[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF SILICON VALLEY
BANK AND SIGNATURE BANK:
GAO'S PRELIMINARY REVIEW
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MAY 11, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-21
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-933 PDF WASHINGTON : 2023
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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 Oversight and Investigations
BILL HUIZENGA, Michigan, Chairman
PETE SESSIONS, Texas AL GREEN, Texas, Ranking Member
ANN WAGNER, Missouri STEVEN HORSFORD, Nevada
ALEXANDER X. MOONEY, West Virginia RASHIDA TLAIB, Michigan
JOHN ROSE, Tennessee SYLVIA GARCIA, Texas
DAN MEUSER, Pennsylvania NIKEMA WILLIAMS, Georgia
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
May 11, 2023................................................. 1
Appendix:
May 11, 2023................................................. 29
WITNESSES
Thursday, May 11, 2023
Clements, Michael E., Director, Financial Markets and Community
Investment, Government Accountability Office (GAO)............. 4
APPENDIX
Prepared statements:
Clements, Michael E.......................................... 30
Additional Material Submitted for the Record
Barr, Hon. Andy:
Written responses to questions for the record submitted to
Michael E. Clements........................................ 41
Mooney, Hon. Alexander X.:
Written responses to questions for the record submitted to
Michael E. Clements........................................ 42
OVERSIGHT OF SILICON VALLEY
BANK AND SIGNATURE BANK:
GAO'S PRELIMINARY REVIEW
----------
Thursday, May 11, 2023
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2220, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Members present: Representatives Huizenga, Sessions,
Wagner, Rose, Meuser, Ogles; Green, Horsford, Tlaib, Garcia,
and Williams of Georgia.
Ex officio present: Representative Waters.
Also present: Representative Barr.
Chairman Huizenga. Good morning. The Subcommittee on
Oversight and Investigations 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, ``Oversight of Silicon Valley
Bank and Signature Bank: GAO's Preliminary Review.''
I now recognize myself for 5 minutes for an opening
statement.
Congressional oversight is a Constitutional authority used
to maintain the well-being of our system of government. This
lesson of oversight was something that I learned from someone
who is considered the, ``lion of the House,'' John Dingell. He
was still in Congress when I first came here, and he taught me
a couple of things. The first, he called, ``the tyranny of the
vote.'' It did not matter whom you were with, what you were
doing, what was happening, or where you were, when they rang
the bells, we had to go to the House Floor to vote.
The second was our Constitutional standing, our obligation,
frankly, of oversight of the Administration, and he was an
expert at that. It did not matter what the party label was, he
always fought for the standing of Congress. The Government
Accountability Office (GAO), is an investigative arm of
Congress. They provide fact-based, non-partisan information
that can be used to improve government and save taxpayers
billions of dollars. Committee Republicans and Democrats should
support robust oversight of our financial regulators, aiming to
seek transparency and demanding that accountability.
Unfortunately, as you will hear in today's testimony,
regulators in Washington are attempting to paint a bit of a
different picture. But the facts are clear: The collapses of
SVB and Signature Bank were the result of risky business
strategies, no doubt, and years of failed supervisory action.
In fact, some of the concerns identified in GAO's April report
are not new. In 2013, in a report entitled, ``Financial
Institutions: Causes and Consequences of Recent Bank
Failures,'' the GAO highlighted that aggressive growth
strategies, using non-traditional, riskier funding, similar to
those of SVB and Signature, were key factors in bank failures.
These uninsured, unstable deposits accounted for much of SVB's
and Signature Bank's total assets, which the FDIC noted in
2019, ``could pose risks to regional banks.'' SVB was also
affected by rising interest rates, which was fueled by reckless
spending in the Federal Reserve, that was too late to react.
In 2015, a GAO report on bank failures concluded that the
regulatory process was not always effective or timely in
correcting the underlying problems before these banks failed.
In the years prior to their collapse, the Federal Reserve and
the FDIC identified management risks at both banks, yet allowed
those risks to go unfixed. The failure of Federal regulators to
mitigate or escalate management concerns proved costly.
The GAO's report examines Treasury's use of the Systemic
Risk Exception (SRE), and the establishment of the Bank Term
Funding Program (BTFP). Particularly, the use of the SRE is a
powerful emergency tool, and that has not been without
criticism. As part of our investigation into the government's
response to these bank failures, the subcommittee hopes to
better understand how the Federal Reserve and the FDIC
concluded that recommending use of the SRE was a last resort.
Again, the GAO reported that the use of the Systemic Risk
Exception, ``may weaken market participants' incentives to
properly manage risk.''
While the Treasury Secretary has warned the public not to
assume these actions create a guarantee of deposits, it is
hard, frankly, to think otherwise. Ultimately, losses to the
Deposit Insurance Fund (DIF) will be passed down to hardworking
Americans.
Frankly, any loss of confidence in our banking system is a
loss of confidence in our regulators. Regulators had the tools
at their disposal to prevent these bank failures from
happening, and they missed it, period. And instead of
concentrating on the basics, the things that they did not get
right, some of my friends on the other side of the aisle want
to give our regulators even more complicated rules. As the
Biden Administration and the Federal Reserve attempt to shift
the narrative, the GAO's report provides no evidence that the
failure of either SVB or Signature Bank was the result of
relaxed regulations.
I believe it is necessary to reiterate how important it is
that this committee receives the information that has been
requested, and the information we will be requesting, moving
forward. The American people deserve answers. We should not
allow history to be rewritten. And I welcome the FDIC and the
Federal Reserve to appear at future subcommittee hearings to
further answer our questions.
I am committed to making sure this subcommittee does not
just draw conclusions but bases its findings on evidence. That
is what oversight is, and as the chairman, that is my
commitment to our members.
So, I look forward to hearing from Director Clements, and I
yield back the balance of my time.
And with that, the Chair now recognizes the ranking member
of the subcommittee, the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I commend
the prompt response of President Biden, Full Committee Ranking
Member Waters, and Federal regulators to the failures of
Silicon Valley Bank and Signature Bank. This collective
judicious response, led by President Biden, prevented extensive
contagion, protected depositors, and preserved the integrity of
our banking system, among many other things. The rapid collapse
of these banks revealed how quickly bank runs can occur in our
increasingly-connected world.
Although fingers will be pointed at technology, President
Biden, and regulators as factors in the failure of Silicon
Valley Bank and Signature Bank, they were not--N-O-T--the root
cause of the banks' failures.
The focus of today's hearing should be the mismanagement of
these banks by their executives in the years leading up to the
collapse, in tandem with the Trump-era deregulation that
enabled this mismanagement to fester.
Both Silicon Valley Bank and Signature Bank experienced
outsized growth between 2018 and 2022. Signature Bank grew from
approximately $47 billion in total assets in 2018, to $110
billion in 2022. Silicon Valley Bank increased from $56 billion
to $209 billion over that same period of time. Mr. Chairman,
some things bear repeating: Silicon Valley Bank increased from
$56 billion to $209 billion over that same period of time.
This outsized growth in assets was fueled by more than 70-
percent uninsured deposits at both banks, far higher than the
median of 32 percent for comparable banks. The executives at
both banks knew, or should have known, that their risk
management practices had to be strengthened appropriately as
they grew exponentially.
Adding insult to injury, Mr. Chairman, Silicon Valley Bank
irresponsibly operated without a chief risk officer from April
until December of 2022.
Is it a coincidence, I ask, that these banks grew rapidly
beginning in 2018, and failed to adequately manage their risk
around the same time that former President Trump signed S.
2155, his Bank Deregulation Bill, into law? S. 2155 diminished
regulatory standards on these mid-sized banks, resulting in
much less enforcement security.
Friends, blaming President Biden and regulators will not
reinstate stronger regulations on mid-sized banks or promulgate
needed legislation to enable lawful clawback of ill-gotten
mismanagement executive compensation. Only legislation can do
that.
I want to thank you for the time, and I would like to ask
Full Committee Ranking Member Waters if she desires any time?
Ms. Waters. Thank you very much, Mr. Green.
Mr. Green. I yield to the ranking member.
Chairman Huizenga. The gentleman yields to Ranking Member
Waters.
Ms. Waters. I thank the GAO for the preliminary review it
issued at my and Chairman McHenry's request on the failure of
Silicon Valley and Signature Banks. The GAO has clearly
described how the FDIC and the Fed repeatedly informed these
banks, as early as 2018, about deficiencies in their liquidity
and risk management. But instead of taking action, these banks
ignored the warnings. Let me be clear: Regulators need to be
more aggressive, something I have long been demanding with
regard to repeated abuses at Wells Fargo. However, it was the
responsibility of the banks, first and foremost, to swiftly and
thoroughly correct the deficiencies that were flagged by
regulators.
We now need to hold banks and their executives accountable,
reverse Trump-era deregulation, enhance supervision of banks,
and reform deposit insurance.
Thank you, and I yield back.
Chairman Huizenga. Thank you.
Today, we welcome the testimony of Mr. Michael Clements.
Mr. Clements is the Director of GAO's Financial Markets and
Community Investment Team. He leads GAO's work in overseeing
the financial markets and the regulators. Mr. Clements led the
team responsible for preparing the interim report issued by the
GAO 2 weeks ago, on the March 2023 bank failures.
Since 1999, Mr. Clements has contributed to GAO's mission
of supporting Congressional oversight efforts over the
regulation of the financial banking regulators, and previously,
the broadband communications and telecommunications industries
as well.
We thank you for taking the time to be here today, sir. You
will be recognized for 5 minutes to give an oral presentation
of your testimony, and without objection, your written
statement will be made a part of our permanent record.
And you are now recognized for 5 minutes.
STATEMENT OF MICHAEL E. CLEMENTS, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE
(GAO)
Mr. Clements. Good morning, Chairman Huizenga, Ranking
Member Green, Full Committee Ranking Member Waters, and members
of the subcommittee. I am pleased to be here today to discuss
GAO's preliminary work on the March 2023 bank failures, as
reflected in our April 28th report to the committee.
As you know, at the time of their failure, Silicon Valley
Bank, or SVB, and Signature Bank were the 16th- and 29th-
largest banks, respectively, in the country. Their failures
could impose a $22-billion cost on the Deposit Insurance Fund.
And while not part of our work, First Republic's recent failure
could impose another $13-billion cost on the Deposit Insurance
Fund.
For today's hearing, I will focus on: one, bank-specific
factors that contributed to the failures; and two, supervisory
actions that regulators took leading up to the failures.
First, the bank failures. We found that risky business
strategies and weak liquidity and risk management contributed
to the failures at SVB and Signature Bank. SVB and Signature
both experienced rapid growth, far exceeding a group of 19 peer
banks. For example, SVB's assets more than tripled in the 3
years prior to its failure.
SVB and Signature also relied heavily on uninsured
deposits, which are prone to run risks. For example, Signature
funded 82 percent of assets with uninsured deposits.
SVB and Signature also exhibited weak liquidity and risk
management controls. When confronted with external pressures,
rising interest rates for SVB, and weakening digital asset
markets for Signature, the risky business strategies and weak
management contributed to the banks' failures.
Second, the regulators' supervisory actions. We found that
the regulators identified problems at SVB and Signature Bank,
but the regulators did not escalate supervisory actions in time
to mitigate the risks. Federal Reserve staff who examined SVB,
and FDIC staff who examined Signature, identified problems at
the banks. For example, between 2018 and 2022, the Federal
Reserve issued 10 Matters Requiring Attention (MRAs) to SVB for
liquidity and risk management problems. Likewise, the FDIC
issued Matters Requiring Board Attention (MRBAs) and other
supervisory recommendations to Signature for similar problems.
However, we found that the Federal Reserve and the FDIC did not
adequately escalate their supervisory actions.
The Federal Reserve was generally positive in ratings of
SVB from 2018 through June of 2022, rating SVB's overall
condition as, ``satisfactory.'' When SVB moved from the Federal
Reserve's Regional Banking Organization, examiners began
downgrades. Yet, despite the consistent liquidity and serious
management problems, the Federal Reserve did not issue an
enforcement action before the banks failed.
Likewise, FDIC's ratings of Signature Bank found its
overall condition was, ``satisfactory,'' from 2018 through
2021. FDIC staff told us they were considering escalating
supervisory actions in 2022, including taking enforcement
actions. However, despite Signature's repeated failures to
remediate the liquidity and management problems, the FDIC only
issued enforcement action the day before the bank failed.
GAO has reported similar findings in the past. In 2015, we
reported that although regulators often identified risky
practices, the regulators' process was not always effective or
timely in correcting the underlying problems at banks.
Chairman Huizenga. Mr. Clements, I am so sorry. We have
just gotten notice that they are having a difficult time
hearing you through the audio, and this is being televised, so
if you could just pull the microphone a little closer. We can
hear you fine in the hearing room, but apparently not through
the television. So, just pick up where you are at; that is
helpful. Thank you. Sorry about that.
Mr. Clements. In 2011, following the financial crisis, we
recommended that regulators consider adding non-capital
triggers to the prompt corrective action framework to help give
more advance notice of deteriorating conditions. And in 1991,
following the savings and loan crisis, we found that regulators
did not always use the most-forceful actions available to them
to correct unsafe and unsound practices. We continue to believe
taking early action would give regulators and banks more time
to address deteriorating conditions.
Chairman Huizenga, Ranking Member Green, and members of the
subcommittee, this completes my prepared statement. I would be
happy to respond to any questions you may have.
[The prepared statement of Director Clements can be found
on page 30 of the appendix.]
Chairman Huizenga. Thank you, Mr. Clements. We appreciate
that. We will now turn to Member questions, and the Chair
recognizes himself for 5 minutes for questioning.
Again, Mr. Clements, thank you for testifying before our
subcommittee today. The work you and your team have done to
complete the preliminary report so quickly is much appreciated.
Your report is the only impartial review, frankly, conducted on
these bank failures, in my estimation, and I would like to
start by setting the stage a little bit, starting with how the
preliminary review was conducted. I understand that you
conducted interviews with staff from the Federal Reserve, the
FDIC, and Treasury.
Can you talk to us about how those witnesses were
identified for you to interview? Did you do that on your own or
how did that work?
Mr. Clements. We had one meeting with each of those
entities. Our standard practice is to send our list of
questions over to the agencies and then the agencies will
identify staff who are best-positioned to answer those
questions. In follow-up work, which we do tend to complete with
this, we will be more specific in asking for particular
individuals with whom to speak.
In the case of the Federal Reserve, we met with Board staff
in the Supervision and Regulation Division and also with staff
from the Federal Reserve Bank of San Francisco.
Chairman Huizenga. Did you feel like you had full access to
Agency staff? Were you able to do follow-up with those folks as
they were getting back with some of these answers? You said you
had passed those questions along, and they self-identified who
would be best to answer them. Were you able to interview those
folks and do some follow-up?
Mr. Clements. At this point, we just had the one meeting
with the three agencies. Again, moving forward, we will have
further meetings with them.
Chairman Huizenga. Okay. So, were those meetings in person?
Mr. Clements. They were not. They were virtual.
Chairman Huizenga. They were virtual, okay. And then, do
you know if, in the interviews that you conducted, there were
multiple people on at the same time, or was it with one
individual at a time?
Mr. Clements. These were hour-long meetings with the entire
staff that the agencies had identified for us.
Chairman Huizenga. Okay. So it was kind of a whirlwind, you
had everybody on the screen doing this Zoom?
Mr. Clements. It is what we refer to as an, ``entrance
conference.''
Chairman Huizenga. I'm sorry--a what conference?
Mr. Clements. An entrance conference. It is our
preliminary, initial meeting with the agencies to go over what
our work is going to be and some preliminary questions that we
have for them.
Chairman Huizenga. So in other words, you were planning on
doing follow-up?
Mr. Clements. We do plan additional work once we move
beyond getting the April 28th report out.
Chairman Huizenga. This preliminary report, okay. And did
you feel like the regulators provided you with access to all of
the documents and the material facts that you had requested in
a timely manner? What was the turnaround time from when these
requests were sent in, to when you were actually doing these
Zoom interviews?
Mr. Clements. The Agencies were responsive in getting us
the desired information. We had requested a variety of
supervisory information--scoping memos, schedules, records of
exams, supervisory letters. We received all of those, I would
say, within probably 3 or 4 days. I know the Fed staff was
working over the weekend to get us that information. So, we
actually did appreciate the timeliness for this engagement. I
think they recognized the importance of this work.
Chairman Huizenga. I am glad to hear they were responsive
to somebody in this, because we have a number of letters that
have been out that are lacking that response, frankly.
Now, I would like to pivot and ask about something specific
in your report, or rather something that was maybe not in your
report. GAO is in a position to provide sort of an unique
historical perspective on bank failures with other economic
events from the past, because you have done some of these
reports in the past, correct, on previous challenges?
Mr. Clements. That is correct. We go back to 1991, or I
think 1989 might have been our first work, looking at the
savings and loan community.
Chairman Huizenga. Savings and loan failures, then. In
contrast to the GAO report, the report issued by the Federal
Reserve partially blames the failure of Fed examiners to
escalate SVB's liquidity and interest rate risk concerns
quickly on, ``a shift in culture and expectations that changed
how supervision was executed.''
From what you saw, was a culture shift referenced in any
discussions that you had with the Fed staff, or in any of the
documents that you reviewed over the course of compiling your
initial report?
Mr. Clements. I have no basis to say whether there was a
culture shift one way or the other. Again, we had the single
meeting with the Fed. The issue of culture was not brought up.
In fairness, we did not ask it, but they did not bring it up
either.
Chairman Huizenga. Okay. But it features prominently in
their report that there was this culture shift. It seems a
little odd to me that they would not have brought that up in
your investigation.
To your knowledge, was a culture shift mentioned in any
past GAO work on similar bank supervision issues in 1991 or
2011 or 2015 or 2019, when you have done some of these other
reports?
Mr. Clements. I am not aware of there being a culture
change. We have previously reported that, in general, examiners
in the past have taken a cooperative and formal approach with
agencies, and that has been as early as 1991.
Chairman Huizenga. Okay. My time has expired. We are going
to be sending you some additional written questions from me as
well, regarding the FDIC and trying to make sure that we
understand the process for both SVB and Signature Bank.
I now recognize the ranking member of the full Financial
Services Committee, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much. Mr. Clements, when I
served as Chair of the Financial Services Committee, I
investigated the egregious pattern of consumer abuse at Wells
Fargo and found that regulators failed to use escalating
enforcement actions to correct the bank's bad behavior, even as
new and similar abuses emerged. I have legislation that would
require the bank regulators to impose limits on bank growth,
divestment, and other penalties for noncompliance. That is why
I am pleased to hear that regulators like the Consumer
Financial Protection Bureau (CFPB) and the Office of the
Comptroller of the Currency (OCC) are beginning to focus on
ways to ensure that repeat offenders correct their bad
behavior.
According to the GAO report, the Federal Reserve and the
FDIC had been advising Silicon Valley Bank and Signature Bank
about the weaknesses in their risk management and liquidity
programs in multiple examinations since 2018.
Mr. Clements, from your review, did the banks receive
adequate explanation and information from the regulators to
know that they had problems, what those problems were, and what
was needed to fix them?
Mr. Clements. We certainly saw numerous instances of
Matters Requiring Attention (MRAs), Matters Requiring Board
Attention (MRBAs), and Matters Requiring Immediate Attention
(MRIAs), that laid out issues, and we focused on the liquidity
and risk management because that was sort of the approximate
causes of the failures. We did not go on the various other
consumer angles as well.
But we have, in the past, reported that the communication,
the clarity of some of the supervisory letters could be
clearer. We issued a report in 2019 on those issues. The
agencies have taken steps to address the lack of clarity that
they do provide to these banks, and their supervisory letters
are records of this examination.
Ms. Waters. So Mr. Clements, if the banks had adequate
information on what the problems were and how to fix them for 5
years, what were the reasons they offered for not being able to
correct problems in that time period?
Mr. Clements. We, in our past work, have seen a couple of
issues. In some instances, the bank would disagree with the
finding, and in fact, in the case of Signature Bank, I think
there were a few instances where it did not agree with the
supervisors' thoughts on where there were problems.
In other instances, the bank simply is unable to fix the
problems, and we certainly saw, in the case of SVB, it agreed
with the findings, but it was simply taking them a longer time
than needed to get the problems fixed, and obviously, in the
interim, the bank failed.
Ms. Waters. Could you explain a little bit further the
excuse that the banks were unable to fix the problem, for
example?
Mr. Clements. In a number of instances, the bank would
agree with the problem being cited, but it would simply say it
was going to take a while to fix the underlying problem. And,
in fact, in the case of SVB and the San Francisco Fed, they
agreed that it was going to take a while to fix the problem.
Unfortunately, the problem got large enough where the bank
failed before the problem could get resolved.
Ms. Waters. Let me just raise a question with you that I
really need to understand further, on the balance sheet. Did
the balance sheet reflect liquidity, and do they have the
responsibility to report the securities that they have and the
value and whether the value has changed? Someone told me that
for the regionals, it is just a footnote. Can you explain that?
Mr. Clements. A bank of the size of both SVB and Signature
is required to mark securities that are considered available
for sale, mark those to the market value. Any changes in that
value is an account called, ``other comprehensive income,''
where it would be recorded. So, it is being recorded. If the
securities are held not for sale, then those securities are not
marked for the market.
Ms. Waters. Have there been recommendations about how the
balance sheet should reflect the value of those securities?
Mr. Clements. I am not aware of any. In our past work, we
have recommended or reported that it is important to have an
accurate accounting of the firms, that the bank's financial
condition be able to have a good sense of its vulnerabilities.
Ms. Waters. Thank you very much. I yield back.
Chairman Huizenga. The gentlelady's time has expired.
The gentleman from Texas, Mr. Sessions, is recognized for 5
minutes.
Mr. Sessions. Mr. Chairman, thank you very much. Mr.
Clements, I would like to continue down the line that the
ranking member was coming down, and I have the report in front
of me here and it provides me--and I am sure, other people
here--a lot of intrinsic information. But it talks about how
the amount of outstanding shares of advances under the program
on April 19, 2023, was approximately $74 billion in outstanding
advances.
Does that mean that they put all this excessive money that
they had into a longer-term something that would generate money
to them, perhaps interest? Is that what you are referring to,
outstanding advances under the program? It is at the bottom of
page, I think the first page that I have here says, ``As of
April 19, 2023, outstanding advances under the program were
approximately $74 billion.'' Can you describe that to me?
Mr. Clements. Sure. That is the Federal Reserve's Bank Term
Funding Program. At the point when SVB and Signature were
failing, the Treasury made the systemic risk determination,
which essentially allowed the coverage of uninsured and insured
deposits at the two banks. The Federal Reserve also set up this
Term Funding Program. The purpose of the program is to allow
banks that perhaps would be experiencing liquidity problems to
borrow money from the Fed, the collateral being the securities
that they are holding, which would be Treasuries and mortgage-
backed agency securities.
Mr. Sessions. I am going to keep going here. Maybe, I will
catch up with myself at some point. But they took an excessive
amount of money. What did they do with those uninsured risks
that are being discussed here? Where were they holding that
money? Were they loaning it back out? Was it unavailable at the
time that someone would need the money to be available when
they wrote checks? What did they do with all of this money that
came in?
Mr. Clements. I think there are two separate issues. There
is this issue of the Federal program and the $79 billion, which
it s lending to existing non-failed banks just to help them
cover their liquidity.
Mr. Sessions. Whose money was that?
Mr. Clements. This is the Fed's money.
Mr. Sessions. The Fed's money. But what about all of this
money that SVB brought in? What did they do with that large
amount of money that was called an, ``uninsured risk?''
Mr. Clements. Correct. In the period of 2018 through mid-
2020, SVB grew rapidly, and it grew rapidly through uninsured
deposits, principally from venture capital-backed firms.
Mr. Sessions. Right.
Mr. Clements. It used those funds to purchase what, in
theory, would be safe securities--
Mr. Sessions. Long-term Treasuries?
Mr. Clements. --Treasuries, mortgage-backed securities,
agency securities.
Mr. Sessions. And then, they marked those that they were
going to, over the long run, be getting back money. And they
got pulled out early to where there was an unrealized--
Mr. Clements. Correct. So, they held those securities.
Unfortunately, they had invested in longer-term securities, had
not hedged the securities, and when the interest rates started
going up, the value of those securities dropped. About the same
time, the venture capital tech industry started pulling their
deposits because they were no longer getting a bunch of
funding.
Mr. Sessions. They maybe pulled them out--
Mr. Clements. The deposit base started falling. The bank
eventually needed to start selling those securities, and it was
selling them at a loss. At some point, depositors and other
investors got spooked.
Mr. Sessions. But what it would have expected to have
received.
Mr. Clements. Correct.
Mr. Sessions. Are you saying they lost money, or did not
realize what they thought they were going to get and so they
booked it as a loss?
Mr. Clements. They lost money, because the value of the
securities had dropped as the interest rates--
Mr. Sessions. They lost money.
Mr. Clements. Yes.
Mr. Sessions. Okay. I am clear. This is what I thought
coming into this, but I did not understand that most of this--
am I at my time, Mr. Chairman?
Chairman Huizenga. Yes. You can complete your thought.
Mr. Sessions. My point is--
Chairman Huizenga. We will have a light gavel today.
Mr. Sessions. Thank you, because I think the ranking member
will want to get to this. Who was that held by? Treasury? Most
of these assets?
Mr. Clements. The securities were held by the bank, by SVB.
Mr. Sessions. Right.
Mr. Clements. So again, it took in money in deposits and
invested that money in long-dated Treasuries and other
securities. When the deposits started falling because the tech
firms needed the money for payroll and whatever, the bank
needed to sell the securities, and sold them at a loss.
Mr. Sessions. I got it. That is what I thought happened
too, but you connected it for me. Mr. Chairman, thank you very
much.
Chairman Huizenga. Thank you, and we will be mindful of the
time on both sides.
Mr. Horsford, you are recognized for 5 minutes.
Mr. Horsford. Thank you, Mr. Chairman, and thank you to the
ranking member of the Subcommittee and the ranking member of
the Full Committee. And thank you to Director Clements for
taking the time to discuss this important report, and for the
GAO's nonpartisan work, which is crucial to our ability to know
what occurred during the rapid collapse of Silicon Valley and
Signature Banks, and now others that have followed.
And while this may be only a preliminary report, the
insights provided point to serious deficiencies with both
supervisory practices as well as management's reaction to
glaring issues. Actually, it would be more fitting to describe
it as management's inaction to the warning signs that were
flashing when it came to even the most rudimentary risk
management.
And I really want to point out that reality right now, in
this moment, dealing with the default on America, that my
colleagues on the other side are failing to acknowledge, and
their role in basic rudimentary risk management against an
economic collapse that none of us can even imagine.
According to the White House, in the event of a default
because of our colleagues on the other side's unwillingness to
raise the debt limit, ``a crisis characterized by spiking
interest rates and plunging equity prices, including home
equity, would be ignited. Short-term funding markets, which are
vital for the liquidity backing long-term mortgages would
likely shut down completely. There would be a rapid and
complete tightening of credit at regional and community banks,
which would no longer be able to accurately price their
Treasury bills or use them as high-quality collateral. Since
these banks do the bulk of mortgage lending, the mortgage rates
would go through the roof.''
That is the management decision of the House of
Representatives in this moment. We are standing here as the
board of directors for the people of America, whose mortgages,
whose car loans, and whose financing ability is being
jeopardized because of Kevin McCarthy and the default on
America proposal that is holding America ransom in paying its
bills.
Mrs. Wagner. --to the Chair.
Mr. Horsford. Excuse me. I have the floor.
Mrs. Wagner. I have a parliamentary inquiry.
Chairman Huizenga. There is a parliamentary inquiry, which
is appropriate.
Mrs. Wagner. The gentleman needs to make his remarks to the
Chair, not to individuals.
Mr. Horsford. That has nothing to do with this--
Chairman Huizenga. Just a moment. The Chair did not hear a
reference to another Member.
Mr. Horsford. I reclaim my time.
Chairman Huizenga. Just a moment.
Mr. Horsford. I reclaim my time.
Chairman Huizenga. Just a moment. There was not a reference
to another Member. It was not that. He was talking about the
Speaker, so the Chair does not see the problem.
Mrs. Wagner. By name.
Chairman Huizenga. By name. Correct. So it is noted, and
the gentleman may continue.
Mr. Horsford. Clearly, I have hit a nerve, because this is
about the American people and their finances, which are being
held hostage because of a ransom note that is being offered by
Kevin McCarthy and the default on America proposal that they
have made, rather than our obligation to raise the debt limit
and to pay the bills that have already been incurred by the
prior Administration and prior Congresses.
So, I think that while we do our job in examining Silicon
Valley Bank and Signature Bank and First Republic Bank, we
should actually do our job as Congress and avoid this major
catastrophe that is weeks away, and we know it. We have a
responsibility as Congress to manage risk, and we are failing
to do our job.
Now, let me make it clear: Republicans are failing to do
their job. So, I am asking that we use the time of our
committees to focus on the crisis that is right in front of us.
And if my constituents--small businesses, people who have
mortgages, families who are worried about meeting their
obligations--are going to be impacted by higher interest rates
because of Congress' inability to do its job, then we should be
discussing that at this time.
Mr. Clements, you primarily focus on the failure of
regulators to adequately escalate their supervisory concerns,
and we certainly have some work to do bolstering supervisory
escalation. However, I found the sections in the report focused
on management's unwillingness to address repeated shortcomings
just as alarming. For example, if Silicon Valley Bank's board,
which I would say is the Congress right now, is unwilling or
unable to, as you say, ``provide effective oversight of
implementation of the risk management framework,'' then what is
the use of the framework in the first place?
You go on to say that the behavior of these executives and
board members was irresponsible at best, as they let multiple
supervisory letters fall on deaf ears, as we are hearing
economists tell us today. Specifically for Silicon Valley, I am
particularly--the other side went for more than a minute the
last time. I am just using--
Chairman Huizenga. The Chair is very aware of the timing. I
am giving you a tap of wrapping it up.
Mr. Horsford. If the Federal Reserve is correct in their
report statement that Silicon Valley Bank's management was
focused on the short-run impact of profits, in this report it
is mentioned that Silicon Valley Bank did take steps to revise
its incentive compensation programs, but evidently--
Chairman Huizenga. The gentleman will suspend.
Mr. Horsford. --they failed to do so.
Chairman Huizenga. The gentleman will suspend. If we are
going to play that game, we will play that game.
The gentlelady from--
Mr. Horsford. The only game being played is by the other
side failing to do its job.
Chairman Huizenga. The gentleman is not--
Mrs. Wagner. Order--
Mr. Horsford. I do not mind being out of order.
Chairman Huizenga. The gentleman will suspend. The Chair
will not accept this behavior. I let a line of questioning go
for an answer that was along the lines of the ranking member's.
I then allowed you to have a full minute, which was not what my
colleague from Texas got. So, I expect that we are going to
behave like adults at this table--just a moment--as you are
demanding that Congress act. So, lead by example, everybody.
Ms. Waters. Parliamentary inquiry.
Chairman Huizenga. Yes, ma'am.
Ms. Waters. Parliamentary inquiry. Are you going to afford
to every member of the committee an additional minute?
Chairman Huizenga. No, I will not. We will be adhering to
the exact 5 minutes from now on. It has been even on both
sides.
Ms. Waters. Chair--
Chairman Huizenga. Everyone is--
Ms. Waters. I would caution you not to imply that--
Chairman Huizenga. The ranking member is--
Ms. Waters. --Members are not acting like adults. I do not
think that is a credible statement.
Chairman Huizenga. The ranking member will suspend. That
comment was to all sides, and everybody watching, as we are on
television. Let us present to the American people that we can
actually act like adults at this table, everyone.
Ms. Waters. I think we are, and we do not need you to
admonish us.
Chairman Huizenga. Thank you for your commentary.
Ms. Waters. And thank you.
Chairman Huizenga. And with that, the gentlelady from
Missouri, Mrs. Wagner, is recognized for 5 minutes.
Mrs. Wagner. Thank you. Thank you, Mr. Chairman. And I
would remind my good friend from Nevada, Mr. Horsford, that the
only body in Congress or the Administration that has passed a
debt ceiling are the Republicans in the United States House of
Representatives weeks ago. We have waited over 100 days to hear
from the White House regarding the very important issue of the
debt limit, and reining in out-of-control spending, which,
frankly, has driven inflation, which drove interest rates, that
drove us to some of the banking volatility that we are
currently seeing right now.
So, I would remind us all once again that it is the
Republican House that passed a debt ceiling. Thank you very
much.
Mr. Clements, I want to thank you for appearing before us
today, and certainly for GAO's very quick work in preparing
this thorough and independent report on the March 2023 bank
failures.
Over the past 2 months, this committee has gathered more
information about the management failures within these banks
and the blatant lack of urgency for many years by Federal
regulators to act more forcefully in preventing these failures.
I am committed to investigating and holding accountable those
who were asleep at the wheel, once again, and allowed these
preventable failures to occur.
Mr. Clements, on page 23 of your report you note that the
Federal Reserve Bank of San Francisco did not recommend the
issuance of a single enforcement action against SVB, despite
the bank's serious liquidity and management issues. On March
29th, Vice Chair Barr stated that there were seven supervisory
determinations raised, but we have now come to learn that since
2018, there were actually 15 related liquidity and risk
management issues.
After 15 MRAs and MRIAs had been issued, did you agree that
escalating supervisory actions should have happened sooner,
sir?
Mr. Clements. Yes.
Mrs. Wagner. Thank you. What is the GAO's perspective when
it comes to this slow-to-act pattern we are seeing from Federal
regulators?
Mr. Clements. Again, this has been a pattern going back to
1991. Following the financial crisis in 2011 we had similar
findings. We have, in the past, recommended trigger mechanisms.
For example, if a particular measure is hit or if there are
multiple instances of not resolving a problem, that would force
an escalation.
Mrs. Wagner. And enforcement must happen, after so many
citations having been given out year after year after year
after year. Mr. Clements, in your work, did the GAO see a
notable shift in how SVB was supervised, particularly as it
rapidly grew in size from a bank of approximately $71 billion
in assets in 2019, to over $200 billion in 2022? What were
those differences?
Mr. Clements. There was a shift. Under $100 billion, SVB
was overseen by the Regional Banking Organization at the Fed.
Once it passed over that threshold, it moved to the Large and
Foreign Banking Organization. At that point, the number of
examiners expanded rapidly; I think it got up to around 20
examiners looking at the bank, doing very targeted samples--
Mrs. Wagner. But these liquidity and risk management
citations that were issued went all the way back to 2018, sir.
Mr. Clements. That is correct.
Mrs. Wagner. Okay. In the report, the Fed cited the
pandemic as one of the factors explaining why the agency failed
to properly supervise SVB. Yet, according to the Fed's November
2020 Supervision and Regulation Report, ``Reduced examination
activity only lasted for 3 months, from late March to mid-June,
with the greatest reduction occurring at the smallest banks.''
Do you think the 3-month pause was a significant contributor to
the Fed's challenges in escalating SVB's known supervisory
issues?
Mr. Clements. I think the pause is separable from the
decision to escalate. There were a number of warning signs
along the way. Clearly there was the combination of the
pandemic and their switch between regulatory divisions causing
that.
Mrs. Wagner. Three months only, and mainly the smallest
banks.
I have a couple more questions, Mr. Clements, but I am
going to adhere to the clock and decorum, and I will yield back
the rest of my time, Mr. Chairman, and I thank you.
Chairman Huizenga. The gentlelady yields back. The
gentlewoman from Georgia, Ms. Williams, is recognized for 5
minutes.
Ms. Williams of Georgia. Thank you, Mr. Chairman.
In our Full Committee hearing on the failures of Silicon
Valley Bank and Signature Bank on March 29th, I reminded
everyone listening of the regular, hard-working people who are
impacted by these failures. I want to continue to center on
these same people that these failures of SVB, Signature Bank,
and now First Republic bank have affected.
As the Congresswoman for Atlanta, the City with the largest
racial wealth gap in the country, I am focused on how we can
prevent future bank failures that disproportionately impact
marginalized communities. We have regulators--the OCC, the Fed,
and the FDIC--to monitor banks' behavior and practices and
ensure repeat offenders correct their bad behavior. Regulators
repeatedly warned SVB and Signature Bank about their weak risk
management and liquidity issues.
In fact, regulators identified numerous Matters Requiring
Attention and Matters Requiring Immediate Attention regarding
the liquidity and risk management of SVB and Signature Bank.
These warnings were not sufficiently acted upon, and as a
result, many small business owners, including Black
entrepreneurs from Atlanta, were faced with the possibility of
not being able to make payroll. If entrepreneurs of color
cannot trust that the bank regulators are taking serious action
to ensure that their banks are safe, then how are they supposed
to build their businesses and create wealth in communities like
Atlanta?
Mr. Clements, how can regulators ensure that Matters
Requiring Attention and Matters Requiring Immediate Attention
are appropriately addressed by banks?
Mr. Clements. Yes, I think that goes back to our prior
recommendations to have some type of trigger mechanism. The
regulators currently operate on a more-informal basis, trying
to get a collaborative solution. It was our recommendation in
1991, and then again in 2011, to have some type of trigger
mechanism so that if the problem is serious enough or if there
are multiple instances where the problem is not getting
resolved, it would automatically require enforcement action.
Ms. Williams of Georgia. How does that impact the
escalation framework? How can regulators improve their
escalation framework for regional banks?
Mr. Clements. Again, I think it takes some of the
discretion away from the regulator by requiring particular
enforcement action if a particular trigger has been met.
Ms. Williams of Georgia. And how could those improvements
be applied or adapted and then applied to larger banks,
especially the banks considered too-big-to-fail?
Mr. Clements. In our work, I think we would apply those
standards throughout, having a trigger, again, if particular
conditions are met that would require either an informal or a
formal enforcement action, or other escalations of supervisory
actions.
Ms. Williams of Georgia. GAO's preliminary review states
that in the years prior to 2023, the Federal Reserve and the
FDIC identified what turned out to be key drivers of bank
failures--liquidity and management risk. However, according to
GAO, neither regulators' actions resulted in the banks'
management sufficiently mitigating the risks that contributed
to the banks' failures.
Mr. Clements, based on the GAO's review, can we determine
whom is at fault here? I see three potential options, and I
would like your thoughts on which is the most accurate
portrayal of fault. Was it the inability of the banks to
mitigate risk due to the failure of regulatory agency officials
to adopt examiner recommendations for corrective actions? Was
it the banks' failure to effectively institute the corrective
actions directed by the agencies? Or was it the banks' failure
to effectively institute the corrective actions directed by the
agencies, combined with the agencies' failure to take strong
action the when banks' responses were insufficient?
Mr. Clements. At the end of the day, it is the bank's
responsibility to manage the organization in a safe and sound
manner. At the same time, we would expect that if a supervisor
is seeing problems, and they are repetitive, that more forceful
action would be taken.
Ms. Williams of Georgia. As we sit here less than 2 weeks
after the failure of the First Republic Bank, and 2 months
after the failures of SVB and Signature Bank, the second-,
third-, and fourth-largest bank failures in the country's
history, I am concerned about the possibility of yet another
bank failure that would impact my constituents, one that could
have even more disastrous effects.
I would like you to speak to what Congress should take away
from the GAO preliminary report.
Mr. Clements. Again, at the end of the day, it is a bank's
responsibility to manage the organization. However, we think
that if there are repeated problems or serious problems, the
regulators need to take more forceful and early action before
the problems become too large to get resolved. In fact, when we
were talking with the San Francisco Fed officials and they
described illiquidity at SVB, and they said it was going to
take a while for SVB to fix the problem because it was so big,
the natural question you ask yourself is, why did it become so
big?
Ms. Williams of Georgia. Mr. Clements, my time has expired,
but I have many more questions that I would like to submit to
you in writing for the hearing record.
Chairman Huizenga. The gentlelady is allowed to do so.
With that, the gentleman from Tennessee, the Vice Chair of
this subcommittee, Mr. Rose, is recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Huizenga, and Ranking Member
Green, for holding this hearing on what is obviously an
important topic. I want to dive right in.
Director Clements, in response to a question from Chairman
Huizenga earlier, you mentioned that there were multiple people
in the interviews between the GAO, the FDIC, and Fed staff.
Director Clements, were staff conferring with counsel during
these interviews?
Mr. Clements. Traditionally, the agencies would have their
General Counsel's office there.
Mr. Rose. So, they were conferring during these particular
interviews?
Mr. Clements. The staff spoke freely to us, but it is
fairly common for somebody from the legal division to be
present at these meetings.
Mr. Rose. Okay. Thank you.
Mr. Clements. Not simply these meetings, but in general.
Mr. Rose. First Citizens Bank's stock has nearly doubled
since acquiring Silicon Valley Bank, but the FDIC capped its
potential gain on First Citizens stock at $500 million, which
to me seems like the FDIC got a raw deal for us. My concern is
that sweetheart deals like this actually encourage acquiring
banks to wait until the FDIC takes over a bank before making a
bid, because they can get a better deal once they are in
conservatorship. Why buy the cow when the milk is free, so to
speak.
So Director Clements, did GAO review the terms of the
offers that were submitted to the FDIC?
Mr. Clements. We did not have time to get to that level of
detail. I do know that in the request from the committee, there
is interest in those topics.
Mr. Rose. Going forward, would you commit to reviewing that
issue, these issues of offers that are considered but not
accepted?
Mr. Clements. I think, and again, we are working with the
staff, to sequence with the committee staff, to sequence our
range of work, so that is certainly something we can consider.
Mr. Rose. Okay. The FDIC and the Federal Reserve staff told
the GAO that as SVB and Signature Bank failed, they conducted
analyses and worked closely together, including exchanging
drafts of the recommendations to invoke the Systemic Risk
Exception (SRE) for the two banks. Do you have any insight into
how many drafts of the recommendations there were to invoke the
Systemic Risk Exception?
Mr. Clements. I do not. We saw the final letters that were
sent, along with some preliminary analysis that the agencies
had conducted.
Mr. Rose. The GAO report notes that Treasury staff
consulted regularly with the FDIC and the Federal Reserve and
concurred with the basis of their recommendations to invoke the
Systemic Risk Exception. Could you please provide some
specifics on what this consultation actually looked like?
Mr. Clements. I do not have the specific details on that.
They certainly told us that there were conversations between
the three agencies over that weekend, as each were doing their
own analyses.
Mr. Rose. Thank you. The GAO report notes that you will be
moving forward with more work on this issue as we move
throughout the year. As I am sure you are aware, in the United
States we have a Financial Stability Oversight Council (FSOC),
which is charged, by statute, with identifying risks to the
financial stability of the United States, promoting market
discipline, and responding to emerging threats to the stability
of the U.S. financial system. It seems to me the FSOC was
asleep at the switch here and was instead busy studying the
weather when they should have been concerned with interest rate
risks.
So Director Clements, would the GAO commit to conducting a
review of FSOC's actions during these bank failures?
Mr. Clements. We actually currently have ongoing work
looking at FSOC. I am aware that in its most recent annual
report, it did have a recommendation pertaining to interest
rate risk, but you may know that the recommendations that FSOC
makes are non-binding.
Mr. Rose. I hope you do continue to look at that. Some have
argued that Signature Bank's involvement with digital assets
customers somehow contributed to its subsequent failure. There
also appear to be competing views from the FDIC and the New
York State Department of Financial Services in their recent
reports about the role digital assets played in Signature's
failure.
Did GAO review whether Signature Bank's customer base
contributed to its failure?
Mr. Clements. We looked at the supervisory letters and
records of examinations. We certainly saw instances where there
were large deposits from the digital assets space. But again,
it was simply holding the deposits in operating accounts for
those entities. Following some of the turmoil in 2022, in
particular FTX, some of those deposits did start falling off.
Chairman Huizenga. The gentleman's time has expired.
Mr. Rose. I hope you will dig into that issue. Thank you,
and I yield back.
Chairman Huizenga. The gentleman's time has expired. The
gentlewoman from Michigan, Ms. Tlaib, is recognized for 5
minutes.
Ms. Tlaib. Thank you so much, Mr. Chairman. And thank you,
Director Clements, for this report to kind of really dig deeper
into this. I get a lot of questions regarding the lack of
transparency of fully understanding this.
Did you look at the timeline of some of the compensation
and payouts and things like that, which led up to the failure?
Mr. Clements. We have not gotten to that. We do know that,
again--
Ms. Tlaib. Is that something you would look into?
Mr. Clements. It is one of the requests that is in the
letter that we received from Chairman McHenry and Ranking
Member Waters.
Ms. Tlaib. That would be wonderful. One of the things that
my good colleague was talking about is regarding regulators,
and you said it is not binding. When was the first time the
regulators said, ``Something is going on, could you call us
back?'' What year was that?
Mr. Clements. The first instance that FSOC brought up the
interest rate risk was its most-recent annual report, which
would have come out early this year.
Ms. Tlaib. So, they sent a letter, they tell them whatever.
Can they go arrest them? Can they fine then? What can they do
to make them respond?
Mr. Clements. The recommendations in the annual report are
nonbinding. They can also do what are called Section 120
recommendations, but again, those are also nonbinding.
Ms. Tlaib. So when you do look at the timeline, because I
do not know if you can answer this question, why did the banks
take on the risks and ignore repeated warnings? Why? Why ignore
the Federal Government and their warnings?
Mr. Clements. I do not have a good answer to that.
Ms. Tlaib. I think bankers know how to manage risks. They
are not stupid. I just think they are greedy, and senior
employees promoted unsound practices and ignored risks because
they stood to benefit from it. Look at the timeline, Director,
when you do this next follow-up report. SVB offered some of the
most-generous compensation packages around. Look at it. Compare
it to other banks.
In 2022, CEO Greg Becker's salary was roughly $1 million,
but he enjoyed over $5 million in stock awards last year and $2
million in stock options. Becker also earned over $6 million
since 2020, from an incentive compensation plan on SVB's net
income, even when the warnings were coming in.
This helps explain to me why, during 2022, SVB terminated
close to $15 million in interest rate swaps that hedge against
the impact of rising rates. The same bank started in 2023
almost completely unhedged because, for senior employees,
higher net income meant higher compensation. Correct?
Mr. Clements. I am not familiar with their arrangements.
Again, that would be something we could look at.
Ms. Tlaib. The timeline is critically important, because
you can see how it led up, but they still got benefits. They
still won, even though, again, this is impacting now other
banks, and really people, the payroll, small businesses, and so
forth.
Last year, Signature Bank CEO Joe DePaolo received over $8
million in total compensation. Mr. Clements, do you think that
compensation incentives contributed to the poor risk management
by the banks?
Mr. Clements. I do not have a basis to answer that at this
point.
Ms. Tlaib. I know you can't. I just really love to ask that
question.
I think in the report, one of the things in the Dodd-Frank
Act, and it is something that our committee has been
wonderfully educating me on, but Section 956--it has been,
what, 12 years, and they have not implemented it. Can you, in
your role, Director, look at the impact of not implementing
Section 956 of the Dodd-Frank Act?
Mr. Clements. We can certainly take a look at that.
Ms. Tlaib. Yes, this is really important, because we need
teeth. We need enforcement. We need to be able to claw back. We
need to be able to, again, hold them accountable, because they
are just not going to respond. There is nothing we can do. They
are just going to ignore us so they can set it up so they can
benefit from it over and over again.
One of the things that I think the American people do fully
understand is, we, as a role of oversight, is that we can call
it out and basically expose the greed. But unless we give the
authority and kind of the force and the binding force for our
regulators to do something about it when folks do not respond,
other banks are going to do the same; they are just not going
to respond to us. They are just going to continue doing this
kind of really crooked, very criminal-like, actually, set up so
they can benefit and get more compensation. They sold the stock
when they knew it was--they knew and they never informed us. To
pick up the phone, and tell us, ``Hey, sorry. Tomorrow, we are
closing shop.'' Why isn't anybody more mad at the banks? They
have literally just ignored the American people when they
ignored the regulators.
Thank you. I yield back.
Chairman Huizenga. The gentlelady's time has expired. The
gentleman from Pennsylvania, Mr. Meuser, is recognized for 5
minutes.
Mr. Meuser. Thank you, Mr. Chairman. Mr. Clements, you are
the Director of GAO's Financial Markets and Community
Investment team. I want to just ask you first a couple of quick
questions. In 2021 and 2022, this Congress overspent by over $5
trillion, with policies that caused huge spikes in energy,
causing high levels of inflation, and in turn, we got much
higher interest rate escalation, rattling the economy, and
crushing pension funds and disposable income.
Do you think the American people trust Congress with a
blank check, moving forward, particularly when it is the
American people who have to pay the bills?
Mr. Clements. I do not think I am qualified, honestly, to
answer and to direct that question.
Mr. Meuser. Okay. Thank you. According to a report, the SVB
was downgraded on June 30, 2022, by the Federal Reserve Bank of
San Francisco, due to concerns about its liquidity risk
management, from a May 22nd review. Your report states that the
Federal Reserve Board's team was still working on how to
address this issue when SVB failed in March of 2023.
Is it not true that the regulators have discretion for
oversight on such banks, regardless of the S. 2155-set
thresholds, if there are red flags--they have all kinds of
discretion?
Mr. Clements. The regulators have options to do supervisory
letters, recommendations, information, and formal enforcement
actions, including civil monetary penalties.
Mr. Meuser. Okay. So, blaming it on S. 2155 would head us
down the wrong direction and we would never actually solve the
problem or uncover where the problems occurred?
Mr. Clements. The agencies have plenty of authorities now.
We do know that the committee has asked us to look at the
enhanced prudential standards, so I do not want to prejudge
where we might come in on that.
Mr. Meuser. Thank you. GAO also points out in its report
that the San Francisco Fed gave SVB a 7-month extension to
address a November 2021 deficiency. A key finding from the
report was that the regulators did not escalate supervisory
actions to mitigate key risks associated with the bank failure.
Specifically, you state that the San Francisco Fed lacked
urgency, the San Francisco Fed did not recommend the issuance
of a single enforcement action despite the bank's serious
liquidity and management issues before the bank's failure. Why
do you think that is?
Mr. Clements. Again, this has been a repetitive problem
going back to the 1990s and the early 2000s, and now the
regulators, in general, favor an informal, cooperative process.
It also is a little challenging if a bank is profitable, has
adequate capital, to then suggest to the bank that it needs to
stop behaviors that the regulator thinks are potentially risky.
So, there are a variety of issues that could affect it. Again,
I think we looked at this environment and saw numerous
instances where escalation probably was warranted.
Mr. Meuser. But your report does say the supervisory teams
blamed tailoring reform under S. 2155 for these failures. We
know that the Fed and the FDIC have discretion regardless of
those thresholds, as mentioned earlier, to address,
investigate, and perceive potential or discovered problems. Why
didn't they, and why would they blame it on something that
really did not stand in the way in the first place?
Mr. Clements. Again, I think it is the standard, what we
have seen in the past, which is a hesitancy to take more-
aggressive actions.
Mr. Meuser. Okay. Let me ask you this: In general, do you
think community banks are much better managed than these
outliers that have failed?
Mr. Clements. I do not think I have any basis to talk about
the distinction between the banks. We can go back to the 1990s,
and a number of the smaller banks failed.
Mr. Meuser. No, I am talking about now, and I believe they
are, based upon my research and knowledge and discussions and
financial discussions with community banks. You do not feel
that the community banks would be better managed than these
banks that have failed, SVB, First Republic, and Signature?
Mr. Clements. In the case of these two banks, they are
obviously better managed than the two that failed.
Mr. Meuser. Okay. What about regional banks? Do you think
they are managed better?
Mr. Clements. We have not done any work for me to be able
to opine on their management.
Mr. Meuser. Okay. Well, state of affairs then. These banks
have been rattled by all of this, this bailout that occurred
with SVB, and now community banks are concerned that they may
bear the brunt in higher FDIC fees, and that is unnerving some
of their depositors. Do you think that is undue, unnecessary?
What are your thoughts?
Chairman Huizenga. The gentleman's time has expired.
Mr. Meuser. I yield back, Mr. Chairman. Thank you.
Chairman Huizenga. And Mr. Clements, you will be able to
answer that question in writing.
With that, the gentlewoman from Texas, Ms. Garcia, is
recognized for 5 minutes.
Ms. Garcia. Thank you, Mr. Chairman, and thank you, Mr.
Clements, for being here with us today. I wanted to also lay
out a few facts before I begin, and the first one is that the
President has lowered the deficit by $1.7 trillion--$1.7
trillion--in his first 2 years in office. So, when we talk
about the debt ceiling and we look at everything, we really
need to get some facts out. This President has made it clear
that defaulting on the debt is not an option. The statement
made earlier that Republicans were the only ones who have
passed anything is probably true, but what is not said is that
it is not a clean debt ceiling raising. It comes with cuts,
cuts that are so deep that they would impact Social Security,
they would impact Medicaid, they would impact our veterans, our
teachers, and it would create more job losses. That is the
reason many of us cannot support that.
There has always been a raise of the debt ceiling, hundreds
of times. In fact, every year since World War II, it has been
raised. Only because it is this President and this year do we
see so many concerns about making cuts before or doing it
together.
We do not have any problem with making some cuts. They just
should not be tied to the raising of the debt ceiling. It
should be a debt ceiling that is clean, one that has been done
so many times before, including for former, twice-impeached
President Trump. Many of the people talking about this issue
now did that last time, so where were they then, making some of
these comments?
Second, I am glad that we are having this hearing, but I
wonder, Mr. Chairman, when we are going to really focus on the
root causes of what caused some of these failures, and when we
are going to look at comprehensive legislation and responsible
governance? Because as I review some of these items, it appears
to me that I agree with others who have already said it here at
the table, that this was about governance, it was about
management, it was about failing to minimize risks.
And I was particularly drawn to the response that you gave
the ranking member when she asked you about some of the reviews
that are done by the examiners, and you said that you were told
that, ``it would take a while to fix the problem.''
Since when has taking a while to fix a problem been
acceptable when someone does an audit? I was the City
Controller of Houston, and I oversaw a $2.3-billion budget. We
did audits. If somebody told us, ``Oh well, it is going to take
us a while to fix the problem,'' the first thing we would say
is, ``What is your timeline for getting it fixed?'' Did we see
any of that, or did the examiners just kind of say, ``Oh, okay,
fine. You all fix it?''
Mr. Clements. That occurred in the 2022 timeframe. As I
think we mentioned in the report, starting in August, the San
Francisco Fed and the Federal Reserve itself--
Ms. Garcia. But let's get to my question, sir. Were they
given a timeline, something that told management to respond, to
take corrective action, that we are going to be back? Were
examiners back to make sure that they did what they promised to
do, or was it just let go?
Mr. Clements. In many instances, the supervisory letters
did detail what needed to be done and the timeframes. But
again, for some of these larger issues, it appeared that the
dates were allowed to slip.
Ms. Garcia. Things were allowed to slip. That is part of
the root of the problem, is it not, if things were allowed to
slip? Can you give us an example of what was so major that they
could not do it immediately and take corrective action that
would, ``take time to fix a problem?''
Mr. Clements. A concern was principally about the liquidity
and the governance of the liquidity and the liquidity controls
at SVB.
Ms. Garcia. So, they did not have investment review
committees or an investment team that really looked at that?
Mr. Clements. There were numerous failures in its internal
liquidity stress testing, and the Fed was looking for solutions
to those problems.
Ms. Garcia. Right. And let me ask you, because there has
been a lot of focus on the Federal examiners, what about the
State examiners? What responsibility do they have in this whole
scheme?
Mr. Clements. There is a mix depending upon, that Signature
and SVB are a little bit different because they are dealing
with different States and how they managed those relationships.
For the most part, the Federal regulators were the ones in
charge.
Chairman Huizenga. The gentlelady's time has expired.
Ms. Garcia. Thank you. I yield back.
Chairman Huizenga. The gentleman from Tennessee, Mr. Ogles,
is recognized for 5 minutes.
Mr. Ogles. Thank you, Mr. Chairman, and if I may, I would
like to correct the record. I think my colleague had
inadvertently mischaracterized some things that were taking
place. As far as the debt ceiling goes, there is no intent to
impact Social Security or Medicare, nor are we going to impact
our veterans. In fact, if you go back to 2011, our current
President, in his own words, stated that compromise was part of
the process. In fact, he said it was the normal political order
of things to do so. So Mr. Chairman, I did want to just set the
record straight.
I know we have talked a lot about this, and I do not want
to beat a dead horse, and we do have the benefit of kind of
after-action or the rear-view-mirror approach. But as you look
at some of the high marks, the satisfactory marks that were
given to SVB, you mentioned the hesitancy and the difficulty it
is for the regulator to step in, if you will. But, in part,
isn't that their job?
Mr. Clements. It is the purpose of supervisory regulation
to ensure that banks operate in a safe and sound manner.
Mr. Ogles. As we look forward, and keep in mind that the
small and mid-sized banks--there are roughly 4,700 doing it
right, so we do not want to target an industry because of a few
bad actors. But how do we fix the process and the culture that
seems to have crept into the regulatory structures that is,
quite frankly, preventing them from doing their job in a timely
fashion?
Mr. Clements. I think that is where we think triggers come
into play, that if a particular measure exceeds a threshold or,
in these cases, where there have been MRAs, MRIAs, MRBAs,
multiple times, that triggers an action. The regulator would
then be required to take action, rather than continuing to wait
and trying to work through a problem.
Mr. Ogles. And again, I am not going to ask you to second-
guess the regulators in these specific instances, but when you
look back, all the way going back to, for SVB, 2018, there were
clear signals and signs that there was a problem. But yet,
fast-forward 4 years later, and nothing was happening in a
timely fashion.
Again, if you were to lay out a roadmap of, how do we
improve the process, what timelines might you map out for the
regulators to say, here is a problem, yes, they are profitable,
however, you have increased liquidity risk. Yes, you are
profitable. However, you have this flight risk as you move
forward. What would you see those triggers looking like?
Mr. Clements. In the past, we have recommended that the
regulators and industry work together to find out what would be
the best practices to ensure that there is adequate action, but
you do not want action for a bank that is healthy, and that the
regulator thinks, well, perhaps the problem will occur, because
then you end up imposing unnecessary costs and burdens on that
institution. So, the regulators and industry working together
to come up with adequate measures and benchmarks.
Mr. Ogles. I have said it once, and I will say it again:
Ronald Reagan said that the scariest phrase in the American
language, and I will paraphrase it, is, ``I am from the
government, and I am here to help.'' And I think as we move
forward, we have to be cautious about reaching too far in this
process. But I do look at the regulatory regimes in both
California and New York and see a systemic failure on their
part to take action. When you look at, again, the timeline of
when the draft is taking place in the previous year, and 6
months later, the draft is still being drafted, and meanwhile,
SVB collapses, is that acceptable on the part of the regulators
to take 6 months to draft a letter? I am no Shakespeare, but I
can write a letter in a more-timely fashion than 6 months, even
if I am having to research data points.
Mr. Clements. I think we had the concern, and again, that
is why we talked about a lack of urgency and timely action. In
that case, obviously, going from August 2022, I guess the
argument was they needed to collect additional information, but
it did seem to us that there were enough instances of these
MRIAs and MRAs finding those problems that they could have
moved forward with more urgency.
Mr. Ogles. In my last 30 seconds, is there anything in the
regulatory regime that would have prevented the regulators from
doing their job?
Mr. Clements. The regulators have authority to make
recommendations, and formal and informal enforcement actions,
again, up to and including civil monetary penalties.
Mr. Ogles. Yes, sir. Mr. Chairman, I yield back.
Chairman Huizenga. The gentleman yields back. With that,
the ranking member of the subcommittee, the gentleman from
Texas, Mr. Green, is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. Mr. Director, you are
not here to tell us that the banks are not responsible, are
you?
Mr. Clements. The bank management is responsible for
operating the--
Mr. Green. The bank management.
Mr. Clements. --bank in a safe and sound manner.
Mr. Green. Yes. And you are here to tell us that these bank
managers mismanaged the banks' business. Is that a fair
statement?
Mr. Clements. The records we saw were numerous instances of
at least liquidity and risk management problems that had been
identified going back to 2018.
Mr. Green. You have said that the regulators were calling
things to their attention that you thought should have been
dealt with, and you have indicated as much. Do you now say that
the banks did not have the responsibility to make these changes
themselves?
Mr. Clements. The banks are responsible for resolving the
problems that the supervisors identify, and that is the bank
side. The supervisory concern is when nothing happens--
Mr. Green. Excuse me. Let's talk about the bank side for
just a moment, if you would please. You also have indicated
that the agency has plenty of authority, and then you went on
to say but you did not want to prejudge. You would like to have
an opportunity to review. Is that a fair statement?
Mr. Clements. Correct.
Mr. Green. Excuse me, if I may, I just needed to know if
that was a fair statement. Now knowing this, that it has plenty
of authority, you are not saying that they have enough
authority, are you? Because enough would mean that you would
not have the time to review.
Mr. Clements. The committee's request is for us to look at
enhanced prudential standards and we can do that.
Mr. Green. Are you saying that the regulators have enough
authority and that nothing more should be done?
Mr. Clements. I am not in the position right now to judge
whether--I am saying they have authority.
Mr. Green. They have authority. But you are not saying they
have enough authority, are you?
Mr. Clements. I think we would need to do additional work
in that space.
Mr. Green. To determine?
Mr. Clements. Correct.
Mr. Green. So today, you are not saying they have enough
authority?
Mr. Clements. We are saying they have authorities. We
need--
Mr. Green. But they do not have enough.
Mr. Clements. --to conduct additional work.
Mr. Green. You don't know that they have enough.
Mr. Clements. I cannot, at this point, say that they have
enough.
Mr. Green. Okay, that is fair enough. You cannot, at this
point, say that they have enough. And it is important for you
to say this, Mr. Director, because the other side is making the
case for enough authority. They are making the case for the
status quo. They are making the case for banks to be able to do
what Silicon Valley did. We are making the case for doing
something that can have an impact on the people who have the
responsibility to manage the depositors' money. They are not.
Now, Mr. Director, is it true that the stress test can have
an impact on the decisions that regulators make, once they
review it? If it is an adverse conclusion, can it have an
impact on their decisions?
Mr. Clements. It is a factor in the supervision of
organizations.
Mr. Green. So it can have an impact on what they think, can
it not? Are you shy about saying that an adverse stress test
will have an impact on the decisions of regulators, Mr.
Director?
Mr. Clements. Supervisory tests are an important element.
Mr. Green. I understand, but let's talk about the stress
test.
Mr. Clements. Yes.
Mr. Green. Okay. Thank you.
Mr. Clements. It is--
Mr. Green. And because of changes, the stress test was
scheduled for 2024 for Silicon Valley Bank.
Let me use my last 48 seconds to say this. I want to
commend all of the Members for their questions, but I want to
commend especially the Members on this side, and those who
decided to talk about the preeminent issue facing this
Congress, which is, are we going to allow a default? I commend
them for bringing it up. It is not unusual for us to bring up
issues that relate to the business of the Congress but do not
necessarily relate to the business of a given hearing. And I
thank Mr. Horsford for what he did. He is upset because we may
be facing a default, that may cause a collapse of our economy.
I yield back.
Chairman Huizenga. The gentleman's time has expired. In
accordance with committee rules, we do allow non-subcommittee
members to waive on for questioning, and we will be doing so
with the gentleman from Kentucky, Mr. Barr, who is also the
Chair of our Subcommittee on Financial Institutions and
Monetary Policy. So with that, the gentleman from Kentucky has
5 minutes.
Mr. Barr. Mr. Chairman, thank you. Thanks for allowing me
to waive on. I want to start off by thanking the GAO, Mr.
Clements, and your team for putting out a timely, nonpartisan,
apolitical report that is external to the self-assessments we
have seen from the Fed and the FDIC, that do not give a
complete narrative. I think it is vital that we have an
unbiased, external report that helps inform the American public
and the Congress. I also want to thank my good friends, Mr.
Green and Mr. Horsford, for raising the important, preeminent
issue facing the Congress, and that is raising the debt limit,
and avoiding default. And I would just remind my colleagues
that the only institution in government that has actually done
that work of raising the debt limit is the Republican Majority
in the Congress, and every single Democrat Member of the House
of Representatives voted against raising the debt limit.
To get to my questions, in your work in looking at the bank
supervisors here, especially the San Francisco Fed, do you see
any evidence of concern leading up to Silicon Valley Bank's
failure, about the large concentration of uninsured deposits in
a single sector?
Mr. Clements. There was concern. We certainly saw concerns
raised.
Mr. Barr. So, there was evidence that they raised that
concern?
Mr. Clements. Correct.
Mr. Barr. Okay. I believe the Fed report that I have
reviewed, their self-assessment, they say in here that Silicon
Valley Bank crossed the Regional Bank Organization portfolio to
the Large Bank Organization portfolio within the Federal
Reserve structure in February of 2021. Is that correct? That is
what the Fed says.
Mr. Clements. I do not have the specific dates.
Mr. Barr. Well, that is what the Fed says. The Fed says
that they crossed that supervisory threshold almost 2 years
before the bank's failure.
Mr. Clements. I think it was certainly the case in our
report. I think we might say June, but it is somewhere in the
2021 timeframe.
Mr. Barr. The Fed says they crossed that threshold in
February 2021. So, in other words, enhanced prudential
standards applied to this institution, as a large institution,
according to the Fed's own determination, 2 years before the
bank failed. Is that correct?
Mr. Clements. It would have been a Category 4 firm at that
time.
Mr. Barr. Right. And that is enhanced prudential standards,
under Dodd-Frank, as amended by the bipartisan Regulatory
Relief Law of 2018.
Mr. Clements. Correct, at that point it is subject--
Mr. Barr. As implemented by the Fed, that $100-billion
threshold.
Mr. Clements. Correct, and then there is tailoring above
that level.
Mr. Barr. Sure. But in this case, this bank, under Fed
regulations implementing Dodd-Frank, as amended by the
Regulatory Relief Law of 2018, enhanced prudential standards
applied to this bank, categorized as a large financial
institution, as of February 2021, 2 years before the bank
failed.
Mr. Clements. That is correct. In 2021, it got into that
group and was subject to large foreign institutions.
Mr. Barr. The Fed report also says that Board staff,
meaning Federal Reserve Board staff, provided the San Francisco
Fed team a waiver to delay the initial set of ratings under the
Large Financial Institution (LFI) rating system by 6 months,
until August 2022. In your investigation, do you have any
insight or visibility as to why the board waived that
requirement?
Mr. Clements. That is additional work we will need to do.
Mr. Barr. Yes, please look into that, because the
regulators at the Fed are delaying implementation. The law does
not say that they have to, but they, the supervisors, the bank
examiners, are delaying implementation of the law that we
passed, and that we amended in 2018, and that the Fed
implemented. So look, it is on the supervisors.
Let me just say this also. According to your report, in
2020 the examiners at the Federal Reserve Bank of San Francisco
found that SVB was not doing all required liquidity stress
testing. Specifically, SVB did not provide liquidity risks for
a period of 30 days or less, as they were required. But
examiners continued to give SVB a satisfactory mark for
liquidity and the highest CAMELS rating for liquidity from 2018
to 2022.
In your experience, would it be unusual for an examiner to
give a bank a high liquidity rating despite some of the
required testing not being done?
Mr. Clements. I think that is the concern we had, the high
ratings, especially for liquidity, and also for management.
Mr. Barr. Yes. Also, your report describes informal non-
public enforcement action that was taken by the Federal Reserve
Board staff to address ineffective governance. However, as of
March 2023, the memorandum of understanding (MOU) was still in
the drafting process.
Chairman Huizenga. The gentleman's time has expired.
Mr. Barr. For the gentleman, for the record maybe, is it
typical for an--
Chairman Huizenga. The gentleman's time has expired.
Mr. Barr. --informal enforcement action like this to take
more than 6 months?
Chairman Huizenga. The gentleman's time has expired.
Mr. Barr. It has expired. I appreciate--
Chairman Huizenga. And we will allow you to--
Mr. Barr. --you--
Chairman Huizenga. Excuse me, ranking member, I have it
handled. The gentleman will suspend.
The gentleman from Kentucky can submit his final thoughts
and final question to the witness for a written response.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place his 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.
And with that, this hearing is adjourned.
[Whereupon, at 11:34 a.m., the hearing was adjourned.]
A P P E N D I X
May 11, 2023
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