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Top Biden administration officials faced tough questions from Congress Tuesday as lawmakers and financial regulators assess the causes of the recent collapse of Silicon Valley Bank and Signature Bank and whether new laws and rules are needed in response.
“I anticipate the need to strengthen capital and liquidity standards for firms [with more than $100 million in assets],” like Silicon Valley Bank, Michael Barr, Vice Chairman for Supervision at the Federal Reserve said in a hearing before the Senate Banking Committee.
Barr pushed back on the contention that a 2019 law that eased regulations on banks with between $100 billion and $250 billion in assets was to blame for the failures.
He said the law left the Fed with “substantial discretion” to craft oversight policies for institutions with more than $100 billion in assets, and added that the agency will be examining whether to propose such changes through formal rulemaking.
Barr’s testimony also shed light on the severity of the problems facing Silicon Valley Bank in the week leading to its morning closure on Friday, March 10.
Federal Reserve officials were hopeful in the days before the collapse of Silicon Valley Bank that it could have been saved by replacing fleeing deposits with loans from the Fed’s discount window, Vice Chairman Barr said.
On the morning of Friday March 10, “it appeared that it might be possible to meet the outflow that was expected the day before,” Barr said.
“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,” he added. That was in addition to the $42 billion in deposits that fled the bank in a six-hour period the day before.
Barr also revealed that Fed bank supervisors had been in close and repeated contact with SVB staff and executives for more than a year to convey concern over their management of interest-rate and liquidity risk.
See also: Fed raised concerns over SVB risk management as early as 2021, Vice Chair Barr says
Bank supervisors from the Federal Reserve met with Silicon Valley Bank chief financial officer Daniel Beck in October of 2021 “to convey the seriousness of its concerns over the bank’s management of interest rate and liquidity risk,” Barr said.
Fed supervisors issued six warnings “near the end of 2021” and in May 2022, they issued two more, according to the testimony. That was followed by a downgrade of the bank’s management rating in the summer of last year and a meeting in October with bank senior management.
“They were issued a matter requiring immediate attention based on the inaccuracy of their interest rate risk modeling,” he said. “Essentially the risk model was not at all aligned with reality.”
The warnings culminated in a February presentation to the Fed Board of Governors on the impact of rising interest rates on some banks’ financial condition, including SVB.
Several senators asked why, given these warnings, bank management failed to act on them.
Democratic Sen. Jon Tester of Montana articulated these concerns, asking “at what point in time do Fed regulators drop the hammer on this outfit?”
“For over a year, regulators were saying to this bank, straighten up and fly right, and they never did a damn thing about it,” he added. “It looks to me like the regulator’s knew the problem, but nobody dropped the hammer.”
The Federal Reserve is conducting a review, to be released on May 1, that will seek to answer these questions, with Vice Chairman Barr leading the effort. He said that he also thinks it “appropriate for outsiders to have independent reviews” and that “we expect and welcome independent reviews of our actions.”
The hearing also featured testimony from Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary Nellie Liang.
Gruenberg revealed that his agency was conducting its own review of the bank failures and will recommend possible reforms to the U.S. deposit insurance system in the coming weeks.
The report will come amid a renewed discussion over whether deposit insurance limits should be lifted or eliminated entirely after the government stepped in to bailout uninsured depositors at SVB and Signature Bank.
Read more: Debate over expanding deposit insurance weighs on bank stocks. Here’s what to know.
Regional bank stocks
KRE,
were losing ground in Tuesday trade, along with financial services stocks
XLF,
in the S&P 500
SPX,
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