Michael Barr, vice chairman for oversight at the Federal Reserve, speaks with Martin Gruenberg, chairman of the FDIC, left, and Nellie Liang, undersecretary for domestic finance at the US Treasury Department, right, during the Senate Committee on Banking, Housing and Urban Affairs hearings in Washington, DC, March 28, 2023. Samuel Corum/Bloomberg via Getty Images via Getty Images
A senior Federal Reserve official told Congress Tuesday that the Silicon Valley Bank (SVB) failed because it failed to effectively address issues raised by the Fed back in November 2021.
“The SVB’s failure is a textbook case of mismanagement,” said Federal Reserve Vice Chairman Michael Barr. He listed the factors that led to its failure, citing its concentrated business model with clients in the technology and venture capital sectors.
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As the tech sector boomed early in the pandemic, “the bank grew extraordinarily rapidly, tripling its asset size between 2019 and 2022,” he told the Senate Banking Committee. Deposits grew and the SVB invested in longer-dated securities to seek higher returns and profits – but it never developed “effective tools, models and metrics to measure interest rate risk”.
“SVB failed because the bank’s management failed to effectively manage its interest rate and liquidity risk and the bank then suffered a devastating and unexpected run on its uninsured depositors in less than 24 hours,” Barr said of the bank’s collapse on March 10. March together. He testified that regulators started issuing warnings in November 2021 and the bank failed to address issues in a timely manner.
Barr, along with Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg and Undersecretary of the Treasury Department Nellie Liang, testified before the committee about the failures of the SVB and Signature Bank and sought to reassure lawmakers that the banking system remains sound and resilient.
The FDIC estimates the cost of the deposit insurance fund to cover the Silicon Valley bank collapse at $20 billion — including $18 billion to cover uninsured deposits, Gruenberg said. And Signature Bank’s collapse will likely require about $2.5 billion, including $1.6 billion to cover its uninsured deposits.
“I want to emphasize that these estimates are subject to significant uncertainty and are likely to change depending on the ultimate value realized from each receivership,” said Grünberg, whose agency was hired to manage both banks after their collapse, in his written statement submitted to the committee ahead of his testimony on Tuesday.
Barr leads the Federal Reserve’s review of the two bank failures. This report will be released on May 1st. In his remarks, Barr notes that the Federal Reserve has full responsibility for the bank’s federal oversight and regulation, and the Fed’s review will examine both the growth and management of the Silicon Valley bank, the Fed’s collaboration with the bank and regulatory requirements applicable to the bank.
“The failure of the SVB requires a thorough review of what happened, including the Federal Reserve’s oversight of the bank,” Barr wrote before his testimony. “I am committed to ensuring that the Federal Reserve holds full accountability for any oversight or regulatory failure and that we fully address what went wrong.”
But ranking member Sen. Tim Scott, a Republican from South Carolina, accused regulators of what he said were “sleeping at the wheel.”
Throughout the hearing, lawmakers asked questions about whether there was also a statutory failure. Barr said the Fed has significant discretion over its rulemaking under current law. The Fed could indicate what legislative changes it might need to accommodate rule changes when conducting its review.
Democrats argued that rolling back the Dodd-Frank bank overhaul in 2018, which eased the regulatory burden on all but the country’s largest banks, was a mistake and should be reconsidered.
All three witnesses at Tuesday’s hearing agreed on the need to tighten regulations in the face of bank failures.
The sale of each of the FDIC-administered bridge banks has been completed; A large portion of Signature Bank was sold to Flagstar Bank and SVB was sold to First Citizens Bank.
The FDIC has already launched its own investigation into who should be held accountable for the failures. Grünberg told lawmakers that the FDIC would review the deposit insurance system and release its report concurrently with the Fed’s May 1 release.
As concerns spread about the solvency of the banking system, the Treasury Department, the Federal Reserve, and the FDIC announced on March 12 that the FDIC would be able to transfer all deposits at both Silicon Valley Bank and Signature Bank to guarantee beyond their set limit of $250,000. Liang told lawmakers Tuesday that if officials hadn’t acted, bank runs would have worsened, but their efforts would have stabilized the situation.
The losses of the deposit protection fund must be made up for by special audits at banks. The FDIC intends to release additional information on these assessments related to the failures of Signature Bank and Silicon Valley Bank, considering input from the public comment process in May.
During the hearing, Gruenberg said the FDIC has discretion to charge some banks, such as B. community banks, to exempt from the special audits, but he declined to require the senators to do so at the hearing.
Despite recent failures, all three testifying officials said the US banking system remains sound. While both the Federal Reserve and FDIC both conduct bank default reviews, both welcomed independent investigations.
Banking Crisis & Response
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