[Senate Hearing 118-216]
[From the U.S. Government Publishing Office]
S. Hrg. 118-216
RECENT BANK FAILURES AND THE FEDERAL REGULATORY RESPONSE
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE RECENT U.S. BANK FAILURES AND THE FEDERAL REGULATORS'
RESPONSE
__________
MARCH 28, 2023
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
54-561 PDF WASHINGTON : 2024
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chair
JACK REED, Rhode Island TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey MIKE CRAPO, Idaho
JON TESTER, Montana MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming
TINA SMITH, Minnesota J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania STEVE DAINES, Montana
Laura Swanson, Staff Director
Lila Nieves-Lee, Republican Staff Director
Elisha Tuku, Chief Counsel
Amber Beck, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Assistant Clerk
(ii)
C O N T E N T S
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TUESDAY, MARCH 28, 2023
Page
Opening statement of Chair Brown................................. 1
Prepared statement....................................... 48
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 4
Prepared statement....................................... 50
WITNESSES
Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation 6
Prepared statement........................................... 51
Responses to written questions of:
Chair Brown.............................................. 66
Senator Scott............................................ 79
Senator Reed............................................. 97
Senator Menendez......................................... 98
Senator Cortez Masto..................................... 100
Senator Hagerty.......................................... 103
Michael Barr, Vice Chairman for Supervision, Board of Governors
of the Federal Reserve System.................................. 8
Prepared statement........................................... 60
Responses to written questions of:
Chair Brown.............................................. 104
Senator Scott............................................ 113
Senator Reed............................................. 127
Senator Menendez......................................... 129
Senator Cortez Masto..................................... 130
Senator Warnock.......................................... 132
Senator Fetterman........................................ 136
Senator Kennedy.......................................... 138
Senator Daines........................................... 140
Nellie Liang, Under Secretary for Domestic Finance, Department of
the Treasury................................................... 9
Prepared statement........................................... 64
Responses to written questions of:
Chair Brown.............................................. 144
Senator Scott............................................ 146
Senator Reed............................................. 147
Senator Cortez Masto..................................... 148
Additional Material Supplied for the Record
Letter submitted by American Share Insurance..................... 149
Better Markets Banking Fact Sheet................................ 151
Letter submitted by CUNA......................................... 174
Letter submitted by NAFCU........................................ 176
(iii)
RECENT BANK FAILURES AND THE FEDERAL REGULATORY RESPONSE
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TUESDAY, MARCH 28, 2023
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room 106, Dirksen Senate
Office Building, Hon. Sherrod Brown, Chair of the Committee,
presiding.
OPENING STATEMENT OF CHAIR SHERROD BROWN
Chair Brown. The Committee on Banking, Housing, and Urban
Affairs will come to order.
Thanks to the New Deal and the hard work of our regulators
today, most bank failures, of course never a good thing, are
generally not a big deal. But the quick collapses of Silicon
Valley Bank and Signature Bank were no ordinary failures.
In less than a day, Silicon Valley Bank customers pulled
$42 billion out of the bank, fueled by venture capitalists and
their social media accounts. They created the largest and
fastest bank run in history. In the following days, Signature
Bank lost $17.8 billion.
Regulators--both Republicans and Democrats--came together
to prevent the panic from spreading. They increased liquidity,
promoted confidence in our banking system, and protected the
deposits of customers and small businesses, not, notably, the
investments of executives and shareholders.
I spent that weekend on the phone with Ohio small
businesses and banks and credit unions. Ohio small business
owners simply wanted to make payroll. They did not want to see
years of hard work go down the drain because of venture
capitalists panicking on Twitter 2,000 miles away. One woman
told me she was terrified she would not be able to pay her
workers the next week, and I heard that story over and over.
And Ohio banks and credit unions institutions--institutions
that are sound and well-capitalized--did not want to see
deposits flee their institutions for the biggest Wall Street
banks.
For anyone who lived through the Global Financial Crisis,
it is impossible not to think of 2008.
Once again, small businesses and workers feared they would
pay the price for other people's bad decisions. And we are left
with many questions--and justified anger--toward bank
executives and boards, toward venture capitalists, toward
Federal and State bank regulators, and toward policymakers.
The scene of the crime does not start with the regulators
before us. Instead, we must look inside the bank, at the bank
CEOs, and at the Trump-era banking regulators, who made it
their mission, again, to give Wall Street everything it wanted.
Monday morning quarterbacking aimed only at the actions of
regulators this month is as convenient as it is misplaced,
coming from those who have never met a Wall Street wish list
they did not want to grant.
Many who are the first to scold the regulators for their
failures offer ready ears whenever bank CEOs line up at their
offices complaining about ``out-of-control bank examiners.''
Remember some of those complaints at our hearing with Fed
Chair Powell over the Fed merely reviewing capital, just 3 days
before Silicon Valley Bank failed?
How soon we choose to forget.
When we ask who should have known how the risks were
building in these banks, we should start at the source--with
the executives.
Silicon Valley Bank almost quadrupled in size over 3 years,
and Signature Bank more than doubled in that time.
The principles here are not complicated. Banks should be
prudently managed and be mindful of the full scope of risks
they face, and should diversify across companies and products.
This Committee must consider how these banks exploded in
size, in a way that was clearly unsustainable. Some
explanations will focus on complicated-sounding concepts like
balance sheet risk, moral hazard, stress tests, and liquidity
ratios. Really though, it comes down to more basic concepts:
hubris, entitlement, greed. And always, always, always with big
paydays at the end, for the executives at the top.
The CEOs' own pay was tied directly to the growth at SVB.
At SVB, executive bonuses were pegged to return on equity. So
they took more risk by buying assets with higher yields to make
higher profits. When those investments started to lose money,
they did not back down.
It will not surprise anyone that Silicon Valley Bank went
nearly a year without a Chief Risk Officer.
Venture capitalists fueled the bank's growth by forcing the
companies they invested in and advised to keep their money at
Silicon Valley Bank. And then those same VCs turned around and
sparked the bank run by telling the companies to pull their
money out, creating more chaos and more panic.
Signature Bank found itself in the middle of Sam Bankman-
Fried's crime spree at the crypto exchange FTX. The bank let
him open multiple accounts and ignored red flag after red flag.
It is all just a variation on the same theme, the same root
cause of most of our economic problems: wealthy elites do
anything to make a quick profit and pocket the rewards. And
when their risky behavior leads to catastrophic failures, they
turn to the Government asking for help, expecting workers and
taxpayers to pay the price, and too often workers do.
Even though no taxpayer money is being used to save these
depositors, I understand why many Americans are angry--even
disgusted--at how quickly the Government mobilized when a bunch
of elites in California were demanding it. People have a pretty
good sense of whose problems get taken more seriously than
others in this town.
Of course we have to prevent systemic threats to the
economy. But corporate trade deals are a systemic threat to
towns like I grew up in, in Mansfield, Ohio, and across the
industrial Midwest. So it is a Wall Street business model that
rewards short-term profits over investments in innovation and
workers.
And those threats are not only tolerated, they have been
actively pushed by the same crowd that this month clamored for
the Government to save them. Just as there are no atheists in
foxholes, it appears that when there is a bank crash, there are
no libertarians in Silicon Valley.
I hope that from now on, those who have no problem with
Government intervention to protect their own livelihoods will
think a little bit harder about what their warped version of
the free market has done to workers in Ohio.
It may be tempting to look at all this and say, we do not
need new rules. The real problem was these arrogant executives.
But there will always be arrogant executives. That is
exactly why we need strong rules, and public servants with the
courage--with the courage and guts--to stand up to bank
lobbyists and enforce those rules. The officials sitting before
us today know that their predecessors rolled back protections,
like capital and liquidity standards, stress tests, brokered
deposit limits, and even basic supervision. They greenlighted
these banks to grow and grow and grow, too big, too fast.
There are important questions about deposit insurance we
must consider--whether the current amount works for everyone,
including small businesses whose real goal is make payroll.
We expect bank executives to understand the basic
principles of bank management and to know they cannot grow a
bank by over-concentrating business in specialized areas and
then pay themselves huge bonuses right up until things blow up.
That is not being a trusted partner to your customers. It is
taking advantage of them.
These executives must answer for their banks' downfalls. I
have called on the former CEOs of these failed banks to testify
and I thank Ranking Member Scott for joining us in that effort.
But they must also face real consequences for their
actions. Right now, none of the executives who ran these banks
into the ground are barred from taking other banking jobs, none
have had their compensation clawed back, none have paid any
fines.
Some executives have decamped to Hawai`i. Others have
already gone on to work for other banks. Some simply wandered
off into the sunset.
It will surprise no one in Ohio that these bank executives
face less accountability than a cashier who miscounts the
cashbox.
That is why I will be introducing legislation to strengthen
regulators' ability to impose fines and penalties, to clawback
bonuses, and to ban executives who caused bank failures from
working at another bank ever again.
We also need to look at bank regulators' ability to not
only identify risks and problems at banks, but to also be
empowered to actually make the banks fix them. Today, my
colleagues and I are asking GAO to follow up on a 2019 report
where they highlighted communication failures, and the extent
to which senior bank management fully addressed identified
deficiencies.
I am looking forward to hearing from our financial
watchdogs today. We will be watching them to make sure they
assess the damage, hold accountable those responsible, and fix
what is broken.
Last, I ask my colleagues to work together to make sure
that our financial system is stronger after this crisis.
Americans have watched the same pattern over and over. A crisis
occurs, some of us push for reforms, and if we are lucky, we
are able to seize the moment, and actually pass some.
And then the bank lobbyists go to work, and they are so
good at their jobs.
Politicians spend the ensuing years rolling back reforms,
right up until the next crisis. And that crisis happens
because, you guessed it--we rolled back regulations, and this
body enabling the regulators to roll them back even further.
And we know who is the first to get help in any crisis. It
is little wonder that workers in Ohio and around the country do
not trust banks, and do not trust their own Government. It is
time we proved them wrong--ignore corporate lobbyists, and put
workers and their families first.
Senator Scott.
STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman.
Today, we are here to understand just how we found
ourselves in the middle of the second- and third-largest bank
failures in United States history. Though our questions are
nowhere near answered, this is an important first step in
providing transparency and accountability necessary to the
American taxpayer.
I would like to thank you, Mr. Chairman, for taking the
time and working with me to try to bring the bank CEOs into
this hearing. I think it is incredibly important that we hear
from the folks specifically and uniquely responsible for the
failure of these banks, the folks who managed them.
By all accounts, this is a classic tale of negligence, and
it started with the banks themselves. Without any question,
that is where the buck stops. So it is imperative that we hear
straight from the horse's mouth, so to speak, to find out why
these banks were so poorly managed and so poorly managed the
risks.
Unfortunately, the bank executives are not the only
managers we are missing.
The Secretary of the Treasury and the Chairman of the
Federal Reserve are also not here to testify. I do not mean to
offend the witnesses that are here, but it is hard to believe
the Biden administration seriously is concerned about the
failure that we are seeing when they themselves are shielding
the top official at the Department of Treasury, the same
official that briefed the President and invoked the System Risk
Exception.
Nor do we have Chairman Powell here. Instead, we have the
Vice Chair of Supervision here to use the Committee as a
platform to talk about the wrongs under his supervision. As the
Federal Reserve has already announced, he is conducting a
review to assess any supervisory failures, which is an obvious,
inherent conflict of interest and a classic case of the fox
guarding the henhouse.
The Fed should focus on its mission and not the climate
arena. This is a waste of time, attention, and manpower, all
things that could have gone into bank supervision.
Banks, like any other business, must manage their risk and
be good stewards for their customers. But unlike other
businesses, banks are highly regulated. Sometimes banks even
have their regulators sitting in their banks and continually
monitoring their risks and activities, as is the case with
Silicon Valley Bank.
For the last 2\1/2\ weeks, the regulators have consistently
described Silicon Valley as unique and highly
``idiosyncratic,'' meaning the warning signs should have been
flashing red and SVB should have stood out as what it was,
absolutely a problem child. Clear as a bell were the warning
signs.
In fact, reports indicate that these warning signs were
already flashing, and on March 19, the New York Times wrote
that ``Silicon Valley Bank's risky practices were on the
Federal Reserve's radar for more than a year . . .'' .
Moreover, Silicon Valley suffered from extreme interest
rate risk, due to investments in long-term securities that
declined in value because of soaring inflation. Of all our
supervisors, the Federal Reserve should have been keenly aware
of the impact its interest rate hikes would have on the value
of these securities, and it should have been actively working
to ensure the banks it supervises were hedging their bets and
covering their risk accordingly.
But now we know, based off your testimony, Mr. Barr, that
the Fed was aware. In fact, in 2021, your supervisors found
deficiencies in the bank's liquidity and its management,
resulting in six supervisory findings. Later, in 2022,
supervisors then issued three findings related to ineffective
board oversight, risk-management weaknesses, and the bank's
internal audit function. What were the supervisors thinking?
The law and the regulations are crystal clear. The Federal
Reserve can take any supervisory or enforcement action it deems
necessary to address unsafe and unsound practices.
Recent reports confirm what we already know. Your
priorities and your work with the San Francisco Federal Reserve
Bank President, Mary Daly, centered on climate change, an issue
wholly unrelated to the Federal Reserve's dual mandate and role
as supervisor. Given SVB's social and climate agenda, one must
ask if SVB's investments in climate caused the regulators to be
a bit more permissive of its risks.
If you cannot stay on mission and enforce the laws as they
already are on the books, how can you ask Congress for more
authority with a straight face?
To that end, I hope to learn how the Federal Reserve could
know about such risky practices for more than a year and fail
to take definitive, corrective action. By all accounts, our
regulators appear to have been asleep at the wheel.
In addition, I also hope to learn more from the FDIC about
the role in the receivership and sale of both SVB and Signature
Bank, especially on the auction and bid process.
I am very concerned that private sector offers appear to
have been submitted, and yet were denied. If Silicon Valley
Bank had been purchased before it failed, the panic and the
shock to the market and to market confidence we have seen over
the past 2\1/2\ weeks may have been avoided.
If Silicon Valley had been purchased over the weekend of
March 10, confidence in the marketplace may have sustained
Signature Bank and prevented its failure.
The FDIC's bid auction process has been a black hole for
Congress and the American people, and we deserve answers.
I know hindsight is 2020, but when you hear rumors that
this process was delayed because the White House does not like
mergers in any shape, form, or fashion, it makes you wonder
what actually is going on. Sometimes, when it looks like a
duck, quacks like a duck, it is just a duck.
As I close on this opening statement, three things remain
clear to me regarding SVB. First, the bank was rife with
mismanagement. Second, there was a clear supervisory failure.
Our regulators were simply asleep at the wheel. And finally,
President Biden's reckless spending caused this 40-year high in
inflation, and the country, as well as the bank, experienced
tremendous loss.
Chair Brown. Thank you, Ranking Member Scott. I will
introduce the three witnesses today.
Martin Gruenberg was sworn in as Chair of the Federal
Deposit Insurance Corporation Board of Directors in January of
2023. Michael Barr took office as Vice Chair of Supervision of
the Board of Governors of the Federal Reserve in July of 2022,
for a 4-year term. He serves also as a member, of course, of
the Board of Governors. Nellie Liang has been the Under
Secretary for Domestic Finance at the U.S. Department of
Treasury since July 2021.
Thanks to all of you for joining us, and Mr. Gruenberg, if
you would begin. Thank you.
STATEMENT OF MARTIN GRUENBERG, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Brown,
Ranking Member Scott, and Members of the Committee, thank you
for the opportunity to appear before you today to address the
recent bank failures and the Federal regulatory response.
On March 10th, just over 2 weeks ago, Silicon Valley Bank,
or SVB, as it is known, with $209 billion in assets at year-end
2022, was closed by the California Department of Financial
Protection and Innovation, which appointed the FDIC as
receiver. The failure of SVB, following the March 8th
announcement by Silvergate Bank that it would voluntarily
liquidate, signaled the possibility of a contagion effect on
other banks.
On Sunday, March 12th, just 2 days after the failure of
SVB, another institution, Signature Bank of New York, with $110
billion in assets at year-end 2022, was closed by the New York
State Department of Financial Services, which also appointed
the FDIC as receiver. With other institutions experiencing
stress, serious concerns arose about a broader economic
spillover from these failures.
After careful analysis and deliberation, the Boards of the
FDIC and the Federal Reserve voted unanimously to recommend,
and the Treasury Secretary, in consultation with the President,
determined that the FDIC could use emergency systemic risk
authorities under the Federal Deposit Insurance Act to fully
protect all depositors in winding down SVB and Signature Bank.
It is worth noting that these two institutions were allowed
to fail. Shareholders lost their investment. Unsecured
creditors took losses. The boards and the most senior
executives were removed. The FDIC has authority to investigate
and hold accountable the directors and officers of the banks
for the losses they caused and for their misconduct in the
management of the institutions. And the FDIC has already
commenced these investigations.
Further, any losses to the FDIC's Deposit Insurance Fund as
a result of uninsured deposit insurance coverage will be repaid
by a special assessment on banks as required by law.
The FDIC has now completed the sale of both bridge banks to
acquiring institutions--New York Community Bancorp's Flagstar
Bank for Signature, and First Citizens for Silicon Valley
Bridge Bank.
My written testimony today describes the events leading up
to the failures of SVB and Signature Bank and the facts and
circumstances that prompted the decision to utilize the
authority in the FDI Act to protect all depositors in those
banks following these failures. It further describes the
management and disposition of the bridge institutions that were
established. It also discusses the FDIC's assessment of the
current state of the U.S. financial system, which remains sound
despite recent events. In addition, it shares some preliminary
lessons learned as we look back on the immediate aftermath of
this episode.
In that regard, the FDIC will undertake a comprehensive
review of the deposit insurance system and will release a
report by May 1, that will include policy options for
consideration relating to deposit insurance coverage levels,
excess deposit insurance, and the implications for risk-based
pricing and deposit insurance fund adequacy. In addition, the
FDIC's Chief Risk Officer will undertake a review of the FDIC's
supervision of Signature Bank and will also release a report by
May 1. Further, the FDIC will issue, in May a proposed
rulemaking for the special assessment for public comment.
The two bank failures demonstrate the implications that
banks with assets over $100 billion can have for financial
stability. The prudential regulation of these institutions
merits serious attention, particularly for capital, liquidity,
and interest rate risk. Resolution plan requirements for these
institutions also merit review, including a long-term debt
requirement to facilitate orderly resolution.
Recent efforts to stabilize the banking system and stem
potential contagion from the failures of SVB and Signature Bank
have ensured that depositors will continue to have access to
their savings, that small businesses and other employers can
continue to make payrolls, and that other banks--small, medium,
and large--can continue to extend credit to borrowers and serve
as a source of support. The FDIC continues to monitor
developments and is prepared to use all of its authorities as
needed.
The FDIC is committed to working cooperatively with our
counterparts at the other Federal regulators as well as with
policymakers in the Congress to better understand what brought
these institutions to failure and what measures can be taken to
prevent similar failures in the future.
That concludes my statement, and I would be glad to respond
to questions.
Chair Brown. Thank you, Mr. Gruenberg.
Mr. Barr, you are recognized. Thank you.
STATEMENT OF MICHAEL BARR, VICE CHAIRMAN FOR SUPERVISION, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Barr. Chairman Brown, Ranking Member Scott, other
Members of the Committee, thank you for the opportunity to
testify today on the Federal Reserve's supervisory and
regulatory oversight of Silicon Valley Bank.
Our banking system is sound and resilient, with strong
capital and liquidity. The Federal Reserve, working with the
Treasury Department and FDIC, took decisive actions to protect
the U.S. economy and to strengthen public confidence in the
banking system. These actions demonstrate that we are committed
to ensuring that all deposits are safe. We will continue to
closely monitor conditions in the banking system and are
prepared to use all of our tools for any size institution, as
needed, to keep the system safe and sound.
At the same time, the events of the last few weeks raise
questions about what more can and what more should be done so
that isolated banking problems do not undermine confidence in
healthy banks and threaten the stability of the banking system
as a whole. At the forefront of my mind is the importance of
maintaining the strength and diversity of banks of all sizes
that serve communities across the country.
SVB failed because the bank's management did not
effectively manage its interest rate and liquidity risk, and
the bank then suffered a devastating and unexpected run by its
uninsured depositors in a period of less than 24 hours.
Immediately following SVB's failure, Chair Powell and I
agreed that I should oversee a review of the circumstances
leading up to SVB's failure. In this review, we are looking at
SVB's growth and management, our supervisory engagement with
the bank, and the regulatory requirements that applied to the
bank.
The picture that has emerged thus far shows SVB had
inadequate risk management and internal controls that struggled
to keep pace with the growth of the bank. Supervisors began
delivering supervisory warnings near the end of 2021. Our
review will consider whether these supervisory warnings were
sufficient and whether supervisors had sufficient tools to
escalate them. We are also focusing on whether the Federal
Reserve's supervision was appropriate for the rapid growth and
vulnerabilities of the bank. While the Federal Reserve's
framework focuses on size thresholds, size is not always a good
proxy for risk, particularly when a bank has a nontraditional
business model.
Turning to regulation, we are evaluating whether
application of more stringent standards would have prompted the
bank to better manage the risks that led to its failure. Staff
are also assessing whether SVB would have had higher levels of
capital and liquidity under those standards, and whether such
higher levels of capital and liquidity could have forestalled
the bank's failure or provided further resilience to the bank.
We need to move forward with our work to improve the
resilience of the banking system, including the Basel III
endgame reforms, a long-term debt requirement for large banks,
and enhancements to stress testing with multiple scenarios so
that it captures a wider range of risk and uncovers channels
for contagion, like those we saw in the recent series of
events. We must also explore changes to our liquidity rules and
other reforms to improve the resiliency of the financial
system. In addition, recent events have shown that we must
evolve our understanding of banking in light of changing
technologies and emerging risks.
Part of the Federal Reserve's core mission is to promote
the safety and soundness of the banks we supervise, as well as
the stability of the financial system to help ensure that the
system supports a healthy economy for U.S. households,
businesses, and communities. Deeply interrogating SVB's failure
and probing its broader implications is critical to our
responsibility for upholding that mission.
Thank you, and I look forward to your questions.
Chair Brown. Thank you, Mr. Barr.
Ms. Liang, nice to see you. Thank you for being here.
STATEMENT OF NELLIE LIANG, UNDER SECRETARY FOR DOMESTIC
FINANCE, DEPARTMENT OF THE TREASURY
Ms. Liang. Thank you. Chairman Brown, Ranking Member Scott,
and other Members of the Committee, thank you for inviting me
to testify and for the opportunity to speak several times in
recent days to share updates from Treasury regarding current
events.
The American economy relies on a healthy and diverse
banking system, one that includes large, small, and mid-size
banks and provides for the financial needs of families,
businesses, and local communities.
Nearly 3 weeks ago, problems emerged at two banks with the
potential for immediate and significant impacts on the broader
banking system and the economy. The situation demanded a swift
response. In the days that followed, the Federal Government
took decisive actions to strengthen public confidence in the
U.S. banking system and to protect the American economy.
On March 9th, depositors of Silicon Valley Bank withdrew
$42 billion in deposits in a period of just a few hours. After
concluding that significant deposit withdrawals would continue
the next day, the California State regulator closed SVB and
appointed the FDIC as receiver. Two days later, the New York
regulator closed Signature Bank, which also had experienced a
depositor run, and appointed the FDIC as receiver.
Treasury worked to assess the effects of these failures on
the broader banking system, consulting regularly with the
Federal Reserve and FDIC. On Sunday evening, recognizing the
urgency of reducing uncertainty for Monday morning, Treasury,
the Federal Reserve, and the FDIC announced a number of actions
to stem uninsured depositor runs and to prevent significant
disruptions to households and businesses.
First, the boards of the FDIC and the Federal Reserve
recommended unanimously, and Secretary Yellen approved after
consulting with the President, two actions that would enable
the FDIC to complete its resolutions of the two banks in a
manner that fully protects all of their depositors. These
actions ensured that businesses could continue to make payroll
and that families could access their funds. Depositors were
protected by the Deposit Insurance Fund. Equity holders and
bond holders were not protected.
Second, the Federal Reserve created the Bank Term Funding
Program, a new facility to provide term funding to all insured
depository institutions eligible for primary credit at the
discount window, based on their holdings of Treasury and
Government agency securities. This program, along with the
preexisting discount window, has helped banks meet depositor
demands and bolstered liquidity in the banking system.
This two-pronged, targeted approach was necessary to
reassure depositors at all banks, and to protect the U.S.
banking system and economy. These actions have helped to
stabilize deposits throughout the country and provided
depositors with confidence that their funds were safe.
In addition to these actions, on March 16th, 11 banks
deposited $30 billion into First Republic Bank. The actions of
these large and mid-size banks represent a vote of confidence
in the banking system and demonstrate the importance of banks
of all sizes working to keep our economy strong. Moreover, on
March 20th, the deposits and certain assets of Signature Bridge
Bank were acquired from the FDIC, and on March 26th, the
deposits and certain assets of Silicon Valley Bridge Bank were
acquired from the FDIC.
We continue to closely monitor developments across the
banking and financial system, and to coordinate with Federal
and State regulators. As Secretary Yellen has said, we have
used important tools to act quickly to prevent contagion. And
they are tools we would use again to ensure that Americans'
deposits are safe.
Looking forward, while we do not yet have all the details
about the failures of the two banks, we know that the recent
developments are very different from those of the Global
Financial Crisis. Back then, many financial institutions came
under stress because they held low credit-quality assets. This
was not at all the catalyst for recent events. Our financial
system is significantly stronger than it was 15 years ago. This
is in large part due to the postcrisis reforms for stronger
capital and liquidity.
As you know, the Federal Reserve announced a review of the
failure of SVB and the FDIC a review of Signature Bank. I fully
support these reviews and look forward to learning more in
order to inform any regulatory and supervisory responses. We
must ensure that our bank regulatory policies and supervision
are appropriate for the risks and challenges that banks face
today.
Thank you to the Committee for its leadership on these
important issues and for inviting me here to testify. I look
forward to your questions.
Chair Brown. Thank you, Ms. Liang.
Almost every Member of this Committee will be here today,
on both sides of the aisle. Make your answers as brief and as
quick as you possibly can. So thank you for that.
In 2019, by votes of 4 to 1 and 5 to 1, now chair of the
NEC, Lael Brainard, the only dissenter in every one of those
votes, the Fed rolled back stronger rules and was responsible
for supervising Silicon Bank. Vice Chair Barr, did the Fed drop
the ball because it did not see the risk that was building?
Mr. Barr. Thank you, Chairman Brown, for that question.
Fundamentally, the bank failed because its management failed to
appropriately address clear interest rate risk and clear
liquidity risk. That interest rate risk and liquidity risk was
cited, was highlighted by the supervisors of the firm beginning
in November of 2021. The Federal Reserve Bank brought forward
these problems to the bank, and they failed to address them in
a timely way.
That exposure led the firm to be highly vulnerable to a
shock, and that shock came on the evening of Wednesday, March
8th, when it very belatedly attempted to adjust its liquidity
position and reported losses on its available-for-sale
securities. The market reaction to that was quite negative, and
that eventually, on Thursday, sparked a depositor run.
Chair Brown. So some of their practices appear to have
violated the basic principles of Banking 101, concentration
risk, overreliance on uninsured deposits, inadequate liquidity,
poor risk management--the list goes on. How poorly managed was
this bank?
Mr. Barr. Supervisors had rated the bank at a very low
rating. Normally we would not be describing these matters,
confidential matters, but given that the firm failed and
triggered a systemic risk determination, I am prepared to talk
about that confidential information. The firm was rated a 3 in
the Campbell scale, which is ``not well-managed,'' and at the
holding company level it was rated ``deficient,'' which is also
clearly not well-managed.
Chair Brown. Thank you.
Chair Gruenberg, I heard from many small businesses over
that weekend who had money in SVB and were worried about making
payroll in Ohio, making payroll as a result of the failure. I
heard from Ohio small banks and credit unions who were worried
about deposits leaving their institutions. I know that I am not
unique. Many of my colleagues from both sides of the aisle
heard those same concerns in their State.
Given the unprecedented scale of the bank run, what would
have been the impact on small banks and small businesses across
the Nation if you and other regulators had not taken action to
protect depositors at SVB and Signature Bank?
Mr. Gruenberg. Senator, that was our central concern. I
think the evidence suggested, from the sequential failures of
first Silicon Valley and then Signature, that there was a
significant risk of contagion to other institutions, and in
fact, over that weekend we were seeing serious stress at other
institutions. And I think that and the potential knock-on
effects of that contagion is really what led the Federal
Reserve board and the FDIC board unanimously to recommend to
the Treasury Secretary----
Chair Brown. But you are saying the actions taken were the
least bad option for small businesses and banks across the
Nation. If you had not acted that way, you think there would
have been a contagion.
Mr. Gruenberg. I think there would have been a contagion,
and I think we would be in a worse situation today with
consequences for the actors in our economic system.
Chair Brown. Meaning regulators, Republicans, and Democrats
all across the board there was agreement on those actions.
Mr. Gruenberg. Yes.
Chair Brown. Under Secretary Liang, do you agree with that?
Ms. Liang. Senator Brown, I do agree with that. I think the
actions that were taken have been working to stabilize
deposits. Had they not been taken, the runs by uninsured
depositors from many small and regional-sized banks and mid-
sized banks would have intensified and caused serious problems
for small banks' liquidity and their ability to support small
businesses.
Chair Brown. Thank you. And if you can answer this really
briefly, because I do not want to go over my 5 minutes. Mr.
Gruenberg, the FDIC announced the sale of SVB to First Citizens
Bank and Trust from Senator Tillis' North Carolina. It was
estimated to have cost the deposit insurance fund approximately
$20 billion. How is that cost covered?
Mr. Gruenberg. Oh, that is required by law, and I indicated
in my opening statement the FDIC has to impose an assessment on
the banking industry to cover the cost of coverage for any
uninsured deposits. And I would note that the law provides the
FDIC authority in implementing that assessment to consider the
types of entities that benefit from any action or assistance
provided. And as I also indicated in my statement, we expect to
issue a notice of proposed rulemaking for public comment in
May, to implement the assessment.
Chair Brown. Thank you. I would point out in your testimony
and your answer there were no tax dollars, nothing funded
through the congressional appropriations process.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman. What is the future
of regional banking?
Mr. Gruenberg. I think we have a strong set of regional
banks in the United States. And as a general matter, their
liquidities remained stable through this episode. And I think
it was a good indication, frankly, that in the two failed
institutions, in both of those cases the strongest bids we
received to acquire those failed institutions were from two
other regional banks that had the capability and strategic
business interest to acquire them.
So there are a lot of cautionary lessons to be learned from
this, Senator. I completely agree with that. And we are going
to need to carefully review this episode. But as a general
proposition, I think the regional banks in the United States
remain a source of strength for the system.
Senator Scott. I walked in on the Chairman's comments about
the actions that were taken the weekend of March 9th and how
important it was and the importance of making sure we get
credit for doing something that actually, I thought, could have
been avoided, frankly. I thought it could have been avoided if
we had someone in the private sector make the decision to buy
the bank, buy the assets. Had that been done on Friday, March
10th, I think we could have literally eliminated the fiasco
that we saw over the weekend.
Were there folks interested in buying Silicon Valley Bank
on Friday?
Mr. Gruenberg. Senator, just to be clear, before the bank
failed, on an open institution basis?
Senator Scott. After.
Mr. Gruenberg. Oh, after the failure, on a closed basis.
Senator Scott. Yes.
Mr. Gruenberg. Oh, we had expressions of interest.
Remember, this was a very rushed process, if I may say. The
bank failed on Friday morning. The other institution failed
over the weekend. We had to set up two bridge institutions to
manage those failed banks.
To your point, though, we had expressions of interest. We
quickly set up a bidding process that we ran on Sunday. We
received two bids. One was not valid because it had not been
approved by the board of the bank, and the other, after we
evaluated it, indicted that it was more expensive than a
liquidation of the institution would have been to the FDIC. So,
in effect, we did not have an acceptable bid, and it was really
a determination that we made to try to set up two bridge
institutions to manage for a short period of time these two
failed banks, and then to organize a bidding process, an open
bidding process, for both institutions, which we ultimately
were able to implement successful. And so Signature Bank,
previous weekend, two weekends ago, and then to sell SVB this
past weekend.
Senator Scott. Are you suggesting that the fact that the
board had not approved the offer that was on the table was the
primary reason why you turned down that offer?
Mr. Gruenberg. It was one of the bids. As a matter, we are
required, for a bank, to make a valid offer to the board of the
bank.
Senator Scott. Yes, to approve the offer. That was the
primary reason why you did not----
Mr. Gruenberg. For that bid. The other bid did not have
that issue, but the other bid was more costly than liquidation
would have been.
Senator Scott. So you are suggesting that a private sector
engagement would have increased the cost, not decreased the
cost.
Mr. Gruenberg. At that point, I think, in part because it
takes a bit of time. This was a substantial institution. It
takes some time for a bank to do appropriate due diligence, to
evaluate the assets and liabilities, and to make an informed
bid for the institution. And I think as a practical matter that
was difficult to do given the compressed timeframe over that
initial weekend. I think that is why we set up the bridge
institutions, to try to put in place quickly an orderly bidding
process where any interested party could submit a bid, have an
opportunity to do due diligence in order to evaluate the
institution, and to make an informed bid. I think we were
ultimately able to do that for both of these failed
institutions.
Senator Scott. I will just say, with my remaining time,
that I look forward to the second round of questions. But I
will say, without question, that if we would have had a better
private sector engagement with quicker action from the Feds, I
think we could have avoided the concept that rushed us to a
decision, which was a concern of contagion, in part. That could
have been avoided if we had had a decision made on Friday, if
there were private sector folks willing to make a decision. But
we will have an opportunity, hopefully, on the second round.
Chair Brown. Thank you.
Senator Warner, from Virginia.
Senator Warner. Thank you, Mr. Chairman, and thank you for
having this hearing. It is good to see all of you.
A couple of weeks ago, when we were in a Finance Committee
hearing, I asked Secretary Yellen, that I thought it was very
important that we try to get all the facts out about what
happened here. I very much appreciate, Vice Chairman Barr, you
taking on this unenviable task of sorting this out, because I
had real questions. Was this a regulatory and bank management
failure or was it, as some on my side of the aisle have
indicated, was it a statutory failure? If it was a statutory
failure and an additional test or activity was needed, I am all
for putting it in place.
But my operating premise at this point is if this had been
not a $200 billion bank but a $5 billion bank that management's
mistakes, not having a risk officer, other items, and failure
of basic prudential regulation should have caught this. We had
two chief regulators, a State regulator that at some point, Mr.
Chairman, I hope we would get in front to where were they, and
obviously the San Francisco Fed. So I am going to be very
interested in making sure we get to the bottom of this.
I think some of the things you have already pointed out,
Vice Chair Barr, is that the bank's business, concentrating in
one industry, an industry that I used to be part of, but the
fact that there was such a high concentration of counterparty
risk. My understanding, 10 depositors alone had about $13
billion of deposits. Again, it seems to me interest rate
mismanagement is Banking 101, and again, even at a $5 billion
bank they should have been called out.
I also think the speed--I have often cited the fact that
the largest bank failure we have seen was WAMU back in the
crisis. Sixteen billion dollars left that bank over a 10-day
period. In this case, $42 billion, the equivalent of 25 cents
on every deposit, went out in 6 hours. I am not sure at that
point what regulatory structure could have prevented that. And
at least from reports it seems to me that--and I say this as
somebody who used to be in the VC industry--some of the very
VCs who banked for a long time at SVB may have started this run
and demanded all of their ancillary companies all go out at
once.
So Vice Chairman Barr, can you take us through, with a
little more detail, starting Wednesday night through Friday
afternoon, how this happened, how we got here, and what you
have seen so far?
Mr. Barr. Thank you very much, Senator. I will start where
you did, which is this is a textbook case of bank
mismanagement. The risks the bank faced, interest rate risk and
liquidity risk, those are bread-and-butter banking issues. The
firm was quite aware of those issues. They had been told by
regulators investors were talking about problems with interest
rate and liquidity risk publicly. And they did not take the
action necessary. They were quite vulnerable to risk, to
shocks, and they did not take the actions necessary to meet
that.
What happened on Wednesday night is they belatedly
attempted to improve their liquidity position, and they did it
in a way that spooked investors, that spooked depositors, that
spooked the market. Nonetheless, on Thursday morning, things
appeared calm, according to the bank's report to supervisors,
but later Thursday afternoon deposit outflows started, and by
Thursday evening, we learned that more than $42 billion, as you
had indicated, had rushed out of the bank. That is an
extraordinary pace and scale. Federal Reserve bank staff worked
with the bank through the afternoon, evening, and overnight, to
try and find enough collateral that the Federal Reserve could
continue discount window lending against.
On Friday morning it appeared that it might be possible to
meet the outflow that was expected the day before, but that
morning the bank let us know that they expected the outflow to
be vastly larger, based on client requests and what was in the
queue. A total of $100 billion was scheduled to go out the door
that day. The bank did not have enough collateral to meet that,
and therefore they were not able to actually meet their
obligations to pay their depositors over the course of that
day, and they were shut down.
Chair Brown. Senator Crapo is recognized, from Idaho.
Senator Crapo. Thank you very much, Mr. Chairman.
In your testimony, Mr. Barr, you indicated that you were
going to be, in one of the aspects of what you are working on
you are going to be looking at whether more stringent standards
are needed. And I want to follow up on Senator Warner's
questions relating to this argument that has been put out
there, I think as part of the blame-shifting game, and there is
a lot of that going on right now, that it was a statutory
failure.
That brings us to the 2018 reforms, Senate bill 2155. And I
just want to read to you a couple of sentences out of Senate
bill 2155 with regard to the question of whether that
legislation prohibited our Federal regulators, and particularly
the Fed, from doing anything they needed to do with regard to
applying the appropriate strict standards. And to start out
with I will read--what Senate bill 2155 did was to stop a one-
size-fits-all system and mandate, by changing the word ``may''
to ``shall,'' mandate that the Federal Reserve tailor its
regulations to the risk and so forth. I want to read the
language.
It mandates that the Federal Reserve ``differentiate as it
tailors, differentiate among companies on an individual basis
or by category, taking into consideration their capital
structure, riskiness, complexity, financial activities,
including financial activities of their subsidiaries, size, and
any other risk-related factors that the board of Governors
deems appropriate.''
And then at the conclusion of the statute, that section of
the statute, it makes it crystal clear--and this is the
statutory language--``Nothing in Subsection A shall be
construed to limit the authority of the board of Governors of
the Federal Reserve system in prescribing prudential standards
under this section, or any other law to tailor or differentiate
among companies on an individual basis or by category, taking
into consideration their capital structure, riskiness,
complexity, financial activities, including financial
activities of their subsidiaries, size, and any other risk-
related factors that the board of Governors deems
appropriate.'' And I could go on with multiple times that that
language was repeated.
My question to you is, was there any statutory restriction
faced by the Federal Board of Reserves as it issued its
regulations on tailoring that would have prohibited them from
applying the strictest standards they could to address the
prudential needs of our banking system?
Mr. Barr. Thank you, Senator Crapo. I agree with you there
was substantial discretion under that act for the Federal
Reserve to put in place tailoring rules that were different
from the tailoring rules that it put in place in 2019. I think
there is still, to this day, a substantial discretion in
changing those by notice and comment rulemaking. That is one of
the areas that we will be looking at in our review, whether
there should be appropriate changes.
There are some areas, particularly for smaller firms, firms
between $50 and $100 billion, where the act is more
prescriptive, but for the firms in the category that we are
addressing today there is substantial discretion for the
Federal Reserve to change those rules in a way that is
supportive of safety and soundness and financial stability.
Senator Crapo. Thank you, and I appreciate your answer. You
said recently that the bank failed--referring to SVB--as the
public began to focus on changes in values of securities in the
bank's held-to-maturity account. That is correct, right?
My question to you there is, did the standards on that risk
that are used for supervision, were those changed at all in
Senate bill 2155 in 2018?
Mr. Barr. The standards for capital rules are determined by
the bank agencies. The bank agencies made a decision for
smaller categories of these large banks to not require the
pass-through of AOCI into the capital structure. But that was a
decision that is available to be altered by the discretion of
the bank agencies.
Senator Crapo. And it was not mandated by 2155.
Mr. Barr. No, it was not mandated by 2155.
Senator Crapo. Last question is under the current standards
that are applied with regard to capital, was SVB adequately
capitalized?
Mr. Barr. Yes. Prior to its failure it was categorized
under current capital rules as well capitalized.
Senator Crapo. All right. Thank you very much.
Chair Brown. Thank you, Senator Crapo.
Senator Cortez Masto, from Nevada, is recognized.
Senator Cortez Masto. Thank you, Mr. Chair. Thank you, all
three of you, for being here.
Vice Chairman Barr, let me start with you. You have talked
about how the Federal Reserve is undergoing an investigation to
determine whether the Federal Reserve actually failed in this
instance. Is the Federal Reserve the appropriate body to
conduct this investigation or should we have an independent
investigation?
Mr. Barr. Thank you, Senator. It is a terrific question. We
describe what we are doing as a review. We are reviewing our
own practices. I think it is an important part of risk
management to do self-assessment. I think it would be
irresponsible and imprudent of us not to do self-assessment. We
are going to take that very seriously. We are going to be
thorough, we are going to be transparent, and we are going to
be far-reaching in that self-assessment.
I also think it is appropriate for outsiders to have
independent reviews, and we expect and welcome independent
reviews of our actions.
Senator Cortez Masto. And if you uncover, in your
investigation, that the Federal Reserve failed here in some of
its supervisory roles, will you make that public?
Mr. Barr. Yes. We intend to make our report fully public on
May 1st, and that will report will include--normally it is not
our practice to include, but that report will include
confidential supervisory information such as the exam reports.
Senator Cortez Masto. And in the scope of your review you
identify the scope of that review in your written testimony. Is
there anything in addition that is not in your written
testimony that you will be reviewing here, in that scope?
Mr. Barr. Thank you, Senator. I have asked the staff to be
far-reaching. So if they determine that an issue should be in
scope, they have full discretion to put that issue in scope and
to address it in the review. So there are no limitations on
their ability to review how the Federal Reserve conducted its
supervision and the regulatory oversight of the firm.
Senator Cortez Masto. Thank you. And then one final thing
because there has been a lot of discussion about the previous
rollback of some of the regulation in votes in this body just
recently. If you find that that change in the law impacted the
Federal Reserve's ability to conduct the appropriate test,
based on the tiering of the bank's assets, would you be
forthcoming with that and say so?
Mr. Barr. Yes. We intend to describe where we think
supervisory and regulatory failings occurred. If changing those
to make them what we think is the right standard would require
an act of Congress, we will say so in that review.
Senator Cortez Masto. And then Chairman Gruenberg, the same
to you. You are conducting a scope of the FDIC. Are you
comfortable that you can conduct that and be transparent and
accountable, or should there be an independent body looking at
this?
Mr. Gruenberg. I think there is room for both. As Michael
indicated, I think it is important for each of our agencies to
look internally at our supervision of these institutions and
draw lessons from it. In our case, we have asked our Chief Risk
Officer, who is not directly involved in the supervision
process and whose role is to evaluate risk at the FDIC, to
undertake this internal review of our supervision of Signature
Bank.
Senator Cortez Masto. Thank you. And then there has been a
lot of talk in the media about the executive salaries, about
the executive bonuses, about the sale of stock. Let me ask the
three of you. My first question is what authority do you have
to claw back any of those bonuses or the executive pay, or even
deal with the sale of the stock? And maybe, Mr. Gruenberg, let
us start with you.
Mr. Gruenberg. Thank you, Senator. You know, as I indicated
in my opening statement, the FDIC, for every failed
institution, is required to undertake an investigation of the
conduct of the members of the board, the management of the
institution, as well as professional service providers and
other institution-affiliated parties. We have already begun
that investigation, and we have significant authority under the
law, depending on the findings of the investigation, to impose
civil money penalties, restitution, and as well, bar
individuals from the business of banking.
So the authorities are substantial and we are going to
pursue this as expeditiously as we can. We do not have, under
the Federal Deposit Insurance Act, explicit authority for claw
back of compensation. We can get to some of that with our other
authorities. We have that specific authority under Title II of
the Dodd-Frank Act. If you are looking for an additional
authority, specific authority under the FDI Act for clawbacks,
probably would have some value here.
Senator Cortez Masto. Thank you. Mr. Barr.
Mr. Barr. Thank you. The board does have authority to
pursue actions against individuals who engaged in violations of
the law, who engage in unsafe or unsound practices, who have
engaged in breaches of fiduciary duty. We retain this authority
even after a bank fails. And we stand ready to use this
authority to the fullest extent, based on the facts and
circumstances. And as with Chair Gruenberg, potential
consequences include a prohibition from banking, civil money
penalties, or the payment of restitution. We intend to use
these authorities to the fullest extent we are able.
Senator Cortez Masto. Thank you. Ms. Liang. And I know,
with the Chairman's indulgence.
Chair Brown. Briefly, Ms. Liang.
Ms. Liang. Yes. I defer to the FDIC and the Federal Reserve
on this.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
Chair Brown. That was brief. Thank you, Under Secretary.
Senator Rounds, of South Dakota, is recognized.
Senator Rounds. Thank you, Mr. Chairman. First of all,
thank you to all of you for appearing before our Committee
today.
Vice Chair Barr, in your testimony you said that in
November the Fed supervisors delivered a supervisory finding on
interest rate risk management to Silicon Valley Bank. As you
know, the communication of supervisory findings must be focused
on significant matters that require attention. Matters
Requiring Immediate Attention, or MRIAs, are matters of
significant importance that the Fed believes need to be
resolved right away, including matters that have the potential
to pose significant risk to the safety and soundness of the
banking organization.
My question, Vice Chair Barr, was managing interest rate
risk listed in the MRIA section of the supervisory finding
issued to SVB, and if it was not, why not?
Mr. Barr. Senator, we are still reconstructing the
supervisory record. We have just started the review. But my
understanding is that they were issued a Matter Requiring
Immediate Attention based on the inaccuracy of their interest
rate risk modeling. Essentially, the risk model was not at all
aligned with reality.
Senator Rounds. Pretty interesting statement, if it was not
aligned with reality.
I recognize that you are going to have a complete report,
and I am not going to try to push you too far into this. But I
am really curious. What is the timeframe that is expected for a
response for an MRIA, one that requires immediate attention?
Mr. Barr. Senator, there is not a fixed amount of time. It
depends on the issue, the scope of the issue, the complexity of
resolving the issue. So I do not have a way of giving you a
firm baseline on the action, but they are expected to be a top
priority for management to address. And particularly in the
interest rate environment that we are in, and knowing that the
firm had been cited previously for other problems with
liquidity risk management and interest rate risk management,
supervisors would expect that that would take a high priority
attention by top management.
The supervisors met with the CFO of the firm in the fall,
in October of 2021, to convey the seriousness of the findings
directly.
Senator Rounds. During this time period, perhaps for as
much as 6 months during that previous year, the bank was
without a risk management officer. Is that correct?
Mr. Barr. That is my understanding. I think it is terrible
risk management, obviously, not to have a CRO at the firm. You
need an effective CRO as part of risk management in the firm.
And as I indicated previously, the supervisors had told the
firm in the summer that they had deficiencies in governance and
controls and the management level and at the board level, and
that was related to their failure to appropriately manage risk.
Senator Rounds. My understanding is that there was a period
of time there in which they were without a CFO as well. Is that
correct?
Mr. Barr. I do not have the details of that but I am happy
to get back to you.
Senator Rounds. OK. And I recognize that there is a
difference between a matter requiring immediate attention and a
matter requiring attention. Can you kind of share with us the
difference? I mean, there clearly is a defined difference
between a matter of such importance that it requires immediate
attention versus one where it requires attention. Can you talk
a little bit about what the expectations are between the two?
Mr. Barr. They both really signal that bank management
should pay attention to what is in front of them. They are not
issued lightly. A matter requiring immediate attention is, as
its name suggested, telling managers that they should place a
priority on fixing this issue over other issues. But the
exercise of the line between the two is a matter of supervisory
judgment.
Senator Rounds. Just to follow up a little bit, recognizing
once again that we will get a full report in the next couple of
weeks, but it seems to me that when it turns into an MRIA there
is an expectation that the board, or the executive officers,
would respond fairly quickly. To your knowledge at this point
was that expectation met?
Mr. Barr. Well, I think the fundamental fact is, you know,
the firm failed because of its interest rate risk and its
liquidity risk, and that is, I think, evidence of the fact that
they did not respond strongly enough and promptly enough.
Senator Rounds. In other words, with the information that
you had and that the regulators had, they were able to
determine that there was a problem at the bank, and they
directed that there be a response immediately, an immediate
response, based upon the data that they were able to gather at
that time. That is a reasonable assumption, is it not?
Mr. Barr. I do not know what the timeframe set out in each
of the individual orders were, so I am not able to answer your
question with precision, and I want to be very careful to be
able to do that----
Senator Rounds. That is fair.
Mr. Barr. ----and not go beyond the record.
Senator Rounds. But we will receive that information when
the full report comes out.
Mr. Barr. Yes. On May 1st we will release the full report,
and it will include the reports of examination, so people will
be able to see what is in the record.
Senator Rounds. Very good. Thank you. Thank you, Mr.
Chairman.
Chair Brown. Thank you, Senator Rounds.
Senator Menendez, of New Jersey, is recognized.
Senator Menendez. Thank you, Mr. Chairman.
In 2018, Congress passed a bill which was signed into law
by President Trump, that relaxed regulation for institutions
like Silicon Valley Bank. That law, which I opposed, exempted
those banks from enhanced prudential standards stress tests,
raised the threshold at which a bank would be considered
systemically important. But even as that law kept Silicon
Valley Bank off the list of systemically important
institutions, the Fed and the FDIC rightly cited systemic risk
to justify their actions to prevent runs on other banks.
So Mr. Barr and Mr. Gruenberg, each of you voted to invoke
what is known as the, quote, ``systemic risk exception.'' With
a simple yes or no, can you tell me that the situation at
Silicon Valley Bank posed systemic risk?
Mr. Barr. Thank you, Senator. I think it is an absolutely
crucial question. The invocation of systemic risk exception
required judgment as well as incoming data, and our best
assessment, the assessment of a unanimous Federal Reserve
board, and a unanimous board of the FDIC and the Treasury
Secretary was that we were seeing signs of contagion in the
banking system that threatened to put at risk depositors and
banks across the country. And to make sure that banks could
continue to lend in their communities, to make sure that
depositors were safe, to make sure that businesses could pay
payroll, we thought it was important to invoke that systemic
risk determination----
Senator Menendez. Because you felt that Silicon Valley Bank
was a systemic risk at that point in time?
Mr. Barr. The judgment was really broadly about the risk
that the failures of these institutions and other stresses in
the system were posing as a whole, as opposed to a particularly
decision only about----
Senator Menendez. But that sounds like a distinction
without a difference. If any single bank's failure can cause
contagion that threatens the system, then it seems that the
bank should be considered systemically important. And so you
all need to have an obligation to be clear with us, and with
the American people, when you took extraordinary steps to
protect uninsured depositors that could very well lead to
increased fees charged to banks and ultimately to consumers.
So I think we need to be clear about what is a systemic
risk. And so I am looking for a more crystallized version of
that. I was here in 2008. I do not want to live through it
again.
Do you agree with President Biden's statement 2 weeks ago
that Congress should strengthen rules for banks to make it less
likely that we will see another failure similar to that of
Silicon Valley Bank?
Mr. Barr. Thank you, Senator. I think it is important for
us to strengthen capital and liquidity rules. We are working on
strengthening them as part of our Basel III reforms and our
holistic review of capital, and I think we need to move forward
with that. And as both Chair Gruenberg and I suggested, with a
long-term debt requirement that would provide an additional
cushion in addition to capital for large institutions. That
work will need to go through notice and comment rulemaking,
there will be transition periods for it, but I think that is
really important work for us to do, and I am committed to doing
it.
Senator Menendez. Well let me ask you, Mr. Barr. This
morning I, along with Senator Rounds and other Members of this
Committee, sent a letter to Chairman Powell asking him to
explain whether the Fed applied enhanced supervision or
prudential standards to Silicon Valley Bank or any similar-
sized bank using the Fed's existing authority.
We have also learned from public reporting that Fed
supervisors began flagging problems at the SVB as far back as
2021. Now I understand we have a lot more to learn about the
facts of what transpired, both with the bank with any
management failures, but I expect that we are going to see that
all factored in as part of a review.
So as you begin that review, let me ask you, do you agree
with Chairman Powell's statement last week that from what we
know it is, quote, ``clear that we do need to strengthen
supervision and regulation''?
Mr. Barr. Yes, I absolutely agree with that.
Senator Menendez. Thank you for that.
Now last, I would love to know, Mr. Gruenberg, about, as we
think about should we raise the Federal deposit insurance, what
percentage of account holders does that account for, how much
is private versus business, and what are the costs that are
associated with it. So I will just put that out there for you
to submit an answer to the record, because it will take more
time than what I have.
But the last point I want to make is, we have seen a flight
from regional and community banks to, quote/unquote, ``too-big-
to-fail'' banks. And a concentration of deposits at a select
few institutions also brings about its own risks to the
financial system. At the end of the day, it seems that we are
incentivizing entities to go to too-big-to-fail banks. It only
makes it even more consequential in terms of too big to fail.
Is that what we want to ultimately achieve in this process?
Mr. Barr. Senator, I think that the goal of the actions
that we took are to make sure that we have a thriving and
diverse system of banking in the United States, including
community banks and regional banks that are the lifeblood of
many communities all across the country.
Senator Menendez. Thank you, Mr. Chairman.
Chair Brown. Thank you, Senator Menendez.
Senator Kennedy, of Louisiana, is recognized.
Senator Kennedy. Thank you, Mr. Chairman. Thank you all for
being here today.
Chairman Barr, the Federal Reserve stress-tested 34 banks
in 2022. Is that correct?
Mr. Barr. Senator, I do not have the exact number in front
of me, but that sounds correct.
Senator Kennedy. Well, I have your report. It says 34. And
the cutoff was $100 billion. Is that right?
Mr. Barr. Yes.
Senator Kennedy. OK. You did not stress-test Silicon Valley
Bank, did you?
Mr. Barr. No. Under the Federal Reserve board's rules that
were put in place for transition into the stress testing, it
takes a while for a firm to be considered above the threshold.
They need to have a rolling four-quarter average----
Senator Kennedy. Did you stress test Silicon Valley Bank in
2022?
Mr. Barr. No.
Senator Kennedy. OK. Silicon Valley Bank had $100 billion,
more than $100 billion in assets at the end of 2021, did it
not?
Mr. Barr. Senator, as I was explaining, the transition
rules in place at the time require a rolling four-quarter
average to be above that amount----
Senator Kennedy. OK.
Mr. Barr. ----and then if the firm happens to be in a year
that is not the year that, since it is an every-other-year
test, that a test is running, then it waits until the next
year. So for Silicon Valley Bank that would have meant 2024
would be its first stress test.
Senator Kennedy. But the point is you did not test Silicon
Valley Bank.
Mr. Barr. We did not apply a stress test to Silicon Valley
Bank. It was, of course, using its own stress test----
Senator Kennedy. Did you have the authority to do it?
Mr. Barr. Under our existing regulations, no. We would have
to change our regulations to have that authority.
Senator Kennedy. Under the Congress' amendment to Dodd-
Frank--Senator Crapo talked about it, 2155, Section 252.3--is
it not a fact that we gave the Federal Reserve the authority to
stress test Silicon Valley Bank?
Mr. Barr. Under that legislation the Federal Reserve could
have put in place a rule defining the word ``periodic''----
Senator Kennedy. But you did not.
Mr. Barr. ----in a different way than was done.
Senator Kennedy. Right. But did not, did you?
Mr. Barr. The Federal Reserve did not do that.
Senator Kennedy. OK. If you had stress tested--well, let me
put it this way. If you had stress tested Silicon Valley Bank
in 2022, it would not have made any difference, would it?
Mr. Barr. I do not know the answer to that question.
Senator Kennedy. Well, you did not test for Silicon Valley
Bank's problem. I have read your report. You stress-tested
these 34 banks for falling GDP, spike in unemployment, and
defaults on commercial real estate. Is that not correct?
Mr. Barr. Yes. In a typical adverse scenario for banks, we
are testing falling interest rates----
Senator Kennedy. But that was not our problem in 2022.
Mr. Barr. I completely agree with you.
Senator Kennedy. That is not our problem today. The problem
is inflation-high interest rate and loss value in Government
bonds, is it not?
Mr. Barr. I completely agree with you.
Senator Kennedy. So you stress-tested in 2022 for the wrong
thing.
Mr. Barr. The stress test is not the primary way that the
Federal Reserve or other regulators test for interest rate
risk.
Senator Kennedy. But you stress-tested for the wrong thing.
Mr. Barr. As I said, Senator, I agree with you that it
would be useful to test for hiring rising interest rates. That
is why, in our alternative scenario, multiple scenario that we
put in place for this year's stress test, we do that. These
decisions were made before I arrived, but I agree with you that
it would be better to do that.
Senator Kennedy. But it is like somebody going in for a
test for COVID and getting a test for cholera, is it not?
Mr. Barr. I do not know enough about either of those tests
to know.
Senator Kennedy. Yeah. Well, they are different.
So all this business about, well, the amendment to Dodd-
Frank kept them from stress-testing. The way I see it, you
chose not to stress-test, and if you had stress-tested Silicon
Valley Bank you would not have caught the problem.
Mr. Barr. As I said, Senator, I agree with you that the
statute requires periodic stress-testing. The Federal Reserve
made a decision about how to implement that in 2019.
Senator Kennedy. Right.
Mr. Barr. That resulted in SVB not being tested until, plan
to be tested until 2024. But as I said, the stress test
requirements----
Senator Kennedy. You knew from the--I am sorry to cut you
off but the Chairman is going to cut me off in a second--but
you knew, the Federal Reserve knew well in advance that Silicon
Valley Bank had a problem with holding too much of its money in
interest rate sensitive long Government bonds, did it not?
Mr. Barr. I think the investing public and the Federal
Reserve which cited it for interest rate risk problems knew
that it had interest rate risk. But nobody anticipated the
bank----
Senator Kennedy. But the Federal Reserve did not do
anything about it, did it?
Mr. Barr. I am sorry. I could not hear you.
Senator Kennedy. The Federal Reserve did not do anything
about it, did it?
Mr. Barr. I disagree with that, Senator, respectfully. The
Federal Reserve did cite these problems to the bank and
required them to take action. Bank management failed to act on
those.
Senator Kennedy. You did not follow up, did you?
Chair Brown. The Senator's time has expired. I sit here and
watch Mr. Barr reluctant to criticize some of the moves of his
predecessors at the Federal Reserve. I will leave it at that.
Senator Smith, from Minnesota, is recognized.
Senator Smith. Thank you, Mr. Chair, and thanks to our
folks for being here today. I really very much appreciate it.
So I want to just start by reiterating what I know some of
my colleagues have said, which was that as these two banks
collapsed I heard you say very clearly, Vice Chair Barr, the
Silicon Valley Bank in particular collapsed because of what
looks like gross mismanagement, and failure to manage even the
most basic of risks, liquidity and interest rate risks.
The Biden administration and regulators took strong and
decisive action to protect people and to keep our banking
system safe and secure. And the reality is that that action
that you took was necessary, but it was also extraordinary.
Extraordinary actions were called for in the moment. And you,
of course, do not want to have to use extraordinary actions.
You want to be able to rely on banks to make good decisions and
to protect their shareholders and to protect their depositors.
But let me just clarify one thing before I want to follow
up a little bit on Senator Kennedy's questions. The Fed, under
the previous Vice Chair of Supervision, put into place rules
that I think there is a question about whether those rules--I
mean, I think even in the moment you were critical of those
rules. Is that right?
Mr. Barr. Yes, that is correct.
Senator Smith. And so your review will take a look at what
would have happened if those rules had not been in place, and
then you can make decisions about what new rules need to be in
place to protect from this kind of extraordinary situation that
we saw with these two banks. Is that correct?
Mr. Barr. Yes, that his correct, Senator.
Senator Smith. So I think that is just important for us all
to understand here, as we think about what has happened.
The Silicon Valley Bank's failure was the result, it
appears, of management failures at many levels, all coming
together at the worst possible time, and I am particularly
struck by the bank's failure to manage interest rate risk--you
and I talked about this last week--which is basic bank
management. It is not rocket science to manage interest rate
risks.
And, you know, interest rates were near zero for more than
a decade, and a lot of business models, it appears, including
Silicon Valley Bank's business model, was predicated on
basically free money. And that obviously presents risk when
that changes.
So I am concerned, Vice Chair Barr, about other
institutions, banks and nonbanks alike, how they are managing
what must be similar interest rate risks. Could you just
address that, and talk about how the Fed right now, and others,
are monitoring that interest rate risk and what that tells you
about what we need to do differently.
Mr. Barr. Thank you, Senator. Let me just start with a
basic point which the banking system is sound and resilient.
Most banks are highly effective in managing interest rate risk
and liquidity risk. It is the bread-and-butter kind of work of
bank management.
So we are monitoring the financial system, monitoring the
banking system. We are looking at interest rate risk and
liquidity risk across the banking system to assess that, where
banks need to do better at interest rate risk and liquidity
risk management, reporting that out. But I think the
fundamental point is the banking system is sound and resilient.
Senator Smith. I might have mentioned to you when we spoke
that I had a chance to meet with a group of Minnesota bankers,
including Minnesota has more community bankers, I think, per
capita than any State in the country. And they were eager to
point out to me that their business models are very different
from the business models of highly risky enterprises like
Silicon Valley Bank. So I appreciate you raising that. In fact,
I have been getting texts from some of my bankers today,
watching this hearing, and wanting to point out that
difference.
Mr. Barr, can you talk about the risks of interest rates,
sort of this interest rate risk as it might affect nonbanking
institutions as, for example, mortgage loan companies?
Mr. Barr. Thank you. First let me just say, as you
indicated, I hear from community bankers as well, and I know
many other Senators have in your home States, the vibrancy and
the health of that community banking sector, and we see that
too.
We are obviously looking at interest rate risk as it
affects not only banks but also the nonbank sector. We look at,
of course, nonbank mortgage servicers. We look at hedge funds.
We are looking broadly across the financial landscape to see
where those risks might arise and how those might propagate in
other ways into the bank system. So we are highly attuned to
that.
But again, I think the basic point is that the banking
system is sound and resilient, depositors are safe, and we
have, through our actions, demonstrated that.
Senator Smith. Thank you very much. Thank you, Mr.
Chairman.
Chair Brown. Thank you, Senator Smith.
Senator Lummis, of Wyoming, is recognized.
Senator Lummis. Thank you, Mr. Chairman, and thank you
panel. I want to follow up a little bit on Senator Kennedy's
line of questioning. As I read Statute 5365, Section C, Risks
to Financial Stability, Safety, and Soundness, ``The board of
Governors may order or rule''--excuse me--``the board of
Governors may, by order or rule promulgated pursuant to Section
553, apply any prudential standard established under this
section to any bank holding company with consolidated assets
equal to or greater than $100 billion.'' So that was Silicon
Valley Bank.
Then you have got Statute 2155, that when it was changed
from ``may'' to ``shall'' made mandatory a new duty on the
Federal Reserve to take into account higher-risk profiles
presented by certain banks, and to strengthen supervision of
those banks.
So you look at Silicon Valley Bank. They had a number of
activities with above average risk profiles--the concentration
of deposits, the quantity of uninsured deposits, 94 percent
uninsured deposits. Then you look at Federal Reserve authority
under Regulation YY, to impose additional risk-based or
leverage capital or liquidity requirements or other
requirements the board deems necessary to carry out the
purposes of Dodd-Frank.
I look at all this and I think that among all these
statutes and regulations the Fed had plenty of authority to
prevent Silicon Valley Bank and the problems it encountered,
and was aware pretty early on that there were unique problems
there and that it was a very, very unique financial institution
because of its risk profile, but did not do it.
As I look at what authority you have been given, I cannot
think of another additional rule or regulation or law that you
needed. Tell me whether you agree with that or not.
Mr. Barr. Senator, I agree that the Federal Reserve has
substantial discretion to alter, through notice and comment
rulemaking, the rules that were put in place in 2019 with
respect to firms over $100 billion. There are some areas that
the statute would provide some limitation to, but there is
substantial discretion for the Federal Reserve to change its
rules for firms in the $100 to $250 billion range.
Senator Lummis. Change its rules. What would it have to do?
Mr. Barr. We would have to go through a notice and comment
rulemaking process.
Senator Lummis. Oh, I do not mean the procedure for
changing a rule. I mean, what changes would you make to the
rule?
Mr. Barr. Senator, we have not made a definitive conclusion
on that. We are undertaking this review of SVB's failure in
order to better assess whether it would be appropriate to
change capital rules and liquidity rules of this size firm, for
firms more generally. We are looking at that right now.
Senator Lummis. Is fractional reserve banking overly risky
in this age of online banking?
Mr. Barr. Senator, let me just repeat what I said before,
which is that overall the safety and soundness of the banking
system is strong. Banks are safe and sound. Depositors should
feel assured that their deposits are safe.
Senator Lummis. Well, here is the problem, though. As I see
it, the way that these banks have been managed, Wyoming's
community banks may end up paying for this through higher
assessments from the FDIC. Am I correct, Mr. Gruenberg?
Mr. Gruenberg. As I indicated, Senator, in regard to these
two institutions any cost of the deposit insurance fund from
covering uninsured deposits is required by law to be recovered
through an assessment on the banking industry.
Senator Lummis. Exactly.
Mr. Gruenberg. If I could make one additional point. The
law does give the FDIC authority in implementing that
assessment to consider the types of entities that benefit from
any action taken or assistance provided.
Senator Lummis. So are you saying that you are able to
exempt Wyoming's community banks from paying for this?
Mr. Gruenberg. I am suggesting we have some discretion
there and we are going to consider that carefully.
Senator Lummis. Will you exempt community banks from having
to pay for this?
Mr. Gruenberg. That is a judgment our board is going to
have to make, and as I indicated, we anticipate going out for
notice and comment public rulemaking in May to implement the
assessment. And as I indicated, we have discretion here----
Senator Lummis. Do you have to go through APA rulemaking to
assess?
Mr. Gruenberg. That is the law. That is a legal
requirement.
Senator Lummis. Thank you, Mr. Chairman.
Chair Brown. Thank you, Senator Lummis.
Senator Warren, of Massachusetts, is recognized.
Senator Warren. Thank you, Mr. Chairman.
So we just experienced the second- and third-largest bank
failures in American history. Executives at SVB and Signature
took wild risks and must be held accountable for exploding
their banks. And I will soon introduce a bipartisan bill to do
exactly that. But let us be clear. These collapses also
represent a massive failure in supervision over our Nation's
banks.
So coming out of the 2008 crisis, Congress put tough
banking rules in place. Now big banks hated them, and their
CEOs lobbied hard to weaken those rules. Ultimately, Congress
signed off and then it got bad, really bad. Regulators burned
down dozens of safeguards that were meant to stop banks from
making risky bets.
The three of you here today represent the U.S. Treasury,
and two of our top banking regulators. I would like to know if
you believe that we need to strengthen our banking rules going
forward to ensure the safety of our financial system.
Vice Chair Barr, let me start with you. Do you believe we
should strengthen our financial rules going forward?
Mr. Barr. Yes, I do, Senator.
Senator Warren. Thank you. President Biden agrees with you
as well. Two weeks ago he stated that we must, quote,
``strengthen the rules for banks to make it less likely that
this kind of bank failure would happen again.''
Chairman Gruenberg, what about you? Do you agree with
President Biden that we need to strengthen our banking rules?
Mr. Gruenberg. I do agree, Senator.
Senator Warren. Good. And now Under Secretary Liang, do you
agree with the President on this?
Ms. Liang. Senator, I agree that we do need to prevent
these types of bank failures. And----
Senator Warren. Well, I am asking you--of course we need to
prevent them. But that is not by simply wishing it. It is by
stronger regulation. Is that right?
Ms. Liang. I agree, Senator.
Senator Warren. OK. Good. Now we need better laws here in
Congress but let us also talk about how we can strengthen the
rules today even before Congress acts. Under current law, the
Federal Reserve has the discretion to apply stronger prudential
standards on banks with assets between $100 billion and $250
billion, exactly the size of Silicon Valley Bank. That
authority is not being used right now.
Vice Chair Barr, as you use your authority to strengthen
rules for the largest banks in this country will you be
reaching banks with assets of at least $100 billion?
Mr. Barr. Senator, we, of course, would need to go through
a notice and comment rulemaking----
Senator Warren. I understand.
Mr. Barr. ----in this process. But I anticipate the need to
strengthen capital and liquidity standards for firms over $100
billion.
Senator Warren. OK. So this is the area we are looking at.
We are going to push down further in terms of the greater
scrutiny.
Chairman Gruenberg, let me turn to you. Once the Fed began
torching rule after rule in 2018 for big banks, the FDIC, under
your predecessor, joined in on the fun and also started
weakening FDIC rules across the board--capital and liquidity
requirements, stress tests, you name it. In fact, your
predecessor explicitly told these banks that if FDIC bank
examiners were asking too many questions that they should,
quote, ``let us know,'' end quote. Now there is a banking
regulator who makes it clear that she is there to serve the big
banks instead of the American public.
Chairman Gruenberg, will you commit to using your authority
to undo the rollbacks that your predecessor initiated and to
strengthen the rules and supervision for banks with greater
than $100 billion in assets?
Mr. Gruenberg. Senator, as I think you know I was a member
of the board at that time----
Senator Warren. I do.
Mr. Gruenberg. ----and voted against those measures. And I
certainly think it is appropriate for us to go back and review
those actions in light of the recent episode and consider what
changes should be made.
Senator Warren. Well, I have to say review sounds a little
wishy here. You did not think they were good rules to begin
with.
Mr. Gruenberg. My views have not changed, Senator.
Senator Warren. All right. So you still think they were a
bad idea?
Mr. Gruenberg. I do.
Senator Warren. Got it.
You know, each of you at this table has authority that you
could exercise right now to strengthen rules for big banks and
to ensure that our banking system and our economy are safer. I
urge you to use that authority and I urge my colleagues here in
Congress to do our part to protect American families and small
businesses from yet another banking crisis.
Thank you. Thank you, Mr. Chairman.
Chair Brown. Thank you, Senator Warren.
Senator Hagerty, from Tennessee, is recognized.
Senator Hagerty. Thank you, Mr. Chairman. If you would
allow me just a moment to speak to the tragedy that occurred at
the Covenant School in Nashville, Tennessee, yesterday. A
depraved person, a sick person executed a tragic act and it
yielded a terrible result. And my entire community is mourning.
We are mourning for the families, for the victims, for
everybody concerned.
I also want to acknowledge the bravery of the Nashville
Police Department. They stepped into harm's way and within 14
minutes brought the situation under control. Tremendous bravery
at a time when it is called for, and I want to acknowledge
their sacrifices.
Now let us turn to the matter at hand, and I know that
politics in Washington always seizes upon any crisis as an
opportunity to achieve whatever regulatory or legislative
opportunity or goal that may be in front of them. But I would
like to talk about managerial execution here. Specifically, I
would like to start with you, Chairman Gruenberg. I would like
to talk through a series of events that followed SVB's failure
2 weeks ago.
As you know Silicon Valley Bank was taken into receivership
on a Friday morning. That gave the FDIC 3 days to find a buyer
before markets opened on Sunday night. You had tremendous
resources at your disposal, 18 years on the FDIC board
yourself, detailed resolution plans, over 5,000 employees, and
interest from a number of banks to bid, including at least one
formal offer as I understand it.
Instead of successfully executing this process, however,
the FDIC used the systemic risk exemption to guarantee all
deposits at SVB, creating tremendous uncertainty across our
economy. And now, 2 weeks later, the FDIC has announced the
sale of less than half the failed bank's assets at a loss of
$16.5 billion.
So my first question, in the joint statement released on
March 12th you said, quote, ``No losses associated with the
resolution of Silicon Valley Bank will be borne by the
taxpayer.'' Is that still your position?
Mr. Gruenberg. Senator, yes. As you know----
Senator Hagerty. Well, the problem is, with two partial
sales completed and over $22 billion in losses already accrued,
that position just does not square with reality. These losses
are borne by the Deposit Insurance Fund. That fund is going to
be replenished by banks across the Nation that had nothing to
do with the mismanagement at Silicon Valley Bank or the failure
of supervision here. In fact, that is going to be addressed by
a special assessment to those banks. And as we all know, these
banks will have to pass these costs along. Last time I checked,
those costs get passed along to the consumer. Those consumers
are American taxpayers.
Chairman Gruenberg, invoking the systemic risk exemption is
a last resort emergency option to the typical methods of
resolution, and it begs the question of why you had to invoke
that extraordinary exception. Just this past Sunday's
announcement of a new purchaser of part of SVB, not only were
serious losses incurred but the FDIC entered into a loss-
sharing agreement with the acquiring bank and a $70 billion
line of credit was extended to the purchaser. That is a pretty
sweet deal. This makes me wonder what prevented the FDIC from
coming to a deal like this 2 weeks prior.
You told Ranking Member Scott that you received bids for
SVB over the weekend following its collapse, but that they were
insufficient. What was your counteroffer, and did you engage
with the board of the bank that did not approve this to get
them to step up and approve it?
Mr. Gruenberg. We received one offer that was, frankly,
more expensive than the cost of liquidation. It did not appear
to be a viable offer at that moment.
Senator Hagerty. Was there a counteroffer to that?
Mr. Gruenberg. I would have to check with our staff in
terms of how much of a back-and-forth occurred.
Senator Hagerty. Let us talk about the bidding process
itself. Were certain banks dissuaded by you or anyone else
associated with this from bidding on SVB, either before or
after the bank was taken into receivership?
Mr. Gruenberg. No, Senator.
Senator Hagerty. Throughout the course of that weekend I
was inundated with phone calls, telling me that legitimate
bidders were being waved off of the process. It is one thing to
reject a bid if it is bad, but if ideology had anything to do
with this, this entire Committee is going to be deeply
concerned about that.
I look forward to the GAO's report on this because the
result of this failure places the banking sector in a state of
disarray that we have never seen before. In spite of all the
preparation and tools at your disposal, the FDIC failed to do
its job. There was obviously enough demand to orchestrate a
sale. What it looks like to the American people is that you
simply did not feel the incentive to execute and leaned on the
systemic risk exemption to buy time, and in doing so have
placed the entire U.S. banking sector into uncharted waters. I
do not see any apparent improvement in outcome, and this is a
disgrace. I look forward to the GAO review, and I hope that we
get to the bottom of this.
Vice Chair Barr, very quickly I would like to come to you.
In response to the 2008 financial crisis, the size and scope of
the regulatory regime was dramatically expanded by Congress.
Regulators like yourselves were given powers, not to mention
hundreds of academics at your disposal, with the sole job of
monitoring and addressing risk to the financial system. All of
this was in hopes of identifying and preventing bank failures
that pose systemic risk.
And in spite of all these tools, we find ourselves in a
situation today that is unprecedented. It is pretty clear that
Silicon Valley Bank was woefully mismanaged. Their management
team, which did not have a Chief Risk Officer for 8 months last
year, yet created and maintained a Chief Diversity, Equity, and
Inclusion Officer, allowed their bank to accumulate truly
shocking levels of risk.
And while this was occurring, the San Francisco Fed was
focused on researching left-wing policies that they had
absolutely no expertise in, ignoring one of the most basic
risks in banking--interest rate risks. Perhaps most damning of
all, until the day of their failure SVB's CEO sat on the board
of the San Francisco Fed.
So Mr. Barr, in your review of what went wrong in your
supervision, will you consider the level of managerial
distraction that was evident at the San Francisco Fed?
Mr. Barr. Senator, the staff have free rein to examine any
issue that might have addressed supervision. I think the core
issues are the ones I suggested at the outset, and they are
really basic--interest rate risk mismanagement by the bank,
liquidity risk mismanagement by the bank. The examiners at the
San Francisco Federal Reserve Bank called those issues out to
the board, called them out to the bank, and those actions were
not acted upon in a timely way. So, in a way, the issue is
pretty straightforward.
Senator Hagerty. I hope you will dig into the urgency, the
sense of urgency that was brought to bear on this, and the
sense of pressure, and if every tool at their disposal was
used, because they certainly were doing other things well
beyond their remit.
Thank you. Thank you, Mr. Chairman.
Senator Tester [presiding]. Absolutely. Thank you for your
questions. I am going to ask the questions now, if I might.
In 2008, I voted against the bailouts of the big banks
because I do not support taxpayer bailouts. We do need to
protect American consumers and small business folks. We need to
hold bank executives accountable when they screw up. And if the
regulators were asleep at the wheel we need to hold them
accountable.
Look, a correlation I would say is when I run my farm if I
look at the price of diesel fuel and seed, and that his all I
look at, I do not get the whole picture. And quite frankly, I
will not be in business long. If regulators are only looking at
capital, that is not everything that is going on.
At Silicon Bank they had a concentration in a highly
volatile industry, they had grown rapidly, they had mostly
uninsured deposits, their investments were poorly timed with
interest rate increases that were clearly forecasted--all
setting the conditions for a classic bank run, one that
happened quickly due to new technologies that are out there.
So Vice Chair Barr, from 2020 to 2022, the Silicon Valley
Bank grew from $71 billion to more than $200 billion. This was
a very rapid growth. It was heavily concentrated with techs and
startups, industries that have always been volatile. Then the
bank took those mostly uninsured deposits and invested them in
long-term U.S. Treasuries, when the Fed had been clearly
forecasting that rates were going to go up, which the bank
executives should have known because their CEO was a director
at the San Francisco Fed. And for 2 years it seems that Federal
regulators were flagging concerns about this situation.
Is that a fair statement, that for 2 years the Fed was
flagging concerns about this bank's financial viability?
Mr. Barr. Senator, the examiners were focused on interest
rate risk and liquidity risk at the beginning of November 2021,
at least as far as I know from the supervisory record thus far.
I have not seen something that said that the supervisors were
focused on whether the firm was viable, but our review is
underway.
Senator Tester. But does that not impact the viability?
Mr. Barr. Yes, Senator. A core safety and soundness risk,
liquidity risk and interest rate risk are core risks that the
bank mismanaged.
Senator Tester. So were the regulators physically in the
bank? I have talked to a lot of intermediate-sized banks. They
tell me that the regulators are right there 5 days a week, 7
days a week if they are open 7 days a week. Were the regulators
in that bank?
Mr. Barr. Physically speaking----
Senator Tester. Yes.
Mr. Barr. ----I actually do not know. Part of the
supervisory period is during the pandemic when activities were
happening----
Senator Tester. I have got you.
Mr. Barr. ----in part remote.
Senator Tester. OK.
Mr. Barr. So I do not have yet----
Senator Tester. But I just want to point out the fact that
the pandemic has been over for a bit, for quite a bit, and the
opportunity for those regulators to be in there would have been
long before a month ago.
Mr. Barr. Yes, Senator. I do not have the full supervisory
record. We have just begun our review. And I want to be careful
to answer only questions I know.
Senator Tester. Do you know if the Fed supervisors met with
the board of directors of Silicon Valley Bank?
Mr. Barr. I do not know that yet. I know they met with
senior management, but I am still reviewing that.
Senator Tester. So you would not know if Silicon Valley
Bank had a risk committee, and if, in fact, the Fed supervisors
met with the risk committee?
Mr. Barr. I will know that by the May 1st report.
Senator Tester. So were they warned about potential finds?
Mr. Barr. I am sorry. Could you say that again?
Senator Tester. So, I mean, look, they had some problems.
Were they warned to either fix them or they were going to get
fined?
Mr. Barr. The Matters Requiring Attention and Matters
Requiring Immediate Attention, to my understanding, require the
fixing of the problem, but I do not know whether they have
highlighted any additional steps that might be taken. Certainly
the firm was on notice that they needed to fix those problems
quite clearly since November of 2021.
Senator Tester. But yet they did not.
Mr. Barr. They did not.
Senator Tester. So at what point in time do the Fed
regulators drop the hammer on this outfit? I mean, I do not
even need to get going on the bank CEO taking a ton of money,
right before this thing went belly up, as it was going belly
up. At what point in time--we could have all the regulations on
the book. I have talked to a lot of bankers who said if this
would have happened before Dodd-Frank the regulations would
have stopped this from happening.
And we have Dodd-Frank, and we did make 2155 to tailor the
regulations to fit the risk--that was a big part of it--on the
intermediate banks, and, in fact, on the small banks too. But
yet for over a year--and correct me if I am wrong, Mr. Barr--
for over a year regulators were saying to this bank,
``Straighten up and fly right,'' and they never did a damn
thing about it, and the regulators did not make it so damn
miserable--which my understanding is regulators are pretty good
at that when they want to be--make it so damn miserable that
these folks would adjust their business plan to take care of
the risks that were in their bank.
Mr. Barr. Senator, I agree that the risks were there, that
the regulators were pointing them out, and the bank did not
take action. It is ultimately, in the first instance, the bank
management responsibility to fix these problems, and they
failed to do it.
Where we did not take enough action, the Federal Reserve
supervisors did not take enough action, we are going to be
talking about that in our review and we expect to be held
accountable for it.
Senator Tester. So I have got to tell you, Michael Barr, I
am not a banker. I ain't even close to being a banker. I am a
dirt farmer. And I am going to tell you, when they laid out
what had happened at this bank over the last 2 years, you did
not have to be an accountant to figure out what the hell was
going on here.
Mr. Barr. I agree.
Senator Tester. And all I have got to say is as you do your
look-back into what transpired, it better be fixed. If it is
the regulators' fault, it better be fixed. If it is the
regulation fault, it better be fixed. If it is something else,
I hope there is a report to this Committee saying, ``You know
what, guys? This can happen again unless this happens.'' But it
looks to me--I will just say this and I am looking from the
outside in--it looks to me like the regulators knew the problem
but nobody dropped the hammer.
Mr. Barr. Thank you, Senator Tester. As I said, our review
is going to be thorough, it is going to be open, and if we find
problems like the ones that you just described, we are going to
say it clearly and describe what we think should be done.
Senator Tester. When do you think that report will be done?
And I am way over time. Sorry. When do you think that report
will be done?
Mr. Barr. May 1st.
Senator Tester. May 1st. So we have got a month.
Senator Scott. We should have them back after the report is
done.
Senator Tester. We look forward to that. Thank you.
Senator Scott [presiding]. Senator Vance.
Senator Vance. Thank you, Mr. Chairman, and thanks to the
three of you for being here.
I want to talk just a little bit about the inherent
unfairness and what I think transpired with Silicon Valley
Bank. I come from the venture capital industry, and this is a
statement against interest and certainly a statement against
the interest of some of my friends. But the business model of
Silicon Valley Bank was to provide banking services to venture
capital firms and to venture-backed companies. And if you think
about the fundamental trade that was implied--and I would even
say explicit in their business model--what they did is they
offered highly beneficial financial products to venture-backed
companies and venture-capitalists in exchange for having a
large number of deposits in your Silicon Valley Bank account,
sometimes often exclusively.
So a common practice, for example, was to say that you
would provide a line of credit to a venture capital firm but
only if that firm put all of its money, 100 percent of its
deposits, in Silicon Valley Bank, or they would offer private
jet financing and other goodies that are basically beneficial
only to the very wealthy, in exchange for having all of your
deposits at Silicon Valley Bank.
Now given that that was implied in the business model of
the bank, I think it is important that we use the term
``bailout''--and I know that some of you do not like that term,
but I think it is the only term that applies fairly here,
because we, using excess fees on community banks all across the
country, effectively chose to bail out the uninsured depositors
at Silicon Valley Bank.
Now there are some outrageous examples there. I think one
firm had deposits over $3 billion, and another, I think Roku
had deposits of $500 million. But there were a lot of people, a
lot of firms at Silicon Valley Bank that had deposits well over
$1 million, well over $5 million. And what we did, in practice
do was bail them out.
I guess my first question, I put this to all three of you,
and because time is limited I would like you to answer quickly,
is what is the threshold? Whether you guys meant to or not, I
think the implication of what happened with Silicon Valley Bank
is that there are a lot of people who expect that their
uninsured deposits are effectively insured at an unlimited
level, or if you are a banker there is an assumption, for a lot
of people, that at a certain level if you are systemically
important enough you uninsured depositors are going to get
bailed out.
Maybe just go from left to right, starting with Mr.
Gruenberg. But at what level do you think uninsured deposits,
in theory, are effectively unlimited, uninsured in our banking
system today?
Mr. Gruenberg. If I may say, Senator, you are asking
important questions. I think we have a lot of lessons to learn
from this episode. The decision to cover uninsured depositors
at these two institutions was a highly consequential one----
Senator Vance. Yes.
Mr. Gruenberg. ----that has implications for the system. I
think we need, and I indicated in my statement earlier, we need
to do a comprehensive review of our deposit insurance system
and consider the questions that you raise. The FDIC is going to
undertake that, and by May 1 we will deliver a report,
including policy considerations to take into account. So we
want to try to be responsive on that.
Senator Vance. Thank you. Mr. Barr.
Mr. Barr. I also think you raise important questions. When
we were looking at the systemic risk determination with respect
to these institutions we were thinking about the risk to the
broader financial system, not the particular depositors at one
or two institutions. We were thinking about and concerned about
the extent to which that could impact regional banks across the
country, community banks across the country.
We were hearing concerns from bankers and from depositors,
from businesses around the country. It is a difficult judgment
but one that, at the end of the day, unanimous FDIC board and a
unanimous Federal Reserve board and the Treasury Secretary
agreed that that risk to the system was not a risk that was
worth taking.
And so, you know, today I think we can say that the banking
system is sound and resilient, and the steps we took
demonstrated that resilience and the safety of deposits around
the country.
Senator Vance. So I am less concerned with the decision
itself, though obviously I have a lot of questions there. I
think there is an open question about whether we could have
provided the confidence to the banking system, the liquidity
that was needed in case of a bank run without bailing out the
uninsured Silicon Valley Bank depositors. I think that is maybe
a topic for a follow-on hearing.
But what I worry about is the fundamental unfairness here,
that we have drawn a line--and I do not know whether the line
stops at Silicon Valley Bank. Maybe it goes much further. Maybe
it stops there--where if you are systemically important, which
is a term that is impossible for anybody here to define with
confidence, if you are systemically important, your uninsured
deposits are effectively unlimited in their insurance, whereas
if you are not systemically important, if you are a regional
bank in Ohio, there is a very good chance that your uninsured
depositors will not receive that bailout.
And I think that uncertainty is a really, really big
problem with what you guys have done. I am not saying that in
an accusatory way. I understand that there were reasons to do
what you did, even though I do not think it was the right
decision. I am just saying I think it has some real moral
hazard here.
I know I am over time here, so the one thing I would ask
here is just unanimous consent to introduce a letter into the
record from American Share Insurance. This is a company that
provides private deposit insurance to most State-chartered
credit unions, including the 43 in Ohio. And just on this point
of moral hazard and on this point of unfairness, what I would
you guys to consider doing is extending the same implied offer
that you gave to the Silicon Valley Bank uninsured depositors,
to do it a little bit further down the banking ladder so that
everybody benefits from the rule that you guys have created for
Silicon Valley Bank.
Senator Scott. Without objection.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman, and thank all
of you for your service and testimony today.
Mr. Gruenberg, you are aware, are you not, of the fact that
the CEO of SVB sold $3.6 million in company stock just 10 days
before the bank collapsed and the FDIC took over its deposits.
You are aware of that, right?
Mr. Gruenberg. I am, Senator.
Senator Van Hollen. And are you aware of the fact that
other executives of the bank and employees of the bank received
bonuses literally hours before SVB collapsed?
Mr. Gruenberg. Yes, Senator.
Senator Van Hollen. Now I believe we need to have an
independent investigation into any criminal culpability, the
possibility of insider trading in this case. But regardless of
any criminal culpability that may be there, I think it is
simply wrong, and I think almost every American would agree it
is simply wrong for the CEO and top executives to profit from
their own mismanagement and then leave FDIC to be holding the
bag.
Would you agree with that proposition, that that would be
wrong?
Mr. Gruenberg. Yes, Senator.
Senator Van Hollen. Now Dodd-Frank provides clawback
authority that applies to the biggest banks under the Orderly
Liquidation Authority, under OLA. But as I understand it, that
authority does not apply to SVB Bank. Am I right about that?
Mr. Gruenberg. That is correct, Senator. Could I elaborate
on that briefly?
Senator Van Hollen. If you could briefly.
Mr. Gruenberg. Very briefly. We do not have explicit
clawback authority. We do have an obligation to investigate any
misconduct by the board and management of the institution, and
we do have authorities to impose consequences, including civil
money penalties, restitution, and barring individuals from the
business of banking.
So we can get at some of the issues raised, but it is true
we do not have explicit clawback authority. And I indicated
earlier it would be reasonable to create parity between the
Dodd-Frank Act and the Federal Deposit Insurance Act in that
regard.
Senator Van Hollen. Well, I am glad you raised that. I
heard your response earlier, and Senator Kennedy, a Member of
this Committee, and I are working right now on bipartisan
legislation to accomplish exactly what you said. I hope we can
introduce it this week, and I know the Chairman of the
Committee is interested as well, in pursuing that. And I asked
Secretary Yellen in another hearing last week whether she and
the Biden administration fully supported it. The answer was
yes.
So I hope we can move forward on that piece as quickly as
possible, because there does seem to be a hole in your
authority. You have some authorities, you indicated, but there
is a hole in that authority that we have to plug, and you agree
with that.
Mr. Gruenberg. I do, Senator.
Senator Van Hollen. So Vice Chair Barr, I wanted to ask you
about some guidance, in fact a rule that was issued by your
predecessor, former Vice Chair of Supervision Quarles, shortly
before his departure in March 2021. And this rule established
that supervisory guidance does not have the force of law, and
it cannot be used in the event where it would halt banks'
abilities to conduct mergers and acquisitions and that sort of
thing.
I fully understand the distinction between supervisory
guidance and black-letter law, but I think it is important to
note that this request for this rule, according to the Fed's
staff memo, that this guidance was issued upon industry
request, and they specifically note the Bank Policy Institute
and the American Bankers Association is submitting a petition
asking for this rule to provide guidance to try to weaken the
punch of the supervisory rules.
Are you aware of that?
Mr. Barr. Yes, Senator.
Senator Van Hollen. This goes into the frame that the
Chairman of the Committee made earlier on, where we have got a
lot of folks that had been saying, for months and years, let us
rein in the bank supervisors, and now all of a sudden it is
like where were the supervisors? Why were they not being more
aggressive?
Do you agree that that guidance, putting that into a rule,
sent a message that you do not have to listen to supervisors'
guidance that much, and would you be willing to take a look at
whether or not that should be repealed?
Mr. Barr. Senator, I am not sure of the impact of that
guidance. I think it is an appropriate area for us to be
looking at. I know that staff are going to be thinking about
that with respect to the SVB case, whether it mattered or it
did not matter. I do think it is an appropriate area to look
at, but I do not have a firm conclusion about it.
Senator Van Hollen. Well, I hope you will take a look at it
because it was done at the behest of the industry, and clearly
the intent was to undermine the impact of the guidance provided
by the regulators. So it seems to be part of a pattern of an
effort to push back on regulators' authority and then come back
and do the Monday morning quarterbacking and saying where were
they.
Thank you, Mr. Chairman.
Chair Brown [presiding]. Thank you, Senator Van Hollen.
Senator Daines has yielded to Senator Britt, right? Senator
Britt is recognized, from Alabama.
Senator Britt. Thank you, Mr. Chairman. Thank you, Senator
Daines. I appreciate the opportunity to be able to ask you all
a few questions. I want to start by saying I am proud to be
from the great State of Alabama, where our financial
institutions are strong, our regional banks, our community
banks, our credit unions, and the critical role they play from
our Main Streets to our rural roads could not be understated.
So I am proud of the work they do and proud of the strength
they continue to exhibit.
Mr. Barr, I want to follow up on a question that one of my
colleagues brought up. You keep talking about the Fed focusing
on the size of SVB and banks. However, 2155 also requires the
Fed to take into consideration riskiness, complexity, financial
activities, along with other risk-related factors. Tailored
supervision ensures that the Fed focuses on the most risky
banks. You have said repeatedly that bank mix management led to
SVB's failure.
The whole point of 2155 was so that you could tailor your
regs and your supervision to risk. So why did you not require
definitive corrective action based on the flaws that you saw?
Mr. Barr. Thank you very much, Senator Britt, and I
appreciate your comments about the Alabama banking sector,
which I think is a thriving sector and is contributing to its
communities, and like bankers across the country, is strong and
vibrant. You should be very proud.
Senator Britt. Thank you. We are.
Mr. Barr. We are looking at the range of tailoring
approaches the Federal Reserve took. The decision to set those
lines by asset size and other risk factors was made back in
2019. I joined the board in July of 2022, and began looking at
that approach. I expect to continue to review it as part of the
SVB review, and I believe we have substantial discretion to
alter that framework.
Senator Britt. Excellent. You have talked about your
review, which is ongoing. In that review will you take a look
at if you used all of the tools in your toolbox to prevent
this, both before and after? Will that be part of your review?
Mr. Barr. Yes, Senator. The staff are reviewing the steps
that supervisors took and whether they should have taken more
aggressive action.
Senator Britt. So at the current rate, though, you cannot
speak to whether or not you utilized all of the powers that
were given to you.
Mr. Barr. I really would like to wait for the formal
review, for the staff to come evaluate the full supervisory
record to make an assessment. But we are certainly very focused
on that question, and if we did not do the right steps we are
going to say that.
Senator Britt. Yes. Well, I find it concerning, though,
when you all were asked, each one of you were asked would you
like to see more powers, more strength in this, and every
single one of you said yes, when you do not actually know if
you utilized the tools in your toolbox correctly or if the
people that were under your supervision were supervising
appropriately.
I think that is what people hate about Washington. We have
a crisis and you come in here without knowing whether or not
you did your job. You say you want more. That is not the way
this works. You need to be held accountable, each and every one
of you. I am a big believer in you have got to own your own
space.
And speaking of, Mr. Gruenberg, I want to talk about yours.
You were not the primary supervisor here. Obviously that is the
Fed. But you are the nonprimary supervisor for SVB, or were. Is
that correct?
Mr. Gruenberg. Yes. We have backup supervision.
Senator Britt. You have backup supervision. You had that
before Dodd-Frank. Correct?
Mr. Gruenberg. Yes.
Senator Britt. You had it after Dodd-Frank. Correct?
Mr. Gruenberg. Yes.
Senator Britt. And 2155 did not change that responsibility
that you had.
Mr. Gruenberg. That is correct.
Senator Britt. Right. So in that role what did you do prior
to the bank's failure to exercise that power?
Mr. Gruenberg. In this instance we were working with the
Fed as the institution was experiencing difficulties, but I
think it is fair to say that it was in a supportive role with
the primary regulator.
Senator Britt. OK. But you did raise this to the primary
regulator. You did exercise that.
Mr. Gruenberg. We were working with the primary regulator
in regard to the institution.
Senator Britt. Excellent. I am so glad to hear that. We
have to make sure that we are working together and doing our
job in order to prevent these things from happening in the
future.
One of the things I also want to talk about is just the
different responsibilities that each of you have and whether
they were executed, and then additionally we will move into the
FDIC's bank auction process for just a minute, although I only
have 33 seconds left.
It seems that you failed to put the bank in receivership,
and the FDIC passed on allowing the Silicon Valley Bank to be
purchased. Is that a correct assessment, or do you feel like
that has been incorrectly identified throughout the new cycles?
Mr. Gruenberg. Yes, Senator. The bank was placed in
receivership on Friday morning, and we endeavored to solicit
bids over the weekend As I indicated previously it was a rapid
failure so there was no opportunity prior to failure to prepare
for a resolution. We tried to market it. We had two bids.
Neither would have been less costly than liquidation. So we
then proceeded to put in place a process where we were able to
bid it out.
Senator Britt. Yes, and I am out of time but I will say, 6
months prior, JPMorgan noticed that there was a problem, their
equity research team, and then Moody's obviously met with SVB
prior to saying they were going to downgrade. So I have heard
you all say this was a rushed process. If the outside sector
knew this was happening, you and the Fed and the 4,000
examiners should have known that this was coming as well.
Chair Brown. Senator Warnock, of Georgia, is recognized.
Senator Warnock. Thank you very much, Mr. Chairman.
Many Americans, in fact all of us, would remember the
unfairness of 2008 and that crisis, when bankers who made bad
decisions, who played games with our economy, not only did they
not go to jail, they got to keep their jobs and their
multimillion-dollar salaries. I feel that in a particular way
as someone who pastors and moves in communities where poor and
marginalized people have the weight of the law come down upon
them for the smallest of infractions. Not one banker went to
jail. They kept their multimillion-dollar salaries. When
bankers made risky bets that threatened our entire economy they
got to cash in. They should be held accountable.
We discovered shortly after regulators took control of
Silicon Valley Bank that top executives at the bank offloaded
millions of dollars' worth of stock in the weeks leading up to
the collapse--very convenient--including their former CEO, who
sold $3.6 million worth of stock 2 weeks before the bank
crashed. The Dodd-Frank banking reform law included a
compensation clawback provision for executives identified as
excessive risk takers, in other words, those who put their
banks and the entire economy in jeopardy.
Mr. Gruenberg, the FDIC, in conjunction with the other
financial regulators, began working on a rule to implement this
provision in Dodd-Frank in 2011, and then again in 2016, but a
final rule was never issued. Does the FDIC have plans to
revisit this rule?
Mr. Gruenberg. It has been discussed, Senator, and it seems
to me appropriate.
Senator Warnock. It is appropriate, and I would say urgent.
And I know that the Justice Department and the SEC are looking
closely into this matter, and I would encourage them to include
any evidence of insider trading. That seems only appropriate
given the circumstances. That should be a part of the scope of
their probe.
But there is a scenario where these executives not only get
away scot-free but also with sizable paydays, and the FDIC
should use every tool it has at its disposal to prevent it. We
certainly do not want to incentivize this kind of behavior.
So again, Mr. Gruenberg, outside of this rule, tell me
where can Congress step in to stop incentivizing this type of
high-risk behavior? Does the FDIC need additional legal tools
to hold excessive risk takers accountable?
Mr. Gruenberg. Thank you, Senator. First, as a matter of
law, whenever a bank fails the FDIC is required to conduct an
investigation of the conduct of the board and the executives of
the institution, and we have authorities under the law to
impose accountability, including civil money penalties,
restitution, and barring individuals from the business of
banking. So we have significant civil authorities under the law
now.
It was mentioned earlier, and I think it is appropriate,
that we do not have explicit clawback authority in regard to
compensation. We can get at that issue through our existing
authorities, but certainly providing explicit clawback
authority under the Federal Deposit Insurance Act, as the FDIC
has under the Dodd-Frank Act, would be appropriate, in addition
to completing the rulemaking that you raised previously.
Senator Warnock. Both of these things are important. We
have got to complete the rulemaking and see whatever additional
tools may be necessary. Certainly as the ship is sinking we do
not want bankers to be able to move all of their products on
the lifeboat.
Mr. Gruenberg. I agree, Senator.
Senator Warnock. And so we have got to address this.
I want to switch to a related topic. For several days,
payroll providers banking with SVB or Signature Bank had no way
to access their deposits--everyday folks--leading to many
Americans receiving their paychecks late or having missing
paychecks. Too many Americans live paycheck-to-paycheck, and in
this case they got it late. And as a result, some of the 64
million Americans living paycheck-to-paycheck were hit with
overdraft fees, nonsufficient fund fees due to the disruption,
something I have addressed in other settings. And that is why I
sent a letter with Senator Booker urging regulators to impose a
temporary moratorium on overdraft and nonsufficient fund fees
for folks who incurred these fees at no fault of their own.
Mr. Gruenberg, does the FDIC have a plan surrounding
overdraft and nonsufficient fund fee protections in the event
that we experience broader systemic issues?
Mr. Gruenberg. Senator, you raise an important question. We
received your letter. As a starting point, we know there were
delays. We really want to get the facts in terms of if
overdraft fees were really imposed as a result of those delays.
If we can confirm that information then we can consider what
actions to undertake. We are glad to work with you and your
staff as we follow up on that.
Senator Warnock. I look forward to working with you on
this.
Here is the bottom line. Ordinary folks who just showed up,
put in their deposits, they should not have to bear the brunt
and burden of these bad decisions made by bank executives.
Mr. Gruenberg. Understood.
Chair Brown. Thank you, Senator Warnock.
Senator Daines, from Montana, is recognized.
Senator Daines. Mr. Chairman, thank you.
The failure of Silicon Valley Bank, Signature Bank, and the
general turmoil in the banking sector are the direct result of
the failures of regulators, including the agencies we have
before us today, also the executive teams at these financial
institutions, and the inflationary environment sparked, in no
small part, by the Biden administration's reckless spending. I
remember having debates right here with the Banking Committee
about these massive stimulus bills, that $1.9 trillion spending
bill, that even Lawrence Summers said was inflationary. On a
purely partisan vote it passed, with Democrats supporting and
Republicans opposing.
But each of these groups, back to Silicon Valley Bank and
Signature Bank, failed to prioritize properly clear and present
risks of the inflationary environment, rising interest rates,
what it did to bond values, instead opting to focus on climate
change, equity, and other factors that did not contribute in
any way to the crisis we have before us. I raised these issues
of misaligned priorities with Secretary Yellen during a Finance
Committee hearing back in June of 2021, when she identified
climate change, nonbank financial intermediation, and Treasury
market resilience as the key priorities for FSOC.
Now we are facing a situation where responsible banks, in
my home State of Montana and elsewhere, will be on the hook for
providing tens of billions of dollars, and potentially more, to
bail out irresponsible coastal banks for risk-taking that
regulators failed to act upon, despite first noticing as far
back as 2019.
Turning to my question, Vice Chair Barr, you state in your
testimony that your review is, quote, ``focusing on whether the
Federal Reserve supervision was appropriate for the rapid
growth and vulnerabilities of the bank,'' end quote.
The question is, if you find, as part of your review, that
certain individuals were clearly negligent in the performance
of their duties, are you willing to recommend they be fired?
Mr. Barr. Senator, I do not want to prejudge in any way the
review. I am going to get that evidence back. I am going to
understand it fully, and----
Senator Daines. I said if as part of your review you find
them negligent, would you recommend they be fired?
Mr. Barr. It is hard for me to answer in the abstract, sir.
I believe we will take appropriate action with respect to the
supervisory structure as a whole. With respect to----
Senator Daines. Are you willing to--is termination one of
the options?
Mr. Barr. I do not know----
Senator Daines. That is an easy question. I just said an
option. I am not saying you have to exercise it. Is that an
option? Can somebody be fired for this?
Mr. Barr. I would have to understand the basis in our human
resources law, and I do not want to----
Senator Daines. The bank executives lost their jobs, as
should some of these regulators. Should that not be the case if
they are asleep at the wheel?
Mr. Barr. Senator, I want to be very careful. There are
laws and procedure with respect to how you----
Senator Daines. But you can make a recommendation to HR,
and they can tell you whether or not that is allowed or not. I
have been in the corporate world for most of my career. I have
worked with HR, as is true within the Federal Government. You
can make a recommendation if somebody is asleep at the wheel
and negligent.
Mr. Barr. I would be happy to follow up with you, Senator.
I promise we will take appropriate action based on the review,
but I do not have a definitive answer for you at this moment.
Senator Daines. I do find it ridiculous that you are
unwilling to say that if people failed to perform their
responsibilities that you might recommend they be fired.
Vice Chair Barr, did you visit the San Francisco Fed in
October of last year?
Mr. Barr. October of last year? What year? I mean, in----
Senator Daines. In 2022.
Mr. Barr. I do not believe so.
Senator Daines. OK. Well, the San Francisco Fed published a
supervision and brief memo, saying the top priorities that you
outlined with that visit aligned with their top priorities.
Mr. Barr. It may be that I did a virtual seminar for a
range of supervisors, and so the San Francisco Fed folks were
in attendance for that, but I do not believe I was in San
Francisco.
Senator Daines. So the regulators' perspective that came
out from the 12th District, the San Francisco Fed, said they
were aligned with what was top-of-mind for the work being done
in the 12th District. The first thing it says is ``financial
risks from climate change.'' This is at a time, back in October
of 2022, when you saw the discount rate was all the way up to 3
percent. We were seeing those three-quarter-point increases
coming out of the Federal Reserve over and over, and they were
communicating this was probably going to continue.
And that was about the time that also the Richmond Fed, in
the 5th District, they had a little different view in terms of
prioritizing risks, and they thought perhaps a rising rate
environment might be the highest risk in terms of priority to
look at, versus San Francisco Fed says it is about climate
change was the number one priority listed, stack-ranked with
the three that they placed out.
It is clear, in hindsight, that the Richmond Fed was
focused on the clear and present risks of rising interest rates
while the San Francisco Fed was not.
My question is, since you were confirmed in July, what
percentage of your time have you spent focusing on climate
policy and financial inclusion versus how the Federal Reserve's
monetary policy might impact banks like Silicon Valley Bank?
Chair Brown. Be as brief as you can in that answer. Thank
you.
Mr. Barr. Senator, I have been focused on risk throughout
the system, both short-term and long-term risks, and interest
rate risk is a bread-and-butter issue in banking. It is what
our supervisors do all the time.
Chair Brown. Thank you.
Senator Daines. But the San Francisco Fed said it was
climate change. And by the way----
Chair Brown. Senator Sinema is recognized.
Senator Sinema. Thank you, Mr. Chairman, and thank you to
our witnesses for being here today.
Today's hearing is about trust--whose trust has been
broken, who broke that trust, and how all of us work together
to reaffirm and rebuild that trust. Trust is a key principle
that the modern banking system is built on. Families trust that
their hard-earned savings are safe in the U.S. banking system.
Congress entrusts are Federal banking regulators with the power
to supervise, regulate, and examine banks. We trust you to be
the cops on the beat and have given you the tools to do that
job.
The failure of Silicon Valley Bank on the Federal Reserve's
watch very clearly calls into question whether or not some of
trust was misplaced. Make no mistake: the lion's share of the
blame is on incompetent bank executives, and it is outrageous
that these people took bonuses and sold stock in the days
leading up to the bank's failure. We should hold these
executives accountable to the fullest extent of the law and
claw back those bonuses and stock sales. I am cosponsoring a
bill to do just that.
But as I laid out in a letter to you, Vice Chair Barr--
that, by the way, was signed by 11 other Senators, spanning the
ideological spectrum--it is gravely concerning that retail
participants, literally just regular, everyday people, were
able to figure out that something was wrong with Silicon Valley
Bank before your regulators took appropriate action.
Now these folks do not have access to nonpublic information
like the bank examiners do, but when people on Reddit and
Twitter can spot bank mismanagement before the regulators,
something is terribly wrong.
So my questions today are for you, Vice Chair Barr. I have
lots of questions so I would like concise answers, and we will
follow up in writing. You were sworn in as Vice Chair for
Supervision on July 19, 2022. Your testimony indicates that due
to ongoing review you will focus on what you know, so let us
start there. The Fed knew of problems at the bank dating back
to 2019. Were you personally made aware of major deficiencies
at Silicon Valley Bank prior to the collapse, and if so, which
ones, and when were you notified?
Mr. Barr. Thank you, Senator. The staff made a presentation
to the Board of Governors in the middle of February of this
year, that was focused on interest rate risk broadly in the
banking system and how banks and managers and supervisors were
addressing those risks. And as part of that presentation the
staff highlighted the interest rate risk that was present at
Silicon Valley Bank, and indicated that they were in the middle
of a further review and expected to be basically coming back to
the bank shortly with further information about their status. I
believe that is the first time that I was told about interest
rate risk at Silicon Valley Bank.
Senator Sinema. So you were first notified shortly after
folks on your staff learned about these deficiencies.
Mr. Barr. Senator, the supervisors began highlighting these
deficiencies at the firm in interest rate risk management and
liquidity risk management in a serious way in November of 2021,
as far as I know. So a little bit more than a year prior to
that. They intensified that supervisory review as part of its
full scope exam in the summer of 2022, when the firm was
downgraded for deficiencies in its risk-management practices.
And they brought those issues again, according to the record,
to the CFO of the firm in October, and issued additional
findings in November of 2022.
So that, as far as we know from the current supervisory
record, is the picture.
Senator Sinema. And that is when you--so you were first
notified in October and November of 2022?
Mr. Barr. No, Senator. To the best of my knowledge I first
learned about the issues at Silicon Valley Bank with respect to
interest rate risk in mid-February of 2023, so several weeks
before the bank failed staff made a presentation to the board
about interest rate risk broadly, and with a highlight, if you
will, on Silicon Valley Bank, and indicated that they were
following up with the bank with further measures.
Senator Sinema. So your testimony says that asset size is
not necessarily an indicator of complexity, and I agree, which
is why Section 401 of S. 2155 gives the Fed explicit authority
to impose the regulations and enhance supervision normally
reserved for the largest institutions. And you can do that on
any bank between $100 and $250 billion in assets, like SVB. The
Fed is given this authority to prevent or mitigate risks to the
financial stability of the U.S. We both agree that this is
existing authority that the Fed has had since the enactment of
S. 2155 in 2018. Correct?
Mr. Barr. Yes. The Fed has broad authority to change the
rules it uses for different approaches to supervision of firms.
Under the rules that were put in place in 2019, the firm was
bucketed by a set of categories. I think that it is important
to revisit those, as I have been doing since arriving at the
Federal Reserve in July.
Senator Sinema. So given the documented issues that----
Chair Brown. You are over time, but wrap up if you can. One
more question.
Senator Sinema. This will be my last question. Thank you,
Mr. Chairman.
So given the documented issues that your supervisors found
with SVB, that we just kind of went over, did the Fed ever
consider using its existing Section 401 authority before the
failure, to more aggressively regulate the bank?
Mr. Barr. Based on the current supervisory record it looked
like the escalations that had occurred were in the format of
Matters Requiring Attention and Matters Requiring Immediate
Attention. And the supervisors also put in place what is called
a 4M agreement, which is a limitation on the firm's ability to
engage in merger transactions with financial companies.
Chair Brown. Thank you, Senator Sinema.
Senator Sinema. Thank you.
Chair Brown. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Thank you all for
being here.
I want to start maybe with a question that I think, Vice
Chair Barr, you answered to Senator Warren, saying you thought
banks over $100 billion should have additional prudential
requirements. Did I hear that correctly?
Mr. Barr. I think it is important for us to strengthen
capital and liquidity requirements for large banks really up
the spectrum.
Senator Tillis. Is there any the tools--you know, just
going back--Mr. Chair, I would like, without objection, to
submit this to the record. This is the regulatory regimen that
applies to banks of certain categories.
Chair Brown. Without objection.
Senator Tillis. And so I am curious. I always worry about
when we create an arbitrary asset limit for doing something,
because it was the activities of Silicon Valley that got them
in trouble. And so I just want to ask briefly--I have got a lot
of questions, and I will get them done on time--you have
mentioned a couple of times, Vice Chair Barr, that the 2019, I
guess, implementation of Senate bill 2155--I am inferring
that--bucketed Silicon Valley in a certain regulatory regimen.
Did that mean that it restricted it from having supervisors
make the judgment that the increased prudential regulations or
supervisory functions could not occur?
Mr. Barr. Senator, we are bound by the rules we put out. So
new framework----
Senator Tillis. Yeah, OK. So what--in 2019, different
administration, predates your tenure, are you saying that the
promulgation and the implementation of 2155 took certain
supervisory or regulatory regimens off the table for Silicon
Valley Bank?
Mr. Barr. The Federal Reserve's implementation in 2019 set
basically the standard for how that firm would apply. I think
that regulators, supervisors do have judgment----
Senator Tillis. That is my point.
Mr. Barr. ----and can put in place mitigating matters.
Senator Tillis. Because when I hear ``bucketing'' I think
about ring-fencing, and I wonder if that meant that a
supervisor--in my opinion, if you take a look at the matters
requiring attention and then immediate attention, do you know
yet--I know we will get the report in May--but do you know yet
how many of those MRAs were followed by an MRI? In other words
the six that were issued over the course of a year-and-a-half
or 2 years, how many of these was an escalation of the Matter
Requiring Attention to immediate attention, if any? And if you
do not know that you can submit it. Actually, if you will just
submit it for the record.
Look, we have got a CEO of Silicon Valley Bank that is a
Class A member of the board of the San Francisco Federal
Reserve, who got summarily terminated on the day of the bank's
collapse. In your review, will we also have insight into
California's role in regulating this bank, or will this be
purely Federal jurisdiction?
Mr. Barr. We are looking only at the Federal Reserve. The
State of California is initiating its own review with respect
to this.
Senator Tillis. I think that is going to be very helpful,
because in my opinion I agree with former Fed Tarullo that he
sees this as a regulatory lapse. Tarullo was never
complimentary of Senate bill 2155. He was implementing Dodd-
Frank when we were doing it. He was hammering it. He made the
statement, and Mr. Chair, I would also like to submit for the
record an article interview with Mr. Tarullo from Marketplace,
that he specifically says in here, you know, 2155 is likely or
impossible to be a root cause of the problem. I am
paraphrasing. He was saying it looks like a regulatory and
supervisory lapse. Now I think we are going to find that that
lapse is not only with the Fed but more likely even the
supervision that the State of California----
Chair Brown. Without objection, so ordered.
Senator Tillis. ----was involved in.
So I am also kind of curious in the report, are we going to
see any movement? I am not a conspiracy theorist, but there is
one question of did we have a level of comfort with this bank,
among some of the supervisors? Do we know or have any insight
over the past few years if anybody who had worked for the Fed
worked for this bank? We know that the CEO was on the Fed
board, or on a board at the Fed?
Mr. Barr. Senator, just with respect to the Class A
directors that you mentioned, Class A directors are prohibited
from participating in any way in supervision.
Senator Tillis. Yeah, no, I get that. But it is just people
in proximity, maybe people calling balls and strikes, the
supervisors did not get that quite right.
But, you know, I think that there are some people who--and
I want to find the root cause of the problem, and I think that
you all will find a lot of information when you issue your
report. I do not think that we are doing the banking industry
any service going forward if we talk about now we have just got
to rein in the small banks, we have got to increase, by
default, regardless of the activities of the bank, we have got
to increase, by default, their prudential requirements, and
with your holistic review, capital requirements, and a number
of other things.
When you have a run on a bank like you did with Silicon
Valley, could any bank possibly have enough to cover the run?
Any bank.
Mr. Barr. You know, Senator, the particular bank in
question was quite unique in its structure, in its liability
approach, and its interest rate risk management. I can just
speak to that particular bank.
Senator Tillis. If you look at their bank, if you looked at
their internal liquidity stress testing, if you took a look at
their contracts and interest rate exposure, this does not take
a highly sophisticated person to understand the risk, and it
damn sure had to be known months before the chickens came home
to roost. And I wish that we could just focus on that problem
and not use the red herring of some lapse in regulatory
oversight that was the root cause of this bank collapse. It
simply was not, and I would love to find anybody to prove it
wrong.
I do not care how you feel about regulatory tailoring, but
use a valid argument to fight against it. Do not use Silicon
Valley Bank as an example. I am not suggesting that you have.
But there are many people that sit up here who have, at the
expense of looking at how we can prevent this in the future.
And I do have questions for the record that I will submit.
Thank you all.
Chair Brown. Thank you, Senator Tillis. Thanks to all three
of you for your testimony, your public service, and I look
forward to the reviews on these bank failures, and thank you
for helping to start that process.
It is interesting, many of my Republican colleagues are now
so eager for bank regulators to crack down on banks for taking
on too many risks. I hope they remember that when it comes time
to empower regulators and strengthen guardrails, including
protecting the independent funding financial regulators.
The events of the last month have shown why we need
independent regulators funding and stability for all of our
financial watchdogs, but now as the Supreme Court considers
whether the CFPB's independent funding is constitutional, these
independent watchdogs' ability to keep our financial system
stable faces an existential threat. U.S. financial regulators,
as we know, are independently funded so they can quickly
respond when crises happen. On this and every issue I will
continue to fight to protect American workers from Wall Street
arrogance and greed.
Thank you for joining us. The meeting is adjourned.
[Whereupon, at 12:33 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIR SHERROD BROWN
Thanks to the New Deal and the hard work of our regulators today,
most bank failures, while never a good thing, are generally not a big
deal.
But the quick collapses of Silicon Valley Bank and Signature Bank
were no ordinary failures.
In less than a day, Silicon Valley Bank customers pulled $42
billion out of the bank--fueled by venture capitalists and their social
media accounts. They created the largest and fastest bank run in
history. In the following days, Signature Bank lost $17.8 billion.
Regulators--both Republicans and Democrats--came together to
prevent the panic from spreading.
They increased liquidity, promoted confidence in our banking
system, and protected the deposits of customers and small businesses--
not the investments of executives and shareholders.
I spent that weekend on the phone with Ohio small businesses and
banks and credit unions.
Ohio small business owners simply wanted to make payroll. They
didn't want to see years of hard work go down the drain because of
venture capitalists panicking on Twitter 2,000 miles away.
One woman told me she was terrified she wouldn't be able to pay her
workers the next week.
And Ohio banks and credit unions institutions--institutions that
are sound and well-capitalized--didn't want to see deposits flee their
institutions for the biggest Wall Street banks.
For anyone who lived through the Global Financial Crisis, it's
impossible not to think of 2008.
Once again, small businesses and workers feared they would pay the
price for other people's bad decisions. And we're left with many
questions--and justified anger--toward bank executives and boards,
toward venture capitalists, toward Federal and State bank regulators,
and toward policymakers.
The scene of the crime does not start with the regulators before
us. Instead, we must look inside the bank, at the bank CEOs, and at the
Trump-era banking regulators, who made it their mission to give Wall
Street everything it wanted.
Monday morning quarterbacking aimed only at the actions of
regulators this month is as convenient as it is misplaced--coming from
those who have never met a Wall Street wish list they didn't want to
grant.
Many who are the first to scold the regulators for their failures,
offer ready ears whenever bank CEOs line up at their offices
complaining about ``out of control bank examiners.''
Remember some of those complaints at our hearing with Fed Chair
Powell over the Fed merely reviewing capital? Just three days before
Silicon Valley Bank failed?
How soon we choose to forget.
When we ask who should have known how the risks were building in
these banks, we should start at the source: with the executives.
Silicon Valley Bank almost quadrupled in size over 3 years, and
Signature Bank more than doubled in that time.
The principles here are not complicated--banks should be prudently
managed and be mindful of the full scope of risks they face, and should
diversify across customers and products.
This Committee must consider how these banks exploded in size, in a
way that was clearly unsustainable. Some explanations will focus on
complicated-sounding concepts like: balance sheet risk, moral hazard,
stress tests, liquidity ratios.
Really though, it comes down to more basic concepts--hubris,
entitlement, greed. And always with big paydays for the executives at
the top.
The CEOs' own pay was tied directly to the growth at SVB.
At SVB, executive bonuses were pegged to return on equity. So they
took more risk by buying assets with higher yields to make higher
profits. When those investments started to lose money, they didn't back
down.
It won't surprise anyone that Silicon Valley Bank went nearly a
year without a Chief Risk Officer.
Venture Capitalists fueled the bank's growth by forcing the
companies they invested in and advised to keep their money at Silicon
Valley Bank.
And then those same VCs turned around and sparked the bank run by
telling the companies to pull their money out, creating more chaos and
panic.
Signature Bank found itself in the middle of Sam Bankman-Fried's
crime spree at the crypto exchange FTX. The bank let him open multiple
accounts and ignored red flag after red flag.
It's all just a variation on the same theme--the same root cause of
most of our economic problems:
Wealthy elites do anything to make a quick profit and pocket the
rewards. And when their risky behavior leads to catastrophic failures,
they turn to the Government asking for help, expecting workers and
taxpayers to pay the price.
Even though no taxpayer money is being used to save these
depositors, I understand why many Americans are angry--even disgusted--
at how quickly the Government mobilized, when a bunch of elites in
California were demanding it.
People have a pretty good sense of whose problems get taken more
seriously than others in this town.
Of course we have to prevent systemic threats to the economy. But
corporate trade deals are a systemic threat to towns in Ohio and across
the industrial Midwest. So is a Wall Street business model that rewards
short-term profits over investments in innovation and workers.
And those threats are not only tolerated--they've been actively
pushed by the same crowd that this month clamored for the Government to
save them.
Just as there are no atheists in foxholes, it appears that when
there is a bank crash, there are no libertarians in Silicon Valley.
I hope that from now on, those who have no problem with Government
intervention to protect their own livelihoods will think a little
harder about what their warped version of the free market has done to
workers in Ohio.
It may be tempting to look at all this and say, we don't need new
rules. The real problem was these arrogant executives.
But there will always be arrogant executives. That's exactly why we
need strong rules, and public servants with the courage to stand up to
bank lobbyists and enforce them.
The officials sitting before us today know that their predecessors
rolled back protections--like capital and liquidity standards, stress
tests, brokered deposit limits, and even basic supervision. They
greenlighted these banks to grow too big, too fast.
There are important questions about deposit insurance we must
examine to consider--whether the current amount works for everyone,
including small businesses who need and want to make payroll.
We expect bank executives to understand the basic principles of
bank management and to know they can't grow a bank by over-
concentrating business in specialized areas and then pay themselves
huge bonuses right up until things blow up. That's not being a trusted
partner to your customers--it's taking advantage of them.
These executives must answer for their banks' downfalls. I have
called on the former CEOs of these failed banks to testify and I thank
Ranking Member Scott for joining me in that effort.
But they must also face real consequences for their actions.
Right now, none of the executives who ran these banks into the
ground are barred from taking other banking jobs, none have had their
compensation clawed back, none have paid any fines.
Some executives have decamped to Hawai`i. Others have already gone
on to work for other banks. Some simply wandered off into the sunset.
It will surprise no one in Ohio that these bank executives face
less accountability than a cashier who miscounts the cashbox.
That's why I'll be introducing legislation to strengthen
regulators' ability to impose fines and penalties, clawback bonuses,
and ban executives who caused bank failures from working at another
bank ever again.
We also need to look at bank regulators' ability to not only
identify risks and problems at banks, but to also be empowered to
actually make the banks fix them.
Today, my colleagues and I are asking GAO to follow up on a 2019
report where they highlighted communication failures, and the extent to
which senior bank management fully addressed identified deficiencies.
I am looking forward to hearing from our financial watchdogs today.
We will be watching them to make sure they assess the damage, hold
accountable those responsible, and fix what is broken.
Last, I ask my colleagues to work together to make sure that our
financial system is stronger after this crisis.
Americans have watched the same pattern over and over:
A crisis occurs. Some of us push for reforms--and if we're lucky,
we're able to seize the moment, and actually pass some.
And then the lobbyists go to work.
Politicians spend the ensuing years rolling back reforms, right up
until the next crisis. And that crisis happens because, you guessed
it--we rolled back regulations.
And we know who's the first to get help in any crisis.
It's little wonder that workers in Ohio and around the country
don't trust banks, and don't trust their own Government. It's time we
proved them wrong--ignore corporate lobbyists, and put workers and
their families first.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
Today, we are here to understand just how we found ourselves in the
middle of the second and third-largest bank failures in United States
history. Though our questions are nowhere near answered, this is an
important first step in providing transparency and accountability
necessary to the American taxpayer.
I'd like to thank you, Mr. Chairman, for taking the time and
working with me to try to bring the bank CEOs into this hearing. I
think it's incredibly important that we hear from the folks
specifically and uniquely responsible for the failure of these banks,
the folks who managed them.
By all accounts, this is a classic tale of negligence, and it
started with the banks themselves. Without any question, that's where
the buck stops. So, it is imperative that we hear straight from the
horse's mouth, so to speak, to find out why these banks were so poorly
managed and so poorly managed their risks.
Unfortunately, the bank executives aren't the only managers we're
missing.
The Secretary of the Treasury and the Chairman of the Federal
Reserve are also not here to testify. I don't mean to offend the
witnesses that are here, but it is hard to believe the Biden
administration seriously is concerned about the failure that we're
seeing when they themselves are shielding the top official at the
Department of Treasury.
The same official who briefed the President and invoked the System
Risk Exception.
Nor do we have Chair Powell here, instead, we have the Vice Chair
of Supervision here to use our Committee as a platform to talk about
the wrongs under his supervision. As the Federal Reserve has already
announced, he is conducting a review to assess any supervisory
failures, which is an obvious, inherent conflict of interest and a
classic case of the fox guarding the hen house.
The Fed should focus on its mission and not the climate arena. This
is a waste of time, attention, and manpower. All things that could have
gone into bank supervision.
Banks, like any other business, must manage their risk and be good
stewards for their customers. But unlike other businesses, banks are
highly regulated. Sometimes--banks even have their regulators sitting
in their banks and continually monitoring their risks and activities--
as is the case with Silicon Valley Bank.
For the last 2\1/2\ weeks, the regulators have consistently
described Silicon Valley as unique and highly ``idiosyncratic''--
meaning the warning signs should have been flashing red and SVB should
have stood out as what it was--absolutely a problem child. Clear as a
bill were the warning signs.
In fact, reports indicate that these warning signs were already
flashing, and on March 19, the New York Times wrote that ``Silicon
Valley Bank's risky practices were on the Federal Reserve's radar for
more than a year . . . ''.
Moreover, Silicon Valley suffered from extreme interest rate risk,
due to investments in long-term securities that declined in value
because of soaring inflation. Of all our supervisors, the Federal
Reserve should have been keenly aware of the impact its interest rate
hikes would have on the value of these securities, and it should have
been actively working to ensure the banks it supervises were hedging
their bets and covering their risk accordingly.
But now we know, based on your testimony Mr. Barr, that the Fed was
aware! In fact, in 2021 your supervisors found deficiencies in the
bank's liquidity and its management, resulting in six supervisory
findings. Later, in 2022, supervisors then issued three findings
related to ineffective board oversight, risk-management weaknesses, and
the bank's internal audit function. What were the supervisors thinking?
The law and the regulations are crystal clear; the Federal Reserve
can take any supervisory or enforcement action it deems necessary to
address unsafe and unsound practices.
Recent reports confirm what we already know, your priorities and
your work with the San Francisco Federal Reserve Bank President, Mary
Daly, centered on climate change--an issue wholly unrelated to the
Federal Reserve's dual mandate and role as supervisor. Given SVB's
social and climate agenda, one must ask if SVB's investments in climate
caused its regulators to be a bit more permissive of its risks.
If you can't stay on mission and enforce the laws as they already
are on the books, how can you ask Congress for more authority with a
straight face?
To that end, I hope to learn how the Federal Reserve could know
about such risky practices for more than a year, and fail to take
definitive, corrective action. By all accounts, our regulators appear
to have been asleep at the wheel.
In addition, I also hope to learn more from the FDIC about its role
in the receivership and sale of both SVB and Signature Bank. Especially
on the auction and bid process.
I am very concerned that private sector offers appear to have been
submitted, and yet, were denied. If Silicon Valley Bank had been
purchased before it failed, the panic and the shock to the market and
to market confidence we've seen over the past 2\1/2\ weeks may have
been avoided.
If Silicon Valley had been purchased over the weekend of March 10,
confidence in the marketplace may have sustained Signature Bank and
prevented its failure.
The FDIC's bid auction process has been a black hole for Congress
and the American people--and we deserve answers.
I know hindsight is 2020--but when you hear rumors that this
process was delayed because the White House doesn't like mergers in any
shape, form, or fashion, it makes you wonder what actually is going on.
Sometimes, when it looks like a duck, quacks like a duck, it's just a
duck.
As I close on this opening statement, three things remain clear to
me regarding SVB. First, the bank was rife with mismanagement. Second,
there was a clear supervisory failure. Our regulators were simply
asleep at the wheel. And finally, President Biden's reckless spending
caused this 40-year high in inflation, and the country, as well as the
bank, experienced tremendous loss.
______
PREPARED STATEMENT OF MARTIN GRUENBERG
Chairman, Federal Deposit Insurance Corporation
March 28, 2023
Chairman Brown, Ranking Member Scott, and Members of the Committee,
thank you for the opportunity to appear before the Committee today to
address recent bank failures and the Federal regulatory response.
On March 10, 2023, just over 2 weeks ago, Silicon Valley Bank
(SVB), Santa Clara, California, with $209 billion in assets at year-end
2022, was closed by the California Department of Financial Protection
and Innovation (CADFPI), which appointed the FDIC as receiver. The
failure of SVB, following the March 8, 2023, announcement by Silvergate
Bank that it would wind down operations and voluntarily liquidate, \1\
signaled the possibility of a contagion effect on other banks. On
Sunday, March 12, 2023, just 2 days after the failure of SVB, another
institution, Signature Bank, New York, NY, with $110 billion in assets
at year-end 2022, was closed by the New York State Department of
Financial Services (NYSDFS), which also appointed the FDIC as receiver.
With other institutions experiencing stress, serious concerns arose
about a broader economic spillover from these failures.
---------------------------------------------------------------------------
\1\ See Silvergate Capital Corporation Press Release, ``Silvergate
Capital Corporation Announces Intent To Wind Down Operations and
Voluntarily Liquidate Silvergate Bank'' (March 8, 2023), available at
https://ir.silvergate.com/news/news-details/2023/Silvergate-Capital-
Corporation-Announces-Intent-to-Wind-Down-Operations-and-Voluntarily-
Liquidate-Silvergate-Bank/default.aspx.
---------------------------------------------------------------------------
After careful analysis and deliberation, the Boards of the FDIC and
the Federal Reserve voted unanimously to recommend, and the Treasury
Secretary, in consultation with the President, determined that the FDIC
could use emergency systemic risk authorities under the Federal Deposit
Insurance Act (FDI Act) \2\ to fully protect all depositors in winding
down SVB and Signature Bank. \3\
---------------------------------------------------------------------------
\2\ 12 U.S.C. 1823 (c)(4)(G).
\3\ See FDIC Press Release, Joint Statement by the Department of
the Treasury, Federal Reserve, and FDIC (March 12, 2023), available at
https://www.fdic.gov/news/press-releases/2023/pr23017.html.
---------------------------------------------------------------------------
It is worth noting that these two institutions were allowed to
fail. Shareholders lost their investment. Unsecured creditors took
losses. The boards and the most senior executives were removed. The
FDIC has authority to investigate and hold accountable the directors,
officers, professional service providers and other institution-
affiliated parties of the banks for the losses they caused to the banks
and for their misconduct in the management of the banks. \4\ The FDIC
has already commenced these investigations.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1821(d)(13)(E) and (k). See also 12 U.S.C. 1818(e)
and (i).
---------------------------------------------------------------------------
Further, any losses to the FDIC's Deposit Insurance Fund (DIF) as a
result of uninsured deposit insurance coverage will be repaid by a
special assessment on banks as required by law. The law provides the
FDIC authority, in implementing the assessment, to consider ``the types
of entities that benefit from any action taken or assistance
provided.'' \5\
---------------------------------------------------------------------------
\5\ 12 U.S.C. 1823(c)(4)(G)(ii)(III).
---------------------------------------------------------------------------
The FDIC has now completed the sale of both bridge banks to
acquiring institutions. New York Community Bancorp's Flagstar Bank is
the acquiring institution for Signature Bridge Bank, N.A., and First-
Citizens Bank & Trust Company is the acquiring institution for Silicon
Valley Bridge Bank, N.A. \6\
---------------------------------------------------------------------------
\6\ The acquiring institutions entered into purchase and
assumption agreements for the bridge banks' deposits and assets, as
described in detail later in this statement.
---------------------------------------------------------------------------
My testimony today will describe the events leading up to the
failure of SVB and Signature Bank and the facts and circumstances that
prompted the decision to utilize the authority in the FDI Act to
protect all depositors in those banks following these failures. I will
also discuss the FDIC's assessment of the current state of the U.S.
financial system, which remains sound despite recent events. In
addition, I will share some preliminary lessons learned as we look back
on the immediate aftermath of this episode.
In that regard, the FDIC will undertake a comprehensive review of
the deposit insurance system and will release a report by May 1, 2023,
that will include policy options for consideration related to deposit
insurance coverage levels, excess deposit insurance, and the
implications for risk-based pricing and deposit insurance fund
adequacy. In addition, the FDIC's Chief Risk Officer will undertake a
review of the FDIC's supervision of Signature Bank and will also
release a report by May 1, 2023. Further, the FDIC will issue in May
2023 a proposed rulemaking for the special assessment for public
comment.
The two bank failures also demonstrate the implications that banks
with assets over $100 billion can have for financial stability. The
prudential regulation of these institutions merits serious attention,
particularly for capital, liquidity, and interest rate risk. This would
include the capital treatment associated with unrealized losses in
banks' securities portfolios. Resolution plan requirements for these
institutions also merit review, including a long-term debt requirement
to facilitate orderly resolution.
Economic Conditions
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
On February 28, 2023, the FDIC released the results of the
Quarterly Banking Profile, which provided a comprehensive summary of
financial results for all FDIC-insured institutions for the fourth
quarter of last year. Overall, key banking industry metrics remained
favorable in the quarter. \7\ Loan growth continued, net interest
income grew, and asset quality measures remained favorable. Further,
the industry remained well-capitalized and highly liquid, but the
report also highlighted a key weakness in elevated levels of unrealized
losses on investment securities due to rapid increases in market
interest rates. Unrealized losses on available-for-sale and held-to-
maturity securities totaled $620 billion in the fourth quarter, down
$69.5 billion from the prior quarter, due in part to lower mortgage
rates. The combination of a high level of longer-term asset maturities
and a moderate decline in total deposits underscored the risk that
these unrealized losses could become actual losses should banks need to
sell securities to meet liquidity needs.
---------------------------------------------------------------------------
\7\ See Remarks by FDIC Chairman Martin Gruenberg on the Fourth
Quarter 2022 Quarterly Banking Profile (February 28, 2023) available at
https://www.fdic.gov/news/speeches/2023/spfeb2823.html.
---------------------------------------------------------------------------
This latent vulnerability within the banking system would combine
with several other prevailing conditions to form a key catalyst for the
subsequent failure of SVB and systemic stress experienced by the
broader banking system.
The Wind Down of Silvergate Bank
Silvergate Bank, La Jolla, California, with $11.3 billion in assets
as of December 31, 2022, had a business model focused almost
exclusively on providing services to digital asset firms. Following the
collapse of digital asset exchange FTX in November 2022, Silvergate
Bank released a statement indicating that it had $11.9 billion in
digital asset-related deposits, and that FTX represented less than 10
percent of total deposits in an effort to explain that its exposure to
the digital asset exchange was limited. \8\ Nevertheless, in the fourth
quarter of 2022, Silvergate Bank experienced an outflow of deposits
from digital asset customers that, combined with the FTX deposits,
resulted in a 68 percent loss in deposits--from $11.9 billion in
deposits to $3.8 billion. \9\ That rapid loss of deposits caused
Silvergate Bank to sell debt securities to cover deposit withdrawals,
resulting in a net earnings loss of $1 billion. \10\ On March 1, 2023,
Silvergate Bank announced it would be delaying issuance of its 2022
financial statements and indicated that recent events raised concerns
about its ability to operate as a going concern, which resulted in a
steep drop in Silvergate Bank's stock price. \11\ On March 8, 2023,
Silvergate Bank announced that it would self-liquidate. \12\
---------------------------------------------------------------------------
\8\ See ``Silvergate Provides Statement on FTX Exposure'',
Businesswire (November 11, 2022), available at https://
www.businesswire.com/news/home/20221111005557/en/Silvergate-Provides-
Statement-on-FTX-Exposure.
\9\ See Silvergate Capital Corporation, 4Q22 Earnings Presentation
(January 17, 2023), available at https://s23.q4cdn.com/615058218/files/
doc--financials/2022/q4/Ex.-99.2-SI-4Q22-Earnings-Presentation-
FINAL.pdf.
\10\ Ibid.
\11\ See Silvergate Capital Corporation Form 12b-25, Notification
of Late Filing, available at https://ir.silvergate.com/sec-filings/sec-
filings-details/default.aspx?FilingId=100117301783.
\12\ See Silvergate Capital Corporation Press Release,
``Silvergate Capital Corporation Announces Intent To Wind Down
Operations and Voluntarily Liquidate Silvergate Bank'' (March 8, 2023),
available at https://ir.silvergate.com/news/news-details/2023/
Silvergate-Capital-Corporation-Announces-Intent-to-Wind-Down-
Operations-and-Voluntarily-Liquidate-Silvergate-Bank/default.aspx.
---------------------------------------------------------------------------
The troubles experienced by Silvergate Bank demonstrated how
traditional banking risks, such as a lack of diversification,
aggressive growth, maturity mismatches in a rising interest rate
environment, and sensitivity to liquidity risk, when not managed
adequately, could combine to lead to a bad outcome. Many of these same
risks were also present in the failure of SVB.
The Failure of Silicon Valley Bank
SVB was established in San Jose, California, on October 17, 1983.
SVB's approximately $191.4 billion in deposit liabilities as of
December 31, 2022, were associated with its commercial and private
banking clients, mostly linked to businesses financed through venture
capital. The bank did not maintain a large retail deposit business.
Total assets grew rapidly from under $60 billion at the end of 2019 to
$209 billion by the end of 2022, \13\ coinciding with rapid growth in
the innovation economy and a significant increase in the valuation
placed on public and private companies. This influx of deposits was
largely invested in medium- and long-term Treasury and Agency
securities. SVB also had significant cross-border operations, with a
subsidiary in the United Kingdom and branches in Germany, Canada, and
the Cayman Islands.
---------------------------------------------------------------------------
\13\ See Silicon Valley Bank's FFIEC Call Report filings from
December 31, 2019, and December 31, 2022.
---------------------------------------------------------------------------
On the same day that Silvergate Bank announced its self-
liquidation, SVB announced that it had sold substantially all of its
available-for-sale securities portfolio at a $1.8 billion after tax
loss. \14\ SVB simultaneously announced an attempt to raise
approximately $2.25 billion through the issuance of common equity and
mandatory convertible preferred shares via an underwritten public
offering and planned private investment. \15\ The following day, SVB's
share price dropped 60 percent. In an attempt to quell the rising
concerns of the bank's depositors and borrowers, the Chief Executive
Officer of SVB urged venture capital clients to remain calm and keep
their deposits in the institution. The appeal did not have the intended
effect. \16\ Many of SVB's venture capital customers took to social
media to urge companies to move their deposit accounts out of SVB. \17\
By the end of the day on Thursday, March 9, 2023, $42 billion in
deposits had left the bank.
---------------------------------------------------------------------------
\14\ See Silicon Valley Bank Strategic Actions/Q1 2023 Mid-Quarter
Update (March 8, 2023), available at https://s201.q4cdn.com/589201576/
files/doc--downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-
030823.pdf.
\15\ See SVB Financial Group Form 8-K (March 8, 2023), available
at https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/
000119312523064680/d430920d8k.htm.
\16\ See New York Times, ``Silicon Valley Bank's Financial
Stability Worries Investors'' (March 9, 2023), available at https://
www.nytimes.com/2023/03/09/business/silicon-valley-bank-investors-
worry.html.
\17\ Ibid.
---------------------------------------------------------------------------
The evening of March 9, the FDIC was informed by SVB's primary
Federal regulator, the Federal Reserve, of the deposit run, subsequent
funding shortfalls and that the bank was unlikely to have adequate
liquidity to meet the demands of depositors and other creditors. FDIC
staff engaged with the chartering authority, the CADFPI, shortly
thereafter. FDIC staff worked through the night with SVB's primary
regulators in an effort to put a resolution strategy in place. At 11:15
a.m., EST, on March 10, 2023, SVB was closed by the CADFPI, which
simultaneously appointed the FDIC as receiver. To protect insured
depositors, the FDIC created the Deposit Insurance National Bank (DINB)
of Santa Clara, an institution operated by the FDIC on a temporary
basis to provide insured depositors with continued access to their
funds until they could open accounts at other insured institutions. The
FDIC also announced its intent to provide uninsured depositors with an
advance dividend against their claims for the uninsured amounts of
their deposits as soon as Monday, March 13, when the DINB of Santa
Clara was scheduled to reopen. \18\
---------------------------------------------------------------------------
\18\ See FDIC Press Release, ``FDIC Creates a Deposit Insurance
National Bank of Santa Clara To Protect Insured Depositors of Silicon
Valley Bank, Santa Clara, California'' (March 10, 2023), available at
https://www.fdic.gov/news/press-releases/2023/pr23016.html.
---------------------------------------------------------------------------
By using a DINB and announcing an advance dividend, the FDIC hoped
to minimize disruption for insured depositors and to provide a measure
of immediate relief for the uninsured depositors while the agency
worked to resolve the institution. The FDIC did not foreclose the
possibility that another institution could purchase the deposits or
assets of the failed bank, an unlikely but far preferable outcome to
liquidation. Over the weekend, the FDIC actively solicited interest for
a purchase and assumption of the failed bank.
Although several institutions expressed an interest in acquiring
SVB, given the limited timeframe for bidders to consider making an
offer, the FDIC received bids from only two institutions, only one of
which provided a valid offer on the insured deposits and some of the
assets of SVB. \19\ The costs associated with the sole valid offer
would have resulted in recoveries significantly below the estimated
recoveries in liquidation. Once the systemic risk determination was
made, the FDIC was able to move all depositors and assets into a bridge
bank and continue the operations of SVB, enabling the FDIC to engage a
wider range of potential acquirers. As a result, the decision was made
to conduct an expanded marketing effort of the institution on a whole-
bank basis, which was anticipated to engender more and better offers.
---------------------------------------------------------------------------
\19\ The other institution failed to submit a resolution from its
board of directors authorizing its offers on SVB; therefore, the offers
could not be considered.
---------------------------------------------------------------------------
Signature Bank Closing
Unlike SVB, which catered almost exclusively to venture capital
firms, and Silvergate Bank, which was almost exclusively known for
providing services to digital asset firms, Signature Bank was a
commercial bank with several business lines. For example, of its
approximately $74 billion in total loans as of year-end 2022,
approximately $33 billion were in its commercial real estate portfolio,
approximately $19.5 billion of which consisted of multifamily real
estate. Signature Bank also had a $34 billion commercial and industrial
loan portfolio; $28 billion of these were loans made through the Fund
Banking Division, which provided loans to private equity firms and
their general partners. Unlike SVB, which showed depreciation in its
total securities portfolio of 104 percent to total capital, Signature
Bank's level of depreciation was approximately 30 percent.
Signature Bank's operating model did share some of the same risk
characteristics of both Silvergate Bank and SVB. Like SVB, Signature
Bank grew rapidly, from $43 billion in total assets at year-end 2017 to
$110 billion at year-end 2022. Growth was particularly significant from
2019 to 2020, when assets grew 64 percent. Also like SVB, Signature
Bank was heavily reliant on uninsured deposits for funding. At year-end
2022, SVB reported uninsured deposits at 88 percent of total deposits
versus 90 percent for Signature Bank. Signature Bank also operated a
business line serving venture capital firms, although it was much
smaller than that of SVB, at less than one percent of total loans and
only 2 percent of total deposits. Moreover, in 2019, Signature Bank
opened an office in San Francisco--the site of SVB's home office--and
later opened another in Los Angeles, although West Coast operations
were small in relation to the overall bank.
Like Silvergate Bank, Signature Bank had also focused a significant
portion of its business model on the digital asset industry. Signature
Bank began onboarding digital asset customers in 2018, many of whom
used its Signet platform, an internal distributed ledger technology
solution that allowed customers of Signature Bank to conduct
transactions with each other on a 24 hours a day/7 days a week basis.
As of year-end 2022, deposits related to digital asset companies
totaled about 20 percent of total deposits, but the bank had no loans
to digital asset firms. Silvergate Bank operated a similar platform
that was also used by digital asset firms. \20\ These were the only two
known platforms of this type within U.S. insured institutions.
---------------------------------------------------------------------------
\20\ See CoinDesk, ``Silvergate Closes SEN Platform Institutions
Used To Send Money to Crypto Exchanges'' (March 3, 2023), available at
https://www.coindesk.com/policy/2023/03/03/silvergate-suspends-sen-
exchange-network.
---------------------------------------------------------------------------
Signature Bank's balance sheet shrank during 2022, from $118
billion in total assets and $110 billion in total deposits at year-end
2021 to $110 billion in total assets and $89 billion in total deposits
at year-end 2022. In the second and third quarters of 2022, Signature
Bank, like Silvergate, experienced deposit withdrawals and a drop in
its stock price as a consequence of disruptions in the digital asset
market due to failures of several high profile digital asset companies.
\21\ Signature Bank met these deposit withdrawals with cash.
---------------------------------------------------------------------------
\21\ See Bloomberg, ``A $60 Billion Crypto Collapse Leads to a New
Type of Bank Run'' (May 19, 2022), available at at https://
www.bloomberg.com/news/articles/2022-05-19/luna-terra-collapse-reveal-
crypto-price-volatility?leadSource=uverify%20wall.
---------------------------------------------------------------------------
Signature Bank was subject to media scrutiny following the
bankruptcy of FTX and Alameda Trading in November 2022, as the bank had
deposit relationships with both. \22\ Subsequently, in December 2022,
Signature Bank announced that it would reduce its exposure to digital
asset related deposits. \23\ These declines were funded primarily by
cash and borrowings collateralized with securities.
---------------------------------------------------------------------------
\22\ See Businesswire, ``Signature Bank Provides Digital Asset
Banking Update'' (November 15, 2022), available at https://
www.businesswire.com/news/home/20221115006076/en/. See also Seeking
Alpha, ``Silvergate Gives Mid-Quarter Update After FTX Collapse'';
stock slips (November 16, 2022), available at https://seekingalpha.com/
news/3908970-silvergate-gives-mid-quarter-update-after-ftx-collapse-
stock-slips.
\23\ See PYMNTS, ``Signature Bank Tries To Distance Itself From
Crypto'' (December 6, 2022), available at https://www.pymnts.com/
cryptocurrency/2022/signature-bank-tries-to-distance-itself-from-
crypto/.
---------------------------------------------------------------------------
In February 2023, Signature Bank was again subject to media
attention when a lawsuit was filed alleging it facilitated FTX
commingling of accounts. \24\ Following the March 1, 2023, announcement
by Silvergate Bank regarding the delay in filing its year-end 2022
financial statements and comments about its ability to continue as a
going concern, Signature Bank once again experienced negative media
attention, which raised questions about its liquidity position. \25\
This attention continued as Silvergate Bank later announced its self-
liquidation.
---------------------------------------------------------------------------
\24\ See CoinDesk, ``Signature Bank Sued for `Substantially
Facilitating' FTX Comingling'' (February 7, 2023), available at https:/
/www.coindesk.com/business/2023/02/07/signature-bank-sued-for-
substantially-facilitating-ftx-comingling/.
\25\ See Crain's New York Business, ``Signature Bank Warns Its
Growth Could Be Impacted if the Cryptocurrency World Suffers Another
Downdraft'' (March 6, 2023), available at https://
www.crainsnewyork.com/finance/signature-bank-warns-its-growth-could-be-
impacted-if-cryptocurrency-world-suffers-another.
---------------------------------------------------------------------------
Subsequently, as word of SVB's problems began to spread, Signature
Bank began to experience contagion effects with deposit outflows that
began on March 9 and became acute on Friday, March 10, with the
announcement of SVB's failure. On March 10, Signature Bank lost 20
percent of its total deposits in a matter of hours, depleting its cash
position and leaving it with a negative balance with the Federal
Reserve as of close of business. Bank management could not provide
accurate data regarding the amount of the deficit, and resolution of
the negative balance required a prolonged joint effort among Signature
Bank, regulators, and the Federal Home Loan Bank of New York to pledge
collateral and obtain the necessary funding from the Federal Reserve's
Discount Window to cover the negative outflows. This was accomplished
with minutes to spare before the Federal Reserve's wire room closed.
Over the weekend, liquidity risk at the bank rose to a critical
level as withdrawal requests mounted, along with uncertainties about
meeting those requests, and potentially others in light of the high
level of uninsured deposits, raised doubts about the bank's continued
viability.
Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank
and appointed the FDIC as receiver within 48 hours of SVB's failure.
\26\
---------------------------------------------------------------------------
\26\ See FDIC Press Release, ``FDIC Establishes Signature Bridge
Bank, N.A., as Successor to Signature Bank, New York, NY'' (March 12,
2023), available at https://www.fdic.gov/resources/resolutions/bank-
failures/failed-bank-list/signature-ny.html.
---------------------------------------------------------------------------
Systemic Risk Determination
With the rapid collapse of SVB and Signature Bank in the space of
48 hours, concerns arose that risk could spread to other institutions
and that the financial system as a whole could be placed at risk.
Shortly after SVB was closed on Friday, March 10, a number of
institutions with large amounts of uninsured deposits reported that
depositors had begun to withdraw their funds. Some of these banks drew
against borrowing lines collateralized by loans and securities to meet
demands and bolster liquidity positions. As previously noted, the
industry's unrealized losses on securities were $620 billion as of
December 31, 2022, and fire sales driven by deposit outflows could have
further depressed prices and impaired equity.
With the failure of SVB and the impending failure of Signature
Bank, concerns had also begun to emerge that a least-cost resolution of
the banks, absent more immediate assistance for uninsured depositors,
could have negative knock-on consequences for depositors and the
financial system more broadly. With uninsured depositors at the two
banks likely to face an undetermined amount of losses, depositors at
other banks began to move some or all of their deposits to other banks
to diversify their exposures and increase their deposit insurance
coverage. \27\ There were also concerns that investors could begin to
doubt the financial strength of similarly situated institutions making
it difficult and more expensive for these banks to obtain needed
capital and wholesale funding.
---------------------------------------------------------------------------
\27\ Depositors also moved funds to Treasury securities and
Government money market funds.
---------------------------------------------------------------------------
A significant number of the uninsured depositors at SVB and
Signature Bank were small and medium-sized businesses. As a result,
there were concerns that losses to these depositors would put them at
risk of not being able to make payroll and pay suppliers. Moreover,
with the liquidity of banking organizations further reduced and their
funding costs increased, banking organizations could become even less
willing to lend to businesses and households. These effects would
contribute to weaker economic performance, further damage financial
markets, and have other material negative effects.
Faced with these risks, the FDIC Board voted unanimously on March
12, to recommend that the Secretary of the Treasury, in consultation
with the President, make a systemic risk determination under the FDI
Act with regard to the resolution of SVB and Signature Bank. \28\ That
same day, the Federal Reserve Board unanimously made a similar
recommendation, and the Secretary of the Treasury determined that
complying with the least-cost provisions in Section 13(c)(4) of the FDI
Act would have serious adverse effects on economic conditions or
financial stability, and any action or assistance taken under the
systemic risk exception would avoid or mitigate such adverse effects.
---------------------------------------------------------------------------
\28\ 12 U.S.C. 1823(c)(4)(G).
---------------------------------------------------------------------------
The systemic risk determination enabled the FDIC to extend deposit
insurance protection to all of the depositors of SVB and Signature
Bank, including uninsured depositors, in winding down the two failed
banks. At SVB, the depositors protected by the guarantee of uninsured
depositors included not only small and mid-size business customers but
also customers with very large account balances. The ten largest
deposit accounts at SVB held $ 13.3 billion, in the aggregate.
The systemic risk determination does not protect any shareholders
or unsecured debt holders of the two failed banks. \29\ The board and
the most senior executives of the banks were removed. The FDIC has
authority to investigate and hold accountable the directors, officers
and other professional service providers of the bank for the losses
they caused to the bank and for their misconduct in the management of
the bank. \30\ The FDIC has already commenced these investigations. In
accordance with the law, any losses to the DIF as the result of
extending coverage to the uninsured depositors are to be recovered by a
special assessment on the banking industry. \31\
---------------------------------------------------------------------------
\29\ The FDIC as receiver for a failed bank routinely affirms the
bank's obligations to providers of services, such as, for example, IT
contractors and utility companies, because the payment of these
obligations is necessary for the administration of the bank's
receivership. 12 U.S.C. 1821(d)(2)(B) & (d)(11).
\30\ The FDIC as receiver for SVB and Signature Bank will pursue
all civil actions against directors, officers, and professional service
providers of the former banks that are meritorious and cost-effective,
as permitted under State and Federal law. Additionally, the FDIC in its
supervisory capacity may pursue administrative enforcement actions
against SVB's officers and directors and institution-affiliated
parties, including the assessment of civil money penalties and
prohibitions from the banking industry, where the individual's
misconduct evidences personal dishonesty, recklessness, or a willful or
continuing disregard for the safety and soundness of the institution.
12 U.S.C. 1818(e) & (i). 12 U.S.C. 1821(d)(13)(E). See also 12 U.S.C.
1821(k) and 12 U.S.C. 1818.
\31\ 12 U.S.C. 1823(c)(4)(G)(ii).
---------------------------------------------------------------------------
Establishment of the Bridge Banks
After the systemic risk determination was approved on March 12, the
FDIC chartered Silicon Valley Bridge Bank, N.A., (SV Bridge Bank) and
transferred all deposits, both insured and uninsured, and substantially
all the assets of SVB to SV Bridge Bank. \32\ The FDIC also chartered
Signature Bridge Bank, N.A., (Signature Bridge Bank) and transferred
all deposits and substantially all assets of the failed Signature Bank
to Signature Bridge Bank. \33\
---------------------------------------------------------------------------
\32\ See FDIC Press Release, ``FDIC Acts To Protect All Depositors
of the Former Silicon Valley Bank, Santa Clara, California'' (March 13,
2023), available at https://www.fdic.gov/news/press-releases/2023/
pr23019.html.
\33\ See FDIC Press Release, ``FDIC Establishes Signature Bridge
Bank, N.A., as Successor to Signature Bank, New York, NY'' (March 12,
2023), available at https://www.fdic.gov/news/press-releases/2023/
pr23018.html.
---------------------------------------------------------------------------
A bridge bank is a chartered national bank that operates on a
temporary basis under management appointed by the FDIC. \34\ It assumes
the deposits and certain other liabilities and purchases certain assets
of a failed bank. The bridge bank structure is designed to ``bridge''
the gap between the failure of a bank and the time when the FDIC can
stabilize the institution and implement an orderly resolution. It also
provides prospective purchasers with the time necessary to assess the
bank's condition in order to submit their offers.
---------------------------------------------------------------------------
\34\ 12 U.S.C. 1821(n).
---------------------------------------------------------------------------
Depositors and borrowers of SVB and Signature Bank automatically
became customers of the new bridge institutions, which reopened on
Monday, March 13, with normal business activities.
Marketing and Sale of the Bridge Banks
The FDIC's ultimate goal in operating a bridge institution is
always to return the institution to private control as quickly as
possible. In the context of SVB and Signature Bank, this goal was
especially important, given the need to provide stability and certainty
to affected depositors and customers of the banks, as well as to
maintain stability and confidence in the banking system and stem the
risk of contagion to other financial institutions. The FDIC opened
bidding for the bridge banks on Wednesday, March 15.
Signature Bridge Bank Purchase and Assumption Agreement
Bidding for Signature Bridge Bank closed on Saturday, March 18. The
FDIC received five bids from four bidders. The FDIC Board approved
Flagstar Bank, N.A., Hicksville, New York, a wholly owned subsidiary of
New York Community Bancorp, Inc., Westbury, New York, as the successful
bidder.
On March 19, the FDIC entered into a purchase and assumption
agreement for the acquisition of substantially all deposits and certain
loan portfolios of Signature Bridge Bank by Flagstar Bank, N.A. The 40
former branches of Signature Bank began operating under Flagstar Bank,
N.A., on Monday, March 20. Depositors of Signature Bridge Bank, other
than depositors related to the digital asset banking business,
automatically became depositors of the acquiring institution. The
acquiring institution did not bid on the deposits of those digital
asset banking customers. The FDIC is providing those deposits,
approximating $4 billion, directly to those customers.
As of December 31, 2022, the former Signature Bank had total
deposits of $88.6 billion and total assets of $110.4 billion. The
transaction with Flagstar Bank, N.A., included the purchase of about
$38.4 billion of Signature Bridge Bank's assets, including loans of
$12.9 billion purchased at a discount of $2.7 billion. Approximately
$60 billion in loans will remain in the receivership for later
disposition by the FDIC. In addition, the FDIC received equity
appreciation rights in New York Community Bancorp, Inc., common stock
with a potential value of up to $300 million.
SV Bridge Bank Purchase and Assumption Agreement
On March 20, the FDIC announced it would extend the bidding process
for SV Bridge Bank. \35\ While there was substantial interest from
multiple parties, the FDIC determined it needed additional time to
explore all options in order to maximize value and achieve the optimal
outcome. The FDIC also announced it would allow parties to submit
separate bids for SV Bridge Bank and its subsidiary Silicon Valley
Private Bank. Qualified, insured banks and qualified, insured banks in
alliance with nonbank partners would be able to submit whole-bank bids
or bids on the deposits or assets of the institutions. Bank and nonbank
financial firms were permitted to bid on the asset portfolios.
---------------------------------------------------------------------------
\35\ See FDIC Press Release, ``FDIC Extends Bid Window for Silicon
Valley Bridge Bank, N.A.'' (March 20, 2023), available at https://
www.fdic.gov/news/press-releases/2023/pr23022.html.
---------------------------------------------------------------------------
Bidding for Silicon Valley Private Bank and SV Bridge Bank closed
on March 24. The FDIC received 27 bids from 18 bidders, including bids
under the whole-bank, private bank, and asset portfolio options. On
March 26, the FDIC approved First-Citizens Bank & Trust Company (First-
Citizens), Raleigh, North Carolina, as the successful bidder to assume
all deposits and loans of SV Bridge Bank. First-Citizens also acquired
the bank's private wealth management business. The 17 former branches
of SV Bridge Bank in California and Massachusetts reopened as First-
Citizens on March 27.
As of March 10, 2023, SV Bridge Bank had approximately $167 billion
in total assets and about $119 billion in total deposits. The
transaction with First-Citizens included the purchase of about $72
billion of SV Bridge Bank's assets at a discount of $16.5 billion.
Approximately $90 billion in securities and other assets remained in
the receivership for disposition by the FDIC. In addition, the FDIC
received equity appreciation rights in First Citizens BancShares, Inc.,
Raleigh, North Carolina, common stock with a potential value of up to
$500 million.
The FDIC and First-Citizens entered into a loss-share transaction
on the commercial loans it purchased of the former SV Bridge Bank. \36\
The FDIC as receiver and First-Citizens will share in the losses and
potential recoveries on the loans covered by the loss-share agreement.
The loss-share transaction is projected to maximize recoveries on the
assets by keeping them in the private sector. The transaction is also
expected to minimize disruptions for loan customers
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\36\ For more information on FDIC loss share transactions, see
https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-
list/lossshare/index.html.
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Impact on the Deposit Insurance Fund
The FDIC estimates that the cost to the DIF of resolving SVB to be
$20 billion. The FDIC estimates the cost of resolving Signature Bank to
be $2.5 billion. Of the estimated loss amounts, approximately 88
percent, or $18 billion, is attributable to the cost of covering
uninsured deposits at SVB while approximately two-thirds, or $1.6
billion, is attributable to the cost of covering uninsured deposits at
Signature Bank. I would emphasize that these estimates are subject to
significant uncertainty and are likely to change, depending on the
ultimate value realized from each receivership.
Under the FDI Act, the loss to the DIF arising from the use of a
systemic risk exception must be recovered from one or more special
assessments on insured depository institutions, depository institution
holding companies, or both, as the FDIC determines to be appropriate.
\37\ The FDI Act provides the agency with discretion in the design and
timeframe for any special assessment to cover the losses from the
systemic risk exception. Specifically, the law requires the FDIC to
consider: the types of entities that benefit from the action taken,
economic conditions, the effects on the industry, and such other
factors as the FDIC deems appropriate and relevant. \38\ Finally, the
FDI Act requires that a special assessment be prescribed through
regulation. \39\ The FDIC intends to seek input on any special
assessment from all stakeholders through notice-and-comment rulemaking
and expects to issue a notice of proposed rulemaking for a special
assessment related to the failures of SVB and Signature Bank in May
2023.
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\37\ 12 U.S.C. 1823(c)(4)(G)(ii)(I).
\38\ 12 U.S.C. 1823(c)(4)(G)(ii)(III).
\39\ Ibid.
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Current State of the U.S. Financial System
The state of the U.S. financial system remains sound despite recent
events.
The FDIC has been closely monitoring liquidity, including deposit
trends, across the banking industry. Since the action taken by the
Government to support the banking system, there has been a moderation
of deposit outflows at the banks that were experiencing large outflows
the week of March 6. In general, banks have been prudently working
preemptively to increase liquidity and build liquidity buffers.
Over the past 2 weeks, banks have relied on new Federal Home Loan
Bank (FHLB) advances to strengthen liquidity and have also pre-
positioned additional collateral at the FHLB to support future draws,
if needed. Banks have also prepared to access the Federal Reserve's
Discount Window and new Bank Term Funding Program by ensuring that they
have prepositioned collateral. It is important that we, as regulators,
message to our supervised institutions that these facilities can and
should be used to support liquidity needs. Sales of investment
securities have been a less common source of liquidity as the level of
unrealized loss across both available-for-sale and held-to-maturity
portfolio remains elevated.
With reference to deposits, as expected, banks report that they are
closely monitoring deposit trends and researching unexpected account
activity. Banks report instances of corporate depositors, in
particular, moving some or all of their deposits to diversify their
exposures and increase their deposit insurance coverage. Banks have
also reported clients moving their deposits out of the banking system
and into Government money market funds or U.S. Treasuries. In general,
the largest banks appear to be net beneficiaries of deposit flows,
increasing the amounts on deposit, or held in custody, at the global
systemically important banks and at large regional banks. While some
banks are reporting a moderate decline in total deposits over the past
2 weeks, the vast majority are reporting no material outflows.
The FDIC is also following other trends in bank activities, in
particular, the steps institutions are taking to support capital and
liquidity in times of market instability and uncertain deposit outlook.
More broadly, the financial system continues to face significant
downside risks from the effects of inflation, rising market interest
rates, and continuing geopolitical uncertainties. Credit quality and
profitability may weaken due to these risks, potentially resulting in
tighter loan underwriting, slower loan growth, higher provision
expenses, and liquidity constraints. Additional short-term interest
rate increases, combined with longer asset maturities may continue to
increase unrealized losses on securities and affect bank balance sheets
in coming quarters.
Preliminary Lessons Learned
In the immediate aftermath of the failure of SVB and Signature
Bank, some preliminary lessons can be identified. A common thread
between the failure of SVB and the failure of Signature Bank was the
banks' heavy reliance on uninsured deposits. As of December 31, 2022,
Signature Bank reported that approximately 90 percent of its deposits
were uninsured, and SVB reported that 88 percent of its deposits were
uninsured. The significant proportion of uninsured deposit balances
exacerbated deposit run vulnerabilities and made both banks susceptible
to contagion effects from the quickly evolving financial developments.
One clear takeaway from recent events is that heavy reliance on
uninsured deposits creates liquidity risks that are extremely difficult
to manage, particularly in today's environment where money can flow out
of institutions with incredible speed in response to news amplified
through social media channels.
A common thread between the collapse of Silvergate Bank and the
failure of SVB was the accumulation of losses in the banks' securities
portfolios. In the wake of the pandemic, as interest rates remained at
near-zero, many institutions responded by ``reaching for yield''
through investments in longer-term assets, while others reduced on-
balance sheet liquidity--cash, Federal funds--to increase overall
yields on earning assets and maintain net interest margins. These
decisions led to a second common theme at these institutions--
heightened exposure to interest rate risk, which lay dormant as
unrealized losses for many banks as rates quickly rose over the last
year. When Silvergate Bank and SVB experienced rapidly accelerating
liquidity demands, they sold securities at a loss. The now realized
losses created both liquidity and capital risk for those firms,
resulting in a self-liquidation and failure.
Finally, the failures of SVB and Signature Bank also demonstrate
the implications that banks with assets of $100 billion or more can
have for financial stability. The prudential regulation of these
institutions merits additional attention, particularly with respect to
capital, liquidity, and interest rate risk. This would include the
capital treatment associated with unrealized losses in banks'
securities portfolios. Given the financial stability risks caused by
the two failed banks, the methods for planning and carrying out a
resolution of banks with assets of $100 billion or more also merit
special attention, including consideration of a long-term debt
requirement to facilitate orderly resolutions.
Conclusion
Recent efforts to stabilize the banking system and stem potential
contagion from the failures of SVB and Signature Bank have ensured that
depositors will continue to have access to their savings, that small
businesses and other employers can continue to make payrolls, and that
other banks--small, medium, and large--can continue to extend credit to
borrowers and serve as a source of support. The FDIC continues to
monitor developments and is prepared to use all of its authorities as
needed.
The circumstances surrounding the failures of SVB and Signature
Bank merit further thorough review by both regulators and policymakers.
The FDIC's Chief Risk Officer will undertake a review of the FDIC's
supervision of Signature Bank and intends to release a report by May 1,
2023. The FDIC will also undertake a comprehensive review of the
deposit insurance system and will release by May 1, 2023, a report that
will include policy options for consideration related to deposit
insurance coverage levels, excess deposit insurance, and the
implications for risk-based pricing and deposit insurance fund
adequacy.
The FDIC is committed to working cooperatively with our
counterparts at the other Federal regulators as well as with
policymakers in the Congress to better understand what brought these
institutions to failure and what measures can be taken to prevent
similar failures in the future.
______
PREPARED STATEMENT OF MICHAEL BARR
Vice Chairman for Supervision, Board of Governors of the Federal
Reserve System
March 28, 2023
Chairman Brown, Ranking Member Scott, and other Members of the
Committee, thank you for the opportunity to testify today on the
Federal Reserve's supervisory and regulatory oversight of Silicon
Valley Bank (SVB). \1\
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\1\ This testimony uses ``Silicon Valley Bank (SVB)'' to refer to
both the State member bank, Silicon Valley Bank, and its bank holding
company, SVB Financial Group.
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Our banking system is sound and resilient, with strong capital and
liquidity. The Federal Reserve, working with the Treasury Department
and the Federal Deposit Insurance Corporation (FDIC), took decisive
actions to protect the U.S. economy and to strengthen public confidence
in our banking system. These actions demonstrate that we are committed
to ensuring that all deposits are safe. We will continue to closely
monitor conditions in the banking system and are prepared to use all of
our tools for any size institution, as needed, to keep the system safe
and sound.
At the same time, the events of the last few weeks raise questions
about evolving risks and what more can and should be done so that
isolated banking problems do not undermine confidence in healthy banks
and threaten the stability of the banking system as a whole. At the
forefront of my mind is the importance of maintaining the strength and
diversity of banks of all sizes that serve communities across the
country.
SVB failed because the bank's management did not effectively manage
its interest rate and liquidity risk, and the bank then suffered a
devastating and unexpected run by its uninsured depositors in a period
of less than 24 hours. SVB's failure demands a thorough review of what
happened, including the Federal Reserve's oversight of the bank. I am
committed to ensuring that the Federal Reserve fully accounts for any
supervisory or regulatory failings, and that we fully address what went
wrong.
Our first step is to establish the facts--to take an unflinching
look at the supervision and regulation of SVB before its failure. This
review will be thorough and transparent, and reported to the public by
May 1. The report will include confidential supervisory information,
including supervisory assessments and exam material, so that the public
can make its own assessment. \2\ Of course, we welcome and expect
external reviews as well.
---------------------------------------------------------------------------
\2\ Typically, the Board does not disclose confidential
supervisory information. We are sharing confidential supervisory
information in the case of SVB because the bank went into resolution,
and its disorderly failure posed systemic risk.
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Why the Bank Failed
To begin, SVB's failure is a textbook case of mismanagement. The
bank had a concentrated business model, serving the technology and
venture capital sector. It also grew exceedingly quickly, tripling in
asset size between 2019 and 2022. During the early phase of the
pandemic, and with the tech sector booming, SVB saw significant deposit
growth. The bank invested the proceeds of these deposits in longer-term
securities, to boost yield and increase its profits. \3\ However, the
bank did not effectively manage the interest rate risk of those
securities or develop effective interest rate risk measurement tools,
models, and metrics.
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\3\ By year-end 2022, the firm's investment portfolio represented
over 55 percent of its total assets.
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At the same time, the bank failed to manage the risks of its
liabilities. These liabilities were largely composed of deposits from
venture capital firms and the tech sector, which were highly
concentrated and could be volatile. Because these companies generally
do not have operating revenue, they keep large balances in banks in the
form of cash deposits, to make payroll and pay operating expenses.
These depositors were connected by a network of venture capital firms
and other ties, and when stress began, they essentially acted together
to generate a bank run.
The Bank's Failure
The bank waited too long to address its problems, and ironically,
the overdue actions it finally took to strengthen its balance sheet
sparked the uninsured depositor run that led to the bank's failure.
Specifically, on Wednesday, March 8, SVB announced that it realized a
$1.8 billion loss in a sale of securities to raise liquidity and
planned to raise capital during the following week. Uninsured
depositors interpreted these actions as a signal that the bank was in
distress. They turned their focus to the bank's balance sheet, and they
did not like what they saw.
In response, social media saw a surge in talk about a run, and
uninsured depositors acted quickly to flee. Depositors withdrew funds
at an extraordinary rate, pulling more than $40 billion in deposits
from the bank on Thursday, March 9. On Thursday evening and Friday
morning, the bank communicated that they expected even greater outflows
that day. The bank did not have enough cash or collateral to meet those
extraordinary and rapid outflows, and on Friday, March 10, SVB failed.
Panic prevailed among SVB's remaining depositors, who saw their
savings at risk and their businesses in danger of missing payroll
because of the bank's failure.
Contagion and the Government's Response
It appeared that contagion from SVB's failure could be far-reaching
and cause damage to the broader banking system. The prospect of
uninsured depositors not being able to access their funds could prompt
depositors to question the overall safety and soundness of U.S.
commercial banks. There were signs of distress at other banking
organizations, and Signature Bank, an FDIC-supervised institution,
experienced a deposit run that resulted in the bank's failure. On
Sunday, March 12, the Secretary of the Treasury, upon the unanimous
recommendation of the boards of the Federal Reserve and the FDIC,
approved systemic risk exceptions for the failures of SVB and
Signature. This enabled the FDIC to guarantee all of the deposits of
both banks. Equity and other liability holders of the two failed banks
were not protected and lost their investments. Senior management was
immediately removed.
In addition, the Federal Reserve Board (Board), with the Treasury
Department's approval, created a temporary lending facility, the Bank
Term Funding Program, to allow banks to receive additional liquidity to
meet any unexpected depositor demand. The facility allows banks to
borrow against safe Treasury and agency securities at par for up to 1
year. Together with banks' internal liquidity and stable deposits,
other external sources, and discount window lending, the new facility
provides ample liquidity for the banking system as a whole.
Our Review of the Bank's Failure
Immediately following SVB's failure, Chair Powell and I agreed that
I should oversee a review of the circumstances leading up to SVB's
failure. SVB was a State member bank with a bank holding company, and
so the Federal Reserve was fully responsible for the Federal
supervision and regulation of the bank. The California Department of
Financial Protection and Innovation--the State supervisor--has
announced its own review of its oversight and regulation of SVB.
In the Federal Reserve's review, we are looking at SVB's growth and
management, our supervisory engagement with the bank, and the
regulatory requirements that applied to the bank. As this process is
ongoing, I will be limited in my ability to provide firm conclusions,
but I will focus on what we know and where we are focusing the review.
The picture that has emerged thus far shows SVB had inadequate risk
management and internal controls that struggled to keep pace with the
growth of the bank. In 2021, as the bank grew rapidly in size, the bank
moved into the large and foreign banking organization, or LFBO,
portfolio to reflect its larger risk profile and was assigned a new
team of supervisors. LFBO firms between $100 billion and $250 billion
are subject to some enhanced prudential standards but not at the level
of larger banks or global systemically important banks (G-SIBs).
Near the end of 2021, supervisors found deficiencies in the bank's
liquidity risk management, resulting in six supervisory findings
related to the bank's liquidity stress testing, contingency funding,
and liquidity risk management. \4\ In May 2022, supervisors issued
three findings related to ineffective board oversight, risk-management
weaknesses, and the bank's internal audit function. In the summer of
2022, supervisors lowered the bank's management rating to ``fair'' and
rated the bank's enterprisewide governance and controls as ``deficient-
1.'' These ratings mean that the bank was not ``well-managed'' and was
subject to growth restrictions under section 4(m) of the Bank Holding
Company Act. \5\ In October 2022, supervisors met with the bank's
senior management to express concern with the bank's interest rate risk
profile and in November 2022, supervisors delivered a supervisory
finding on interest rate risk management to the bank.
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\4\ Supervisory findings include Matters Requiring Attention (MRA)
and Matters Requiring Immediate Attention (MRIA). An MRA is ``a call
for action to address weaknesses that could lead to deterioration in a
banking organization's soundness.'' An MRIA is ``a call for more
immediate action to address acute or protracted weaknesses that could
lead to further deterioration in a banking organization's soundness,
may result in harm to consumers, or have caused, or could lead to,
noncompliance with laws and regulations.'' MRAs and MRIAs typically are
the first step in communicating supervisory findings to a firm. When a
bank has a weakness, supervisors decide whether to assign an MRA or
MRIA--and the timeline for remediation--depending on the severity of
the issue. The number of MRAs and MRIAs per firm is variable and
largely reflects the extent of risk-management weaknesses of a firm.
While most MRAs and MRIAs are resolved without further escalation, to
the extent not resolved, they can serve as the basis for provisions
included in a public enforcement action. See Board of Governors of the
Federal Reserve System, ``Supervision and Regulation Report''
(Washington: Board of Governors, November 2019), at 21, https://
www.federalreserve.gov/publications/files/201911-supervision-and-
regulation-report.pdf.
\5\ 12 U.S.C. 1843(m), 12 CFR 225.83. The growth restrictions
under section 4(m) apply to the expansion of nonbank activities through
merger and acquisition.
---------------------------------------------------------------------------
In mid-February 2023, staff presented to the Federal Reserve's
Board of Governors on the impact of rising interest rates on some
banks' financial condition and staff's approach to address issues at
banks. Staff discussed the issues broadly, and highlighted SVB's
interest rate and liquidity risk in particular. Staff relayed that they
were actively engaged with SVB but, as it turned out, the full extent
of the bank's vulnerability was not apparent until the unexpected bank
run on March 9.
Review Focus on Supervision
With respect to our review, let me start with the supervision of
the bank. For all banks but the G-SIBs, the Federal Reserve organizes
its supervisory approach based on asset size. The G-SIBs--our largest,
most complex banks--are supervised within the Large Institution
Supervision Coordinating Committee, or LISCC, portfolio. Banks with
assets of $100 billion or more that are not G-SIBs are supervised
within the LFBO portfolio. Banks with assets in the $10 to $100 billion
range are supervised within the regional banking organization, or RBO,
portfolio. Banks with assets of less than $10 billion are supervised
within the community banking organization, or CBO, portfolio.
As I mentioned, SVB grew exceedingly quickly, moving from the RBO
portfolio to the LFBO portfolio in 2021. Banks in the RBO portfolio are
supervised by smaller teams that engage with the bank on a quarterly
basis and conduct a limited number of targeted exams and a full-scope
examination each year. \6\ Banks in the LFBO portfolio are supervised
by larger teams that engage with the bank on an ongoing basis. As
compared to RBOs, LFBO banks are subject to a greater number of
targeted exams, as well as horizontal (cross-bank) exams that assess
risks such as capital, liquidity, and cybersecurity throughout the
year. \7\ In addition, banks in the LFBO portfolio are subject to a
supervision framework with higher supervisory standards, including
heightened standards for capital, liquidity, and governance. \8\
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\6\ A full scope examination is an assessment of safety and
soundness of a bank and includes an evaluation of financial condition,
risk management, and control. A target examination is an assessment of
a particular area or risk within a firm.
\7\ A horizontal review is an examination in a particular area or
risk that is coordinated across several firms. Horizontal reviews also
provide a clear picture of the relative risk in an individual firm and
allow supervisors to align supervisory expectations with the firm's
risk profile. For more information, see Board of Governors of the
Federal Reserve System, Supervision and Regulation Report (Washington:
Board of Governors, May 2019), at 18, https://www.federalreserve.gov/
publications/files/201905-supervision-and-regulation-report.pdf.
\8\ SR letter 12-17 / CA 12-14, ``Consolidated Supervision
Framework for Large Financial Institutions,'' https://
www.federalreserve.gov/supervisionreg/srletters/sr1217.htm.
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In our review, we are focusing on whether the Federal Reserve's
supervision was appropriate for the rapid growth and vulnerabilities of
the bank. While the Federal Reserve's framework focuses on size
thresholds, size is not always a good proxy for risk, particularly when
a bank has a nontraditional business model. As I mentioned in a speech
this month, the Federal Reserve had recently decided to establish a
dedicated novel activity supervisory group, with a team of experts
focused on risks of novel activities, which should help improve
oversight of banks like SVB in the future. \9\
---------------------------------------------------------------------------
\9\ Michael S. Barr, ``Supporting Innovation With Guardrails: The
Federal Reserve's Approach to Supervision and Regulation of Banks'
Crypto-related Activities'' (speech at the Peterson Institute for
International Economics, Washington, DC, March 9, 2023), https://
www.federalreserve.gov/newsevents/speech/barr20230309a.htm.
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But the unique nature of this bank and its focus on the technology
sector are not the whole story. After all, SVB's failure was brought on
by mismanagement of interest rate risk and liquidity risks, which are
well-known risks in banking. Our review is considering several
questions:
How effective is the supervisory approach in identifying
these risks?
Once risks are identified, can supervisors distinguish
risks that pose a material threat to a bank's safety and
soundness?
Do supervisors have the tools to mitigate threats to safety
and soundness?
Do the culture, policies, and practices of the Board and
Reserve Banks support supervisors in effectively using these
tools?
Beyond asking these questions, we need to ask why the bank was
unable to fix and address the issues we identified in sufficient time.
It is not the job of supervisors to fix the issues identified; it is
the job of the bank's senior management and board of directors to fix
its problems.
Review Focus on Regulation
Let me now turn to regulation. In 2019, following the passage of
``The Economic Growth, Regulatory Relief, and Consumer Protection
Act'', the Federal Reserve revised its framework for regulation,
maintaining the enhanced prudential standards applicable to G-SIBs but
tailoring requirements for all other large banks. At the time of its
failure, SVB was a ``Category IV'' bank, which meant that it was
subject to a less stringent set of enhanced prudential standards than
would have applied before 2019; they include less frequent stress
testing by the Board, no bank-run capital stress testing requirements,
and less rigorous capital planning and liquidity risk-management
standards. SVB was not required to submit a resolution plan to the
Federal Reserve, although its bank was required to submit a resolution
plan to the FDIC. \10\ And as a result of transition periods and the
timing of biennial stress testing, SVB would not have been subject to
stress testing until 2024, a full 3 years after it crossed the $100
billion asset threshold. \11\
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\10\ Previously, SVB was in the $50 billion to $100 billion
category, which under the statutory tailoring framework does not
require a resolution plan, stress testing, or liquidity rules.
\11\ To be subject to enhanced prudential standards, a bank
holding company's assets must exceed $100 billion on a four-quarter
rolling average. The phase-in for stress testing is roughly 2 years and
was unchanged by the 2019 rule changes. However, moving to an every-
other-year stress test for Category IV firms can result in another year
lag if the phase-in period concludes in an odd-numbered year.
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Also in 2019, the banking agencies tailored their capital and
liquidity rules for large banks, and as a result, SVB was not subject
to the liquidity coverage ratio or the net stable funding ratio. \12\
In addition, SVB was not subject to the supplementary leverage ratio,
and its capital levels did not have to reflect unrealized losses on
certain securities.
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\12\ The banking agencies include the Board, the FDIC, and the
Office of the Comptroller of the Currency.
---------------------------------------------------------------------------
All of these changes are in the scope of our review. Specifically,
we are evaluating whether application of more stringent standards would
have prompted the bank to better manage the risks that led to its
failure. We are also assessing whether SVB would have had higher levels
of capital and liquidity under those standards, and whether such higher
levels of capital and liquidity would have forestalled the bank's
failure or provided further resilience to the bank.
Ongoing Work To Understand and Address Emerging Risks
As I said a few months ago with regards to capital, we must be
humble about our ability--and that of bank managers--to predict how a
future financial crisis might unfold, how losses might be incurred, and
what the effect of a financial crisis might be on the financial system
and our broader economy. \13\
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\13\ Michael S. Barr, ``Why Bank Capital Matters'' (speech at the
American Enterprise Institute, Washington, DC, December 1, 2022),
https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.
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The failure of SVB illustrates the need to move forward with our
work to improve the resilience of the banking system. For example, it
is critical that we propose and implement the Basel III endgame
reforms, which will better reflect trading and operational risks in our
measure of banks' capital needs. In addition, following on our prior
advance notice of proposed rulemaking, we plan to propose a long-term
debt requirement for large banks that are not G-SIBs, so that they have
a cushion of loss-absorbing resources to support their stabilization
and allow for resolution in a manner that does not pose systemic risk.
We will need to enhance our stress testing with multiple scenarios so
that it captures a wider range of risk and uncovers channels for
contagion, like those we saw in the recent series of events. We must
also explore changes to our liquidity rules and other reforms to
improve the resiliency of the financial system.
In addition, recent events have shown that we must evolve our
understanding of banking in light of changing technologies and emerging
risks. To that end, we are analyzing what recent events have taught us
about banking, customer behavior, social media, concentrated and novel
business models, rapid growth, deposit runs, interest rate risk, and
other factors, and we are considering the implications for how we
should be regulating and supervising our financial institutions. And
for how we think about financial stability.
Part of the Federal Reserve's core mission is to promote the safety
and soundness of the banks we supervise, as well as the stability of
the financial system to help ensure that the system supports a healthy
economy for U.S. households, businesses, and communities. Deeply
interrogating SVB's failure and probing its broader implications is
critical to our responsibility for upholding that mission.
Thank you, and I look forward to your questions.
______
PREPARED STATEMENT OF NELLIE LIANG
Under Secretary for Domestic Finance, Department of the Treasury
March 28, 2023
Chairman Brown, Ranking Member Scott, and other Members of the
Committee, thank you for inviting me to testify today.
I have had the opportunity to speak with Committee Members several
times in recent days to share updates from Treasury regarding current
events. In light of that, I will keep my introductory remarks brief.
The American economy relies on a healthy banking system--one that
includes large, small, and mid-size banks and provides for the
financial needs of families, businesses, and local communities.
Households depend on banks to finance their cars and homes and build
their savings. Businesses borrow from banks to start and expand their
operations, creating jobs for American workers and benefits for their
local economies.
Nearly 3 weeks ago, problems emerged at two banks with the
potential for immediate and significant impacts on the broader banking
system and the economy. The situation demanded a swift response. In the
days that followed, the Federal Government took decisive actions to
strengthen public confidence in the U.S. banking system and protect the
American economy.
On March 9th, depositors of Silicon Valley Bank (SVB), withdrew $42
billion in deposits in a period of just a few hours. After concluding
that significant deposit withdrawals would continue the next day, the
California State regulator closed SVB and appointed the Federal Deposit
Insurance Corporation (FDIC) as receiver on March 10th. Two days later,
on Sunday March 12th, the New York regulator closed Signature Bank,
which also had experienced a depositor run, and appointed the FDIC as
receiver.
Treasury worked to assess the effects of these failures on the
broader banking system, consulting regularly with the Federal Reserve
and FDIC. On Sunday evening, recognizing the urgency of reducing
uncertainty for Monday morning, Treasury, the Federal Reserve, and the
FDIC announced a number of actions to stem uninsured depositor runs and
to prevent significant disruptions to households and businesses.
First, the boards of the FDIC and the Federal Reserve unanimously
recommended, and Secretary Yellen approved after consulting with the
President, two actions that would enable the FDIC to complete its
resolutions of the two banks in a manner that fully protects all of
their depositors. These actions ensured that businesses could continue
to make payroll and that families could access their funds. Depositors
were protected by the Deposit Insurance Fund. Equity holders and bond
holders were not covered.
Second, the Federal Reserve created the Bank Term Lending Program,
a new facility to provide term funding to all insured depository
institutions eligible for primary credit at the discount window, based
on their holdings of Treasury and Government agency securities. This
program, along with its preexisting discount window, has helped banks
meet depositor demands and bolstered liquidity in the banking system.
This two-pronged, targeted approach was necessary to reassure
depositors at all banks, and to protect the U.S. banking system and
economy. These actions have helped to stabilize deposits throughout the
country and provided depositors with confidence that their funds are
safe.
In addition to these actions, on March 16th, 11 banks deposited $30
billion into First Republic Bank. The actions of these large and mid-
size banks represent a vote of confidence in the banking system and
demonstrate the importance of banks of all sizes working to keep our
economy strong. Moreover, on March 20th the deposits and certain assets
of Signature Bridge Bank were acquired from the FDIC, and on March 26th
the deposits and certain assets of Silicon Valley Bridge Bank were
acquired from the FDIC.
We continue to closely monitor developments across the banking and
financial system, and coordinate with Federal and State regulators. As
Secretary Yellen has said, we have used important tools to act quickly
to prevent contagion. And they are tools we would use again if
warranted to ensure that Americans' deposits are safe.
Looking forward, while we do not yet have all the details about the
failures of the two banks, we do know that the recent developments are
very different from those of the Global Financial Crisis. Back then,
many financial institutions came under stress because they held low
credit-quality assets. This was not at all the catalyst for recent
events. Our financial system is significantly stronger than it was 15
years ago. This is in large part due to postcrisis reforms for stronger
capital and liquidity requirements.
As you know, the Federal Reserve announced a review of the failure
of SVB and the FDIC a review of Signature bank. I fully support these
reviews and look forward to learning more in order to inform any
regulatory and supervisory responses. We must ensure that our bank
regulatory policies and supervision are appropriate for the risks and
challenges that banks face today.
The American financial system is strong in part because of our
dynamic and diverse banking system. Large, small, and mid-size banks
all play an important role in our economy. Small and mid-size banks,
including community banks, serve a vital role in providing credit and
financial support to families and small businesses. Smaller banks
provide 60 percent of loans to U.S. small businesses. \1\ Their
specialized knowledge, expertise, and relationships in their
communities enable them to capably serve customers, and their presence
increases competition in the banking sector for the benefit of
consumers.
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\1\ https://cdn.advocacy.sba.gov/wp-content/uploads/2022/07/
12095600/2020-Small-Business-Lending-Report-508c.pdf
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I want to thank the Committee for its leadership on these important
issues and for inviting me here to testify today. I look forward to
your questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
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RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
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SENATOR FETTERMAN FROM MICHAEL BARR
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RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
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SENATOR CORTEZ MASTO FROM NELLIE LIANG
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Additional Material Supplied for the Record
LETTER SUBMITTED BY AMERICAN SHARE INSURANCE
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BETTER MARKETS BANKING FACT SHEET
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LETTER SUBMITTED BY NAFCU
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