typically what happens in these whole bank acquisitions,
is there a variety of tradeoffs in terms of what a bank may pay
to acquire a failed bank. So I don't know what tradeoff they
may or may not have gotten as part of that stock appreciation.
Mr. Rose. Why not allow the Federal Government to recoup or
the FDIC, in this case, to recoup more of its losses and share
in those gains?
Mr. Michaud. I think that question would be best for the
FDIC to know exactly what the alternatives were at the time,
which unfortunately is not something that I know.
Mr. Rose. Sure. Thanks for your insights there. Last year,
Senator Elizabeth Warren sent a letter urging Comptroller of
the Currency Hsu to block the TD Bank-First Horizon deal. And
the deal fell apart just last week, because they were not given
a timetable for regulatory approvals. And First Horizon stock
was down nearly 40 percent last week.
So Mr. Gould, do you believe the OCC's actions of being
influenced by members of the Democratic Party, like Senator
Warren, specifically as it relates to bank mergers, do you
believe that their actions are being influenced?
Mr. Gould. I would certainly hope not.
Mr. Rose. Do you think it is appropriate for regulators,
like Comptroller Hsu, to give weight to any one Member of
Congress?
Mr. Gould. I think it is appropriate for independent
regulators to look to the statutory factors that Congress as a
whole as a body has required them to do so. And that is where
their analysis should begin and end.
Mr. Rose. Mr. Gould, we have seen this not only at the OCC,
but at the SEC, the FDIC, the FTC, and the CFPB. The list goes
on and on. So my question is, is it important for regulators to
be apolitical and to make judgments based on objective
criteria? I think you have already answered that, but in his
report, the Fed Vice Chair for Supervision, Michael Barr,
touched broadly on the type of regulations that the Fed may
consider in their review of the recent bank failures. According
to Barr, actions might include increasing capital requirements
and adding early triggers to required stress testing when a
bank crosses the threshold from one category to the next. The
bottom line is that the incremental costs to the banking
industry are likely to fall upon that tier of banks below the
G-SIBs.
Mr. Gould, my question is, won't these actions just further
entrench the G-SIBs and make it harder for the regionals to
compete?
Mr. Gould. Sir, I think that the imposition of additional
kind of regulations on regional banks will have an impact on
the specific markets that they serve, including the
availability of credit. The comparative analysis, as between
one type of bank and another, I think is a little hard to tell.
And I would hope that the Fed is thinking that through before
they put forward any proposals.
Mr. Rose. Thank you. Mr. Chairman, I yield back.
Chairman Barr. The time has expired. The gentlewoman from
Ohio, Mrs. Beatty, is now recognized for 5 minutes.
Mrs. Beatty. Thank you, Chairman Barr, and Ranking Member
Foster, and to all of our witnesses, thank you for being here
today. I am sorry my colleague, Congressman Vargas, has left
for another hearing, but let me say that I want to be on the
record as associating myself with his opening statements on
inflation.
And certainly, if we look back, and I think a report that
the President gave just a month or so ago in March talked about
looking over the last 12 months at how inflation had actually
reduced. And certainly, we know gas and food had contributed to
it. Gas prices also came down. My colleague mentioned COVID.
Certainly, there were a lot of dollars and things put in place.
Over a million people had died because of COVID. Small
businesses and the economy was affected. So for those things
that he did in that space, I support Mr. Vargas and his opening
statements.
Now, let me start with Professor Judge. In the resolution
of Silicon Valley Bank and Signature Bank, do you think that
the Federal Government took the appropriate steps to intervene
and prevent contagion by invoking the systemic risk exception
and insuring all deposits of both banks?
Ms. Judge. Yes, I defer to the policymakers who had the
information. But what we see is policymakers of both parties
were unanimous in their perception that this posed a threat to
the stability of the financial system. And we have seen that
actually, no such disruption subsequently materialized, and
instead, we managed to maintain a relatively resilient banking
system despite major losses.
Mrs. Beatty. Some of my colleagues on the other side of the
aisle are proposing legislation that would place additional
requirements on the President, Treasury, and Federal banking
agencies before they can take action to respond to the bank
failure.
Would those additional requirements, in your opinion, slow
down the ability of those agencies to respond to a bank
failure?
Ms. Judge. Yes. I am very concerned about the way that they
might impede the ability for them to respond appropriately. I
think that Ms. Tahyar did a great job in her comments earlier
comparing the situation to a house on fire, and the first rule
is for the firefighters to put out the fire. And I think
anything that impedes their ability to make sure the fire is
contained, could have adverse consequences on the health of the
economy.
Mrs. Beatty. Okay. Thank you. We have already spent a lot
of time talking about the FDIC and the change to the $250,000
limit on deposit insurance. But let me go back to our hearing,
I believe it was on March 1st, when I asked Chair Gruenberg
about this. And he didn't make a comment on it or declined to
make a comment on any particular proposal until the whole
review was completed.
But earlier this month, I think it was in the FDIC report
that they released, they outlined three options for reforming
the deposit insurance: it was unlimited; it could be targeted;
or it could be limited coverage. And stated that the FDIC
believes that targeted coverage will be the most promising
option to improve financial stability. Do any of these options
resonate with you? And I will ask each one of you.
Ms. Judge. Yes, I thought the report was exceptionally
well-done. And the notion that we might want more targeted
approaches to deposit insurance that allow small business
owners to have the additional protection they need and to also
maintain that close relationship that they so value with their
local community bank, makes a lot of sense.
Mrs. Beatty. That prompts me to ask the other Members, do
you think Congress should focus on expanding coverage to small-
business payment accounts?
Mr. Michaud. I, 100 percent agree. I think the targeted
approach is the right approach. And I think that is the right
cohort to focus on.
Mrs. Beatty. Mr. Gould?
Mr. Gould. I was a Congressional staffer here in 2005, when
Congress raised the deposit insurance limits from $100,000 to
$250,000 for examiner accounts, and I have seen them go up
since then. One thing that I think Congress should really look
at is historically, what have the levels been? What problem are
you trying to solve? And make sure whatever you do in deposit
insurance reform, if you do anything, that it addresses
specific problems. And then, you also understand that it is not
just deposit insurance reform; you also have other mechanisms
to reduce the risk of runs, including from incompetent
supervision.
Mrs. Beatty. Thank you for reminding all of us or many of
us that we raised it recently. And I will end with you, Ms.
Tahyar.
Ms. Tahyar. I thought the FDIC report was very well-done. I
think deposit insurance reform is something Congress has to
look at. I have nothing to add except to say that unlimited
insurance--we would be the only country in the world to do
that, so I would have--
Mrs. Beatty. Thank you.
Chairman Barr. The gentlelady's time has expired. The
gentleman from South Carolina, Mr. Timmons, is now recognized.
Mr. Timmons. Thank you, Mr. Chairman. I just want to begin
by saying it is shocking to me that some of my colleagues
across the aisle are still living in a fantasy land, where they
believe that the $7 trillion of extraordinary spending did not
cause the highest inflation environment in my life. I just
don't understand. I guess, let's just start here. I just want
to say that pandemic spending needed to happen. But I would say
that number was between $1 trillion and $2 trillion, and that
was bipartisan. There was $5 trillion on top of that, that was
largely partisan. So I guess just as a show of hands, well,
let's just do yes-or-no questions each.
Ms. Tahyar, do you believe that the $7 trillion of spending
done in the last 3\1/2\ years caused inflation? Just yes or no?
Ms. Tahyar. Yes.
Mr. Timmons. Mr. Gould?
Mr. Gould. Yes.
Mr. Timmons. Mr. Michaud?
Mr. Michaud. Yes.
Mr. Timmons. Professor Judge?
Ms. Judge. I look across the Atlantic, and I see the U.K.
sitting there, and they engage in--
Mr. Timmons. We are going to that next year. You can say
no; it is fine.
Ms. Judge. It does not seem like it was the perfect--
Mr. Timmons. Okay. So, I guess this is the next thing. The
dollar is still the global reserve currency until this
President undoes that, and he just nominated somebody to lead
his Economic Council who believes that we should actively go
off the dollar as the reserve currency, which is insane.
Mr. Gould, I will start with you. Do you see a relationship
between the inflationary environment that we experience in the
United States, the reserve currency, and that impacting other
countries' inflation and causing hyperinflation in certain
countries; is there a relationship there?
Mr. Gould. I assume if the value of the dollar is not
stable over time, it will lose its appeal as a global reserve
currency.
Mr. Timmons. And many believe that the inflation being
experienced in other countries can be partially blamed on the
United States.
But let's just go to the issue at hand, SVB. Mr. Michaud,
do you think it is best practice to have a chief risk officer
for a bank?
Mr. Michaud. Yes, I do.
Mr. Timmons. Okay. So the fact that SVB didn't have a chief
risk officer from April of 2022 until January 2023, that is a
problem.
Mr. Michaud. I don't know the specifics. But it's something
I would look into, given those facts.
Mr. Timmons. What do you think is the appropriate ratio of
diversity officers to risk officers? Is it at least one-to-one?
Fair enough? You don't have to answer that.
So, 11 of the 12 branches of the Federal Reserve System
were warning banks about stress testing higher interest rate
environments, while the San Francisco Fed was beating the ESG
drum. They were not communicating in the same way that the
other 11 were.
Ms. Tahyar, is that a problem? Do you think that the San
Francisco Fed should have been telling the banks to stress test
higher interest rate environments? Would that be best practice?
Ms. Tahyar. I don't know what was going on at the San
Francisco banks because we don't have the facts. In theory, in
a vacuum, all of the Reserve Bank's should have been focusing
on interest rate risks.
Mr. Timmons. I have spoken to a number of people who are
aware of what they were doing and they were not encouraging
that.
Let's go to Congress's role in all this. We delegated our
authority to bail out future banks because of the Troubled
Assets Relief Program (TARP). If Treasury and the FDIC did not
have the authority to invoke the systemic risk exception, do
you think Congress would have done it? Mr. Gould, what are your
thoughts?
Mr. Gould. I'm sorry, sir. Do I think--
Mr. Timmons. Do you think Congress would have bailed out
SVB and Signature, if not for Treasury and the FDIC having the
statutory authority to invoke the systemic risk exception?
Mr. Gould. That is tough to predict. I recall back in 2008,
the first time TARP was up for a vote, it did fail. My guess is
it would be tough.
Mr. Timmons. Probably not. And the President and the
Treasury Secretary said that this was not a bailout. It did not
impact citizens all over the country. But unfortunately, with
them ignoring the quarter-million-dollar FDIC max and just
saying, well, we are just going to insure everybody, that
creates risk, which results in initial premiums, which my
constituents are going to pay, so that was a lie. It was just a
lie.
The President focused on this concern about payroll, which
would have been met, and the President and the Treasury
Secretary focused on the fact that it wasn't a bailout and it
wouldn't affect anybody. I don't think that the Federal
Government should have bailed out banks which made poor
decisions. I think that those banks should have made their
customers 90 percent whole, and the shareholders should have
lost everything. I think that is what needs to happen when you
lose. The free market has corrections. And when Congress gets
involved and bails people out, the free market ceases to exist.
I do not believe they should have been bailed out, and I am
sick and tired of my constituents being stuck with the bill for
failed Democrat policies. With that, Mr. Chairman, I yield
back.
Chairman Barr. The gentleman yields back, and just a
reminder to Members not to engage in personalities. With that,
the ranking member of the Full Committee, the gentlewoman from
California, Ms. Waters, is now recognized.
Ms. Waters. Let me thank our witnesses for being here today
and sharing the information that you have shared. I have been
looking at some of the reports that have been coming out, not
only from GAO, but from the Fed, et cetera. And based on what I
am seeing, everybody is to blame.
You have management at the banks that was not taking care
to do what they should be doing, particularly when we look at
Silicon Valley Bank. And I don't know who was examining their
balance sheets, but they didn't seem to know or understand that
many of the securities that they were holding had much less
value than when they were acquired, which is one of the
problems. I don't know whether, because they were the go-to
bank for the young creative business people or the startups,
they cared whether or not they had insurance. I don't know a
lot about some of the issues that we are beginning to hear
something about.
But evidently, there were management problems. They grew
too fast to begin with, and perhaps they were too lenient in
the way that they made loans, too many uninsured depositors and
all of that, but the regulators also had problems. Now, some of
those problems were created by S.2155, which certainly did, as
I remember, reduce the prudential oversight, particularly as it
related to stress testing, for example. Now, those who said, we
will say that the regulators had options, they could have
exercised some of the regulation that was created by S.2155,
they didn't have to.
But I want to direct this question to Ms. Tahyar. I
appreciate that you are knowledgeable in your testimony that
the White House and Fed Vice Chair Barr raised constructive
ideas to strengthen the regulatory framework for regional
banks, some of which you agree with and some you may not
specifically. Which prudential standards did they highlight
that you think should be improved?
Ms. Tahyar. I think the long transition period moving from
one category to another is something that ought to be looked
at. I also think that the not passing through OCI in capital,
which is something that has been on the books since 2013,
should be revisited, and I think Vice Chair Barr's statement
that size alone is not what makes an institution risky is, in
fact, a good one.
Ms. Waters. Thank you. Let me just touch on something that
is always controversial as we deal with this oversight. Should
regulators look to strengthen the stress testing and liquidity
requirements, among other prudential standards? When we talk
about additional capital, everybody goes crazy. What do you
think?
Ms. Tahyar. I think there are likely some improvements that
could be made there, but I would be reluctant to put the same
amount of Liquidity Coverage Ratio (LCR) or high-quality liquid
assets (HQLA) requirements on regionals as we have on the G-
SIBs. I really hope that the regulators will look at that
carefully, and be fact-based in the policy changes they make.
Ms. Waters. Well, since you are going there, let me just
ask you, as I look at our regionals now, I am a bit concerned,
and I want to make sure that we can do everything to ensure
that they are functioning and that they are safe. But why is it
that I keep hearing so much about protection for regionals
when, in fact, we know that we would be better off keeping a
close eye on them now?
Ms. Tahyar. I think I am influenced here, Congresswoman, by
the fact that I am from a small town in Michigan, so I know
what it is like for small and mid-sized businesses that aren't
in major coastal cities. I think our regional banks are the
banks that are providing small and mid-sized enterprises with
the most credit they can get. When I teach classes, I talk a
lot about Joe's Auto Body Shop. He has 25 auto body shops in
the Tri-County region. Joe isn't somebody who changes his bank
at a click.
Ms. Waters. Thank you very much. I yield back.
Chairman Barr. The gentlewoman's time has expired. The
gentlewoman from California, Mrs. Kim, is now recognized.
Mrs. Kim. Thank you, Chairman Barr and Ranking Member
Foster, for organizing this timely hearing to discuss the
recent bank failures. And I would like to say on the record
that I believe the Biden Administration's American Rescue
Plan's $1.9-trillion injection into the economy helped spur
inflation to 9.1 percent in 2022, an inflation rate that we
haven't seen in 40 years. And to tame that inflation, the Fed
was forced to act swiftly by raising interest rates at a pace
also not seen in decades.
Unfortunately, in the State of California, where I am from,
we have seen firsthand how partisan economic policies can lead
to the failure of two of its biggest banks, wiping out nearly
half a trillion dollars in assets in just a matter of days. So,
this is why we are having this hearing to get to the bottom of
those bank failures, and we are trying to strengthen our
financial system and protect the backbone of our economy. Those
are the small and mid-sized financial institutions, because
they are the ones who provide much-needed capital for our small
businesses.
Let me ask the first question to Mr. Gould. A lot has been
discussed regarding the FDIC's actions to resolve and sell SVB.
Do you think it was a mistake by the California Department of
Financial Protection and Innovation to close SVB by midday on
March 10th?
Mr. Gould. Congresswoman, based on what I know from the
reports, SVB lost something on the order of over $40 billion in
deposits on Thursday. And I think at least based on, again,
what I read in reports, regulators anticipated another $100
billion was going to flow out the next day. That is, as I
understand it, a deposit run of huge magnitude. So, I think the
decision to close them was really all that was left to do. They
had no other options. I think there are good questions that can
be asked about what led up to those events. I think the time
Thursday, Friday, looking at those kinds of deposit offloads, I
think that gave them great falls.
Mrs. Kim. Do you think there could have been other things
the California regulator and the FDIC could have done
differently in the resolution of SVB?
Mr. Gould. Again, I think it is a little hard for us to
judge simply because we don't have all of the information of
what went on in the period immediately preceding the closures
by California. But also, over that weekend, and then in the
kind of week or so that elapsed until the FDIC found a buyer or
at least a partial buyer.
Mrs. Kim. Let me follow up, and then I will ask another
question. I know this has already been discussed by previous
Members who asked the question, and my understanding is that
the regulators have the tools, like S.2155, to prevent bank
failures. Can you elaborate on that, because I wasn't here when
that conversation took place. Can you elaborate on your
thinking on the argument that S.2155 caused the bank failures?
Mr. Gould. Sure. The discretion that S.2155 afforded the
Fed in particular, but the regulators in general gave the
ability to tailor enhanced prudential standards based on the
asset size of the banks. They did so over the course of 2018,
2019, and 2020. Had SVB been subject to the enhanced prudential
standards that would have existed, but for S.2155, with the
exception of the LCR, which they would have failed, they would
have passed every single other test.
And even failing the LCR, it is important to note they were
already failing the more important internal liquidity stress
testing, and the Fed was not enforcing the existing regulations
on the book. And if they had in order to pass the LCR or to
pass an internal liquidity stress testing, they would have had
to bulk up on even more high-quality liquid assets, which are
themselves ironically subject to interest rate risk. So, they
would have bought more government obligations, thus increasing
their exposure to interest rate risk. That is a perverse and
ironic impact of regulation in this particular case.
Mrs. Kim. Okay. I only have 9 seconds, so maybe I will just
ask that, and hopefully you can follow up with that last
question that I was going to ask. I will yield back. Thank you.
Chairman Barr. The gentlelady yields back. The gentlewoman
from Texas, Ms. De La Cruz, is now recognized.
Ms. De La Cruz. Thank you, Chairman Barr, for holding this
hearing today, as this committee seeks to continue to uncover
facts around the recent bank failures at Silicon Valley Bank
and Signature Bank, and most recently, First Republic Bank. It
is critical that this body continues to investigate the
circumstances around these bank failures and how the Biden
Administration and the financial regulators responded to these
events. I am the Congresswoman in South Texas, and most of my
community is rural. And a lot of my constituents rely very
heavily on smaller institutions or regional banks. So, this is
an area of particular focus to me.
When the bank failures occurred, I got on the phone and I
spoke with those smaller banks, those community banks, and
regional banks to ask, how are you all doing? And they said,
``Congresswoman, we have adequate capital, we are fine, we will
be able to get through this period. But what we are most
worried about is that because of the lack of good management in
these banks, and the failure of the regulators, that we are
going to bear the consequences as small community banks and
regional banks.''
So, my question really goes to all of you. Should the
Federal Reserve call for stronger regulatory tools, as appears
to be implied by the Vice Chair for Supervision? And what
consequences could this have on our small community and
regional financial institutions in districts like mine, that by
the way, serve a large population of Hispanics? In fact, we are
one of the largest Hispanic communities in the entire nation.
Yes, sir?
Mr. Michaud. Maybe, I will take the first shot at that. My
view is that the regulators do already have the tools they need
to adequately supervise. And what you speak about, I think
speaks to tailoring, which is the approach that has been done
very recently. So, I believe that the tools are in place and it
is a matter of how it is supervised, rather than needing new
rules or laws for the Federal Reserve at this moment.
Ms. Tahyar. I agree with that, and I think we have a multi-
tiered banking system because we are a large and complex
country. And we need to continue to have different sizes of
banks serving different communities. I think that the agencies
need to focus on supervision, and they need to clean house more
than they need to focus on regulatory change.
Ms. De La Cruz. Thank you. Yes, Professor?
Ms. Judge. For me, there is a need to do both. There is
clearly a need to ramp up supervision. At the same time, I
loved your framing and the attention that you are paying to the
community banks, and the important roles that they are playing
in your district and in local communities across the country. I
actually believe that appropriately regulating very large
regional banks, banks with over $100 billion in assets that we
have learned cannot be resolved in an orderly fashion, would
actually help to encourage people to focus on those true
community banks and the smaller regional banks that really are
focused on serving their community.
Ms. De La Cruz. Let me ask you a question, ma'am. Where do
you live?
Ms. Judge. I live in New York City, but I actually grew up
in Ann Arbor. The community bank that I worked with most is the
State Bank of Graymont, which is based in Pontiac, Illinois. We
have some farmland exposure to Illinois and they are actually
doing an amazing job with agriculture lending.
Ms. De La Cruz. You live in New York. How many years have
you lived there?
Ms. Judge. I have lived there about 11 years.
Ms. De La Cruz. Eleven years now. So, when was the last
time you went to rural America and spoke with community and
regional banks about what you are proposing?
Ms. Judge. The last time I went to rural? I spent a lot of
time all around the country. I gave the inaugural--
Ms. De La Cruz. In the last 3 months?
Ms. Judge. Yes, I gave the inaugural family and small
business lecture at the University of South Carolina, because I
could not be more dedicated or supportive of small businesses.
And I went to South Carolina and I traveled at lot--
Ms. De La Cruz. I yield back. In the last 3 months speaking
after this failure, I think that being among community and
regional banks, we will hear the same thing over and over
again, which is exactly this, and I think it has been repeated
several times. The Fed was not enforcing current regulation on
the books, and if they did just that, we would not be in this
situation, and community and regional banks would not have the
fear that they have now.
Chairman Barr. The gentlelady's time has expired. The
gentleman from Tennessee, Mr. Ogles, is now recognized.
Mr. Ogles. Thank you, Mr. Chairman, and witnesses. I know
it has been a long afternoon, but thank you, and thank you for
indulging us. Mr. Chairman, I reject the premise that small to
mid-sized banks are somehow a problem in our economy. Mr.
Michaud, you said that roughly 4,700 of the small to mid-sized
banks are getting it right. So, the three banks that failed
were poorly run, they were poorly managed, and they were poorly
supervised.
This is an either/or question for--we can go down the line.
We will start with you, Ms. Tahyar. What is more important: for
banks to examine their liquidity risk or their climate risk?
Ms. Tahyar. Sorry. Was that liquidity risk?
Mr. Ogles. Liquidity versus climate?
Ms. Tahyar. Liquidity.
Mr. Gould. Liquidity.
Ms. Judge. Liquidity and both.
Mr. Ogles. Okay. Same premise, interest rate risk or
climate risk?
Ms. Tahyar. Interest rate risk.
Mr. Gould. Interest rate.
Mr. Michaud. Interest rate.
Ms. Judge. Interest rate doesn't have to be a choice.
Mr. Ogles. We are stating the obvious, right? But when we
look at these banks, when we look at SVB in particular, which
was so focused on climate risk versus their deposit structure--
you want to think of actuarial tables. When I think of
liquidity risk and I think of interest rate risk, I think of
dollars and cents. I think of numbers.
But the problem was, these banks were putting polar bears
and penguins above their fiscal responsibility. So, any effort
to target or impede or to increase the cost structures of our
small to mid-sized banks will face a strong headwind from this
committee, in particular from me, because I represent rural
areas, and it is the small businesses in the communities that
are the backbone of my communities. And it is the small to mid-
sized banks that are lending to those small businesses.
Mr. Chairman, I will also reject the premise that Biden's
policies are not to blame here. Econ 101, when the government
puts more money into the economy than the economy can produce
itself, the back side risk of that is always going to be
inflation. So, when you force an omnibus bill on the American
people that is an additional $2 trillion that doesn't need to
be had, at a time when retail prices are going up, and when
underlying commodities are screaming, stop the madness, and we
did nothing other than spend more money.
Biden's policies were reckless, they were feckless. And I
am appalled at the idea that he is not to blame. At the same
time, he is creating choke points in production, choke points
in energy production. So with that, according to the FDIC
report, unlimited coverage of deposits, Mr. Gould, would
increase the size of the Deposit Insurance fund just to retain
basic ratios of insured deposits to the Fund itself. And the
estimates could be increased 70 percent more, which is going to
lead to increased assessments on the banks. Is that a good or a
bad thing?
Mr. Gould. That, in and of itself, is a bad thing, whether
or not it is justified by whatever benefit it provides.
Mr. Ogles. Again, when I think of the increased assessments
and the impact that is going to have on my small to mid-sized
banks in my district and all of the rural districts across the
country, isn't that an argument against unlimited deposit
coverage?
Mr. Gould. That is certainly an argument. Yes.
Mr. Ogles. When I think about where we are and how we got
here, it is easy to armchair-quarterback. It is easy, quite
frankly, to lay blame. I have said this before, and I will say
it again, Ronald Reagan says the scariest phrase in the
American language is, ``I am from the government and I am here
to help,'' So, what should we not do as we move forward? Ms.
Tahyar?
Ms. Tahyar. We should look at fact-based evidence and then
make policies. We shouldn't just be with our political priors.
Mr. Ogles. That is right.
Mr. Gould. We should examine the efficacy of the
regulations on the books and see whether they are out there
performing as promised, including resolution or recovery
planning,
Mr. Michaud. We should make sure the solution is targeted
for the need, but also something we haven't spoken about yet,
which is, there has been a real headwind to healthy bank M&A
and that has been the message that has been sent to the
industry. I think ultimately, the industry would be healthier,
the mid-sized banks would be healthier, and the industry would
be able to resolve weaker banks in that manner without the
defund if there was a more efficient way to consolidate than
there is right now.
Mr. Ogles. Right.
Ms. Judge. I completely agree that we should look at the
facts and we should look at the efficacy of the current
regulatory scheme. And in light of recent events, we had three
major bank failures imposing massive losses, so I think we have
to see that the current scheme is coming up wanting.
Mr. Ogles. Mr. Chairman, I have just a few seconds left to
give you the last word.
Chairman Barr. I appreciate the gentleman yielding. I think
we are running out of time. We may do just another quick round.
And so, I will take that time the gentleman yielded and I
appreciate him yielding.
And with that, without objection, we are going to go to
just one additional round with the indulgence of the witnesses
and the ranking member. And we have agreed that each one of us
will ask one more round of questions.
Let me just follow up the question about M&A to Mr.
Michaud. On resolutions, if there is a need for additional
resolutions, is it important to avoid more industry
consolidation for regulators if there are additional failures
to give regional banks as opposed to G-SIBs the opportunity to
acquire or merge with failing institutions to preserve that
diversity within our financial ecosystem that you talk about?
Mr. Michaud. I very much support the Congressional limits
where banks with more than 10 percent of the deposits in the
country should not be acquiring other banks. And I think the
industry needs to build competitors for the 4 banks that have
40-percent market share. I think the economy would be better
off if we had other banks that were able to compete with them
more.
Chairman Barr. So, an FDIC reluctance to approve mergers,
particularly among regional banks or small banks, can actually
be quite anticompetitive?
Mr. Michaud. Right now, it is not the FDIC as much as the
Fed. The amount of time it takes to complete a merger in the
United States has doubled in the last 2 years. Not only that,
but there is uncertainty as to the process and the outcome,
should you look to undertake consolidation. The consolidation
that has been happening is regional banks have been trying to
combine to create these regional champions to serve their
regions and compete with the bigger banks.
Also, I believe, even as we sit here today, there are banks
that are willing to take on other banks that may be
underperforming. But the banks would be unwilling to take that
action because they don't know if the regulatory response would
allow them to do it and they can't afford that risk.
Chairman Barr. Mr. Gould, your testimony was interesting
when you said the proliferation of regulation since the 2008
crisis may have reduced risk management and supervision to mere
compliance exercises, damaging both in the process. Can you
elaborate?
Mr. Gould. Yes, sir. I think sometimes regulation,
particularly in the absence of competent supervision, provides
the illusion that we are addressing risks. And I think that is
a problem. I think we should not be overly reliant on mere
regulation. I think supervision is what matters. And I think
supervisors have all of the tools, most fundamentally of which
is just examiner judgment, to ensure the safety and soundness
of banks.
Chairman Barr. Yes. An overreliance on regulatory tools
such as some stress testing may have blinded supervisors to
risks that are hiding in plain sight, like basic interest rate
risk. I also thought it was very interesting that you pointed
out that the one regulation that Silicon Valley Bank was not
subject to as a result of S.2155 and regulatory tailing was a
requirement that hadn't been imposed on them, that would have
actually increased their interest rate sensitivity. The
requirements, had the Fed enforced it on the liquidity coverage
ratio and shifting holdings to high quality liquid assets.
Final question to Ms. Tahyar, thank you. Professor Judge
claimed a regulator transparency legislation would impede
supervisory responsibilities. I would note that nothing in
these bills takes away any regulatory supervisory or emergency
powers. They are only transparency and reporting requirements.
Would that in any way impede the firefighting that you talked
about in your analogy?
Ms. Tahyar. Mr. Chairman, I haven't had a chance to look at
the specifics of the legislation. I would be happy to put
something in the record. But in general, we are living in an
environment where there is not enough transparency from the
banking agencies, and that makes it more difficult for Congress
and others to do their oversight.
Chairman Barr. Let me just stipulate that nothing in this
collection of bills takes away any emergency powers of the
regulators. And let me just stipulate for the record, that the
goal of these bills is to give the American people, through
their Representatives in Congress, greater visibility into
decision-making at the time of the house fire, and after the
house fire. In that scenario, does that in any way impede the
ability of regulators to do their job?
Ms. Tahyar. No, it doesn't, Mr. Chairman.
Chairman Barr. And with that, I yield 5 minutes to the
ranking member, Dr. Foster.
Mr. Foster. Thank you. I was wondering if any of you have
at this point any general after-thoughts about the systemic
risk exception? Did it function as designed? Was this an
appropriate use of it? Are there any changes that we might kind
of play on that? Obviously, it is a big issue with a lot of the
Members here as to how the special assessment is going to land.
If you have any advice on if you were to craft the special
assessment, what would it look like?
And if I remember correctly, only the first two banks had
the systemic risk exception and the third did not. So, most of
the hit actually will come through the special assessment. Does
anyone want to venture any thoughts on how that--
Mr. Michaud. I will start with the systemic exception. I
think it was a good decision to do that. Because if I think it
hadn't happened, I think more banks would have failed. And it
was due to the sudden nature of the bank runs. I think in that
moment, it was important to do.
The other thing is that closing a bank in the middle of the
day is highly unusual. It makes things disorderly. I know that
Mr. Gould spoke earlier about how it would be interesting just
to learn what we can do better in the future as to what
happened in those hours. I think the impact after that was
dramatic. So, I think it is best if this resolution happens
when the markets are not open.
Mr. Foster. Any other thoughts, Ms. Tahyar?
Ms. Tahyar. The systemic risk exception should be rare, but
it is there for a reason, and this time, it was used wisely. I
think the three keys do provide some political checks and
balances, but, again, I think we still need to have after-
action reports with transparency and accountability around what
happened, when, and how.
Mr. Foster. Are there any aspects that give you heartburn?
For example, there is a lot of freedom in the special
assessment. And there is a lot of danger that it will be very
politicized and unavoidable?
Ms. Tahyar. Yes. Thank you, Ranking Member Foster. The
special assessment is we already have the White House Fact
Sheet, which is saying that it shouldn't fall on community
banks. I think that is appropriate, given the need to protect
community banks. But other than that, I think there needs to be
a fairness about how that special assessment is allocated among
the bigger banks and among the regional banks.
Mr. Foster. And what sort of factors, if you were to write
it, would be considered the fraction of uninsured deposits? In
terms of fairness, what you would want is banks, which had a
similar business profile as Silicon Valley Bank or Signature
and so should be preferentially hit with the assessment. Are
there reasonable ways to do that?
Ms. Tahyar. You are thinking if you have a higher
proportion of uninsured deposits.
Mr. Foster. Whatever the risk factors? You want to punish
banks that had similar risk factors, in some sense?
Ms. Tahyar. That particular point makes sense to me. I have
to say that I feel like there is still a lot to learn on how
that special assessment should happen. So, I would prefer to
wait and see what the FDIC proposes and then react to that.
Mr. Michaud. And Ranking Member Foster, I would just do
what we talked about earlier, I think there is a lot of value
in being too-big-to-fail, that these banks just because of
their size, are receiving more deposits as we speak. And so I
believe that those banks should bear a higher proportion of
this assessment. Not all, but should bear a higher proportion
than they do today.
Mr. Foster. And any thoughts on the extraordinary support
that was provided to banks holding Treasuries, and using them
as collateral, I guess, for loans at par, which seemed like
maybe a significant intervention?
Mr. Michaud. My view on that is that they are the lender of
last resort and the market needed that moment, and it brought
stability. We can figure out all of these things if the market
is stable and orderly. It wasn't, and I think that facility
helped bring stability so we could have this conversation.
Ms. Judge. I would just note that Dodd-Frank did make very
significant changes to the systemic risk exception and to
Section 13(3). I think those changes helped, but I think this
was an episode of actually both instruments being used very
prudently by regulators to help maintain a stable and healthy
financial system in the face of significant bank failures.
Mr. Foster. Okay. Any further thoughts you have, we are
going to have to be pondering this for a while, and I really
appreciate your thoughtful comments. Thank you. I yield back.
Chairman Barr. The gentleman yields back. And I would like
to thank our witnesses for your testimony today on this very
illuminating and timely topic.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
May 10, 2023
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]