The Melting Down of Silicon Valley Bank and How We Can Avoid It From Happening Again: A Senate Banking Committee Hearing from the Top Officials
The Senate Banking Committee heard testimony from the country’s top banking and financial regulators about the downfall of Silicon Valley Bank, and what can be done to prevent it from happening elsewhere.
The prepared testimony was submitted by the FDIC. The financial stability of big banks can be jeopardized by the failures of a few, he wrote. The prudential regulation of these institutions should be taken very seriously.
Barr said that there was “insufficient” risk management and internal controls and the bank failed because it waited too long to address its problems.
Depositors yanked $42 billion from SVB on March 9 alone in a bank run, a panic that appeared to be fueled in part by venture capitalists urging tech startups to pull their funds.
Barr said that the banking system is sound and resilient. “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.”
Barr said that the recent events show how regulators must improve rules for banks and study them in order to keep up with changes in technology and customer behavior.
Now, lawmakers are set to begin their investigation into what led to the second-largest bank collapse in US history — and how to prevent something similar from happening again.
On Tuesday morning, members of the Senate Banking Committee will probe federal regulators: Martin Gruenberg, chairman of the board of directors of the Federal Deposit Insurance Corporation; Nellie Liang, under secretary for domestic finance at the US Treasury; and Michael Barr, vice chair for supervision at the Federal Reserve, about the tumultuous events that sent financial systems into a frenzy.
The former CEO of Signature Bank and the ex-CEO of the now-collapsed SVB have both been asked to testify.
Panelists will be grilled by elected officials about the details of the bank failures and about what needs to be done to prevent a similar crisis. They would love to know why no one could predict and prevent the meltdown.
“It is critical that we get to the bottom of how Silicon Valley Bank and Signature Bank collapsed so that we can maintain a strong banking system, protect Americans’ hard-earned money, and hold those responsible accountable, including the CEOs,” said Senator Sherrod Brown, chairman of the Senate Banking Committee, in a letter to the financial regulators testifying Tuesday. Sen. Brown would like the executives of Silicon Valley Bank to be held responsible for the bank’s failure.
One preliminary lesson learned from the collapses, wrote Gruenberg, 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.”
Congressman Patrick McHenry, chairman of the House Financial Services Committee, said earlier this month the collapse of SVB was “the first Twitter-fueled bank run.”
The collapse of the SVB, along with Signature Bank, has sparked scrutiny of the roles played by both bank managers and regulators. Policymakers will be debating whether new laws, rules or attitudes are needed to keep other banks from going under.
The bank recognized the problem only belatedly and tried to raise cash by selling some of its bonds at a loss earlier this month. That panicked deposits and caused a run on the bank.
But the risks remained and the Fed stopped short of ordering changes, which frustrated some of the senators in the Senate Banking Committee from both sides of the aisle.
The problems developed when the Fed was not much into bank regulation. In 2021, for example, the Fed issued a rule — at the urging of bank lobbyists — noting that guidance from bank supervisors does not carry the force of law.
That led some senators to call out colleagues who pushed for lighter rules, only to turn around and blame a lack of regulatory muscle for the bank’s failure.
“We’ve got a lot of folks that had been saying for months and years, ‘let’s rein in the bank supervisors,’ and now all of a sudden, it’s like, ‘Where were the supervisors? Why weren’t they being more aggressive?,’” said Sen. Chris Van Hollen, D-Md.
The bank scrambled to borrow more money overnight, but it couldn’t keep up. By the following morning, depositors had signaled plans to withdraw another $100 billion — more than the bank could get its hands on, according to Barr.
Fines for executives who profit from their own mismanagement by the FDIC: a brief discussion with Chairman Gruenberg and Secretary Martin Gruenberg
The agency has the ability to split insurance costs among different types of banks, as Chairman Martin Gruenberg pointed out. A recommended formula will be announced in early May.
Although the government doesn’t have explicit authority to claw back compensation, it does have the power to levy fines, order restitution and prohibit those executives from working at other banks, if wrongdoing is found.
Van Hollen said it’s wrong for the CEO and top executives to profit from their own mismanagement and then leave the FDIC holding the bag.
President Biden urged Congress to increase fines for bank executives when mismanagement leads to bank failure, but it’s not certain whether lawmakers will act.