The scope of blame for Silicon Valley Bank’s failure stretches across bank executives, Federal Reserve supervisors and other regulators, the banking system’s top cop on Wednesday told U.S. lawmakers demanding answers for the lender’s swift collapse.
“I think that any time you have a bank failure like this, bank management clearly failed, supervisors failed and our regulatory system failed,” Michael Barr, Fed Vice Chair for Supervision, told Congress. “So we’re looking at all of that.”
The failures of SVB, and days later, Signature Bank, set off a broader loss of investor confidence in the banking sector that pummeled stocks and stoked fears of a full-blown financial crisis.
Depositors tried to pull more than $42 billion in a single day at SVB in early March, surprising regulators and kicking off deposit flight across other regional banks.
“That’s just an extraordinary scale and speed of a run that I had not ever seen,” Barr said.
“I think all of us were caught incredibly off-guard by the massive bank run that occurred when it did.”
Representatives from both political parties pressed Barr, Martin Gruenberg, head of the Federal Deposit Insurance Corp, and Treasury undersecretary for domestic finance Nellie Liang on why regulators did not act more forcefully, given Fed supervisors had been raising issues with the bank for months.
“There is still much we need to understand of what you knew when and how you responded,” said Republican Patrick McHenry, chair of the committee. “The bottom line for you as the panel, there’s bipartisan frustration with many of your answers. There’s a question of accountability and appearance of lack of accountability.”
Barr on Tuesday criticized SVB for going months without a chief risk officer and for how it modeled interest rate risk, but lawmakers said the response wasn’t aggressive enough, with Democrat Juan Vargas saying, “it seems like they blew you guys off and you didn’t do anything.”
REPORTS DUE MAY 1
Both the Fed and FDIC are is expected to produce reports on the failure of Silicon Valley Bank by May 1. The Fed’s report will concentrate on supervision and regulation while the FDIC report will center around deposit insurance.
Several lawmakers asked Barr to make available the Fed’s confidential communications around supervision.
Barr told the House Financial Services Committee that he first became aware of stress at Silicon Valley Bank on the afternoon of March 9, but that the bank reported to supervisors that morning that deposits were stable.
Gruenberg of the FDIC told lawmakers he also became aware of SVB’s stress that Thursday evening.
All three testifying said that regulators had sufficient tools to deal with the crisis once it happened, but Barr said the Fed could have done better on supervision.
SVB and Signature became the second- and third-largest bank failures in U.S. history. Investors fled to safe havens like bonds while depositors moved funds to bigger institutions and money market funds.
Markets have calmed since Swiss regulators engineered the sale of troubled Swiss giant Credit Suisse to rival UBS, and after SVB’s assets were sold to First Citizens Bancshares. However, investors remain wary of more troubles lurking in the financial system.
The Fed was in discussions with Silicon Valley Bank the day before its collapse to move pledgable collateral to the discount window, a key facility long associated with providing emergency loans to banks, Barr said on Wednesday.
“(Fed) staff were working with Silicon Valley Bank basically all afternoon and evening and through the morning the next day to pledge as much collateral as humanly possible to the discount (window) on Friday,” Barr said.
Some Democrats have also argued a 2018 bank deregulation law is to blame. That law, mostly backed by Republicans but also some moderate Democrats, relaxed the strictest oversight for firms holding between $100 billion and $250 billion in assets, which included SVB and Signature.
The White House is readying plans for legislation that would reinstate those regulations on midsize banks, the Washington Post reported on Wednesday, citing two sources familiar with the matter.