Relevant Documents:Senate Banking Hearing NoticeHFSC Hearing Memo
The Senate Banking Committee and House Financial Services Committee, or HFSC, this week continued their scrutiny of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank. Senators heard testimony from banking regulators on proposed reforms, and HFSC members grilled the failed bank executives on their risk management processes.
The banking oversight committees held
hearings earlier this week, at which the Senate Banking Committee questioned the executives and the HFSC heard from the regulators.
Federal Reserve Vice Chair for Supervision Michael Barr and Federal Deposit Insurance Chair Martin Gruenberg today refuted claims made by former SVB CEO Gregory Becker earlier this week that SVB had adequately addressed warnings issued by supervisors. Democratic senators generally expressed support for Barr and Gruenberg’s proposed regulatory reforms. Republicans generally disagreed, arguing that regulators’ failure to fully use their existing tools quickly and forcefully enough obviated the need for additional regulations.
Separately, the HFSC on Wednesday heard directly from Becker and former executives from Signature Bank and First Republic. Lawmakers from both parties were quick to criticize Becker and SVB’s management for failing to properly handle interest rate and liquidity risks. Representatives also discussed the potential use of contingent convertible instruments by large banks and potential adjustments to how banks reflect unrealized losses on their financial statements. House members also quizzed state banking regulators from California and New York on their respective roles supervising SVB and Signature Bank.
Senate Hearing With Regulators
Federal Reserve Vice Chair for Supervision
Michael Barr and FDIC Chair
Martin Gruenberg reiterated the proposed regulatory reforms they
previously outlined at Tuesday’s House hearing.
Chair Sen. Sherrod Brown, D-Ohio,
supported the regulators’ proposals to “strengthen our guardrails” with respect to capital, liquidity and stress tests, “consider options for deposit reform” and improve “merger policy so that failed bank acquisitions by megabanks are only a last resort.” He also stressed the importance of “restor[ing] the culture of supervision that puts the public interest ahead of bank executives’ stock portfolios” and said he was working on bipartisan legislation to “hold bank executives accountable for their wrongdoing.”
Ranking Member Sen. Tim Scott, R-S.C.,
was highly skeptical of the proposed regulatory reforms and argued that regulators did not use their existing “tools and the toolbox to do the job that was necessary.” He also criticized Barr’s calls for increased capital requirements for banks, arguing that SVB’s problems “had to do with liquidity and not capital” and that increased capital requirements would leave “more cash on the sidelines so there’s fewer dollars to loan out,” which would harm wider economic growth.
Scott was joined by Sen. John Kennedy, R-La., in expressing frustration that no federal employees were fired over the supervisory shortcomings preceding the banking crisis. Kennedy quipped, “If Elizabeth Holmes worked for one of your agencies, she’d probably be getting a bonus.”
Kennedy also criticized Barr for admitting the shortcomings of the Federal Reserve in supervising the failed banks while asking Congress for “more money and power.” Barr countered that he was not asking lawmakers to change any existing laws. The Federal Reserve is able to use its current statutory authority to craft additional regulations that allow supervisors to act with more speed and agility, according to Barr.
Barr and Gruenberg also contradicted certain claims made by former SVB CEO Gregory Becker at hearings earlier this week. Responding to a question from Sen. Mike Rounds, R-S.D., on whether Becker was correct in claiming that SVB had remediated all but one supervisory finding at the time of its failure, Barr said that was “not true.” There were 31 unaddressed matters requiring attention at the time of SVB’s closure, Barr said, including findings related to interest rate risk, liquidity risk as well as broader risk management and governance issues.
Barr also disproved an assertion made by Becker during the House hearing that no supervisors raised concerns related to interest rate risk prior to SVB’s failure. In response, Barr read to the senators an excerpt of a Nov. 15 letter addressed directly to Becker detailing supervisors’ serious concern about SVB’s interest risk management strategy.
Barr also testified that after the Federal Reserve notified SVB it had failed a liquidity test, the bank changed the model for its liquidity test to make it “less conservative.” Such actions, Barr said, were “counterproductive.”
“So it took the test, it failed the test, then it rewrote the test and passed the test,” Sen. Jack Reed, D-R.I., remarked before calling for stronger liquidity and capital rules.
Gruenberg told Sen. Bill Hagerty, R-Tenn., that contrary to Becker’s claim that the FDIC had rebuffed the former CEO’s offer to assist with the sale of SVB, he was aware of a meeting between Becker and FDIC staff during the weekend following SVB’s collapse.
Sen. Kevin Cramer, R-N.D., said that regulators should, like a soccer referee, focus on issuing more timely “yellow cards” to banks with risk issues instead of proposing more regulations. Barr later remarked that “a lot of yellow cards were issued” to SVB, “but not enough red cards.” The vice chair added that he was overseeing efforts to improve supervisors’ agility, speed and initiative when there is a need to remediate agency concerns.
Sen. Mark Warner, D-Va., remarked that he has not seen “many worthwhile policy recommendations” from regulators to address the role that instant account withdrawals exacerbated by social media played in SVB’s collapse. Barr and Gruenberg said their agencies were considering these factors but did not elaborate on possible policies.
Warner also criticized venture capitalists for “shouting fire in a crowded theater” on Twitter prior to SVB’s failure. Warner also said that the Securities and Exchange Commission should take a “fulsome look” at short selling bank stocks, including possibly requiring the disclosure of short sellers.
Finally, Sens. Jon Tester, D-Mont, and Thom Tillis, R-N.C, called for an independent review of the banking failures, which the regulators supported.
HFSC Hearing With Bank Executives
Similar to his testimony at
Tuesday's Senate Banking Committee hearing, former SVB CEO Gregory Becker on Wednesday blamed SVB’s collapse on “unprecedented events” as well as Federal Reserve statements in 2021 that inflation was “transitory.” Former Signature Bank Chairman Scott Shay said he believed Signature Bank was “well-capitalized” and “solvent,” and disagreed that there was a need by regulators to seize the bank.
Former First Republic Bank CEO Michael Roffler, who did not testify at Tuesday’s Senate hearing,
argued that First Republic “took several steps to mitigate the impact of rising interest rates” and had provided guidance of decreased profits in 2023. “Instead of dealing with temporary decreased earnings due to interest rate pressures, First Republic was contaminated overnight by the contagion that spread from the unprecedented failures of two regional banks,” he added.
Roffler attributed the run on the First Republic to “widespread panic that was inspired by the abrupt failure of Silicon Valley Bank, and then Signature Bank, and exacerbated by traditional media and social media, as well as recent technological advancements that allow depositors to withdraw their money almost immediately.”
HFSC Chair Rep. Patrick McHenry, R-N.C.,
told the executives that while “the economic mismanagement by the Biden Administration created the perfect storm, each of you failed to right the ship.”
Chair of the Subcommittee on Financial Institutions Rep. Andy Barr, R-Ky., said that “the recent banking crisis was fueled by failed bank management, lack of hedges against interest rate risks, failed monetary policy, failed supervision and overspending by the Biden administration.”
Rep. Al Green, D-Tex., criticized Republicans for contending that the banking crisis was primarily caused by failures by regulators, and argued that SVB and Signature had deficient risk management and failed to take necessary corrective actions after receiving repeated supervisory warnings.
After receiving a point-blank question from Rep. Bill Huizenga, R-Mich., on whether the executives were willing to take responsibility for their respective banks’ failures, only Becker said that he bore “responsibility for the ultimate outcome” of SVB as its CEO. Shay said that he was “sorry” that Signature was “seized by regulators,” and Roffler said that First Republic's closure was attributable to contagion and panic that was “too difficult to control.”
Rep. Bill Foster, D-Ill., remarked that had SVB been required to issue contingent convertible bonds, it would have “forced a conversation with the bond market” when the bank’s deposits surged during the pandemic, and would have also provided the bank with an additional capital buffer. He noted that such instruments are “one of the things that I think both Chair McHenry and I think may be part of the solution here.”
Foster also asked Becker if he believed that a rule requiring banks to “immediately recognize some fraction of your mark-to-market losses on securities” on financial statements would have impacted SVB’s behavior during 2022. Becker said that if some fraction of SVB’s available-for-sale, or AFS, and held-to-maturity, or HTM, securities were marked to market, then SVB would likely have been forced to raise capital in the summer of 2022. However, Becker said he doubted that such additional capital would have been sufficient to handle the size and volume of SVB’s outflows in early March.
Rep. Ann Wagner, R-Mo., pressed Becker on why SVB did not contemplate selling its AFS securities earlier. The former CEO said that SVB first began considering selling its AFS portfolio in late 2022 but that “it was decided … at that point it didn’t make the most sense.” “[T]here was a belief that the rapid rise in interest rates could create and likely would create a recessionary environment and rates would actually start to go the other way,” Becker added, noting that the bank changed strategy in early 2023.
Rep. Brad Sherman, D-Calif., criticized SVB’s executive compensation incentives, which he said inappropriately tied higher executive bonuses to unnecessary risk-taking. He also argued that bonus incentives prompted SVB to significantly reduce its hedges for its AFS portfolio in 2022 - actions akin to “throwing away your flood insurance as it began to rain.”
Becker faced repeated inquiries from Democratic lawmakers on whether he would return any of his recent bonuses. Similar to the answers he provided to senators earlier this week, he said that he would “cooperate with the process.”
The HFSC also heard from state banking regulators, including California Department of Financial Protection and Innovation, or DFPI,
Commissioner Clothilde Hewlett and New York Department of Financial Services, or DFS,
Superintendent Adrienne Harris.
Hewlett acknowledged that the DFPI and the San Francisco Fed should have been more forceful in demanding SVB address issues related to liquidity and interest rate risk identified throughout 2022.
Huizenga and other Republican lawmakers pressed Hewlett on why the DFPI and the Fed sent a letter to SVB in August 2022 signaling their intent to commence an informal enforcement action through memorandum of understanding, or MOU, but had not followed through with the MOU as of SVB’s failure in March. Hewlett said that there was a “consensus decision” made by the DFPI and the Fed to “wait for the MOU until after the liquidity risk and horizontal risk review was completed.” Hewlett conceded that regulators “should have” issued the MOU in August 2022.
Harris defended the DFS’ decision to close Signature Bank. She said that over the weekend starting on March 10, Signature was unable to “provide reliable and realistic data concerning immediately available liquidity and deposit withdrawals” and a “credible liquidity strategy” to continue operating.
Additionally, Signature “struggled over the weekend to identify readily pledgeable assets” to the New York Fed, Harris added. Although Signature was “well-capitalized” under standard definitions, Harris said, the bank lacked the appropriate liquidity and risk management standards. She conceded that the DFS should have done more to force the bank to address liquidity issues first identified in 2018.