Federal Reserve Vice Chair of Supervision Michael Barr told the Senate Banking Committee Tuesday that he anticipates a need to strengthen capital and liquidity rules for some regional banks in the wake of Silicon Valley Bank’s dramatic meltdown.
His admission came during an exchange with Democratic Senator Elizabeth Warren, who pressed Barr, FDIC Chair Martin Gruenberg and Treasury undersecretary Nellie Liang to admit tougher measures were needed to prevent such failures in the future. The Fed, Warren said, has the authority to hold banks of $100-250 billion in assets to stiffer standards. Silicon Valley Bank had $209 billion when it was seized by regulators on March 10, becoming the second-largest bank failure in U.S. history.
“I anticipate the need to strengthen capital and liquidity standards for banks with over $100 billion,” said Barr, responding to Warren.
The comments were the strongest indication to date that the Fed’s top official in charge of bank oversight favors a reworking of rules governing regional lenders that were loosened at the end of last decade. Those changes in 2018 and 2019 released financial institutions of Silicon Valley Bank’s size from some of the strictest requirements imposed in the aftermath of the 2008 financial crisis, a downturn that pushed the banking system to the brink.
One key revision was the Fed’s decision to exempt banks with $100-$250 billion in assets from maintaining a standardized “liquidity coverage ratio” that is designed to show whether a lender has enough high-quality liquid assets to survive a crisis. Another was a decision to let most small and mid-sized institutions opt out of deducting paper losses on bonds from key regulatory capital levels. Silicon Valley Bank was among the banks that benefitted from both of those changes.
Lawmakers pressed Barr repeatedly Tuesday on whether he believed the Fed had failed to do its job as supervisor in the case of Silicon Valley Bank. “By all accounts, our regulators appear to have been asleep at the wheel,” said Senator Tim Scott, the top Republican on the committee.
Barr argued the bank’s fall instead was a “textbook case of bank mismanagement.” He, Gruenberg and Liang cited mismanagement missteps such as a high proportion of uninsured deposits as well as heavy losses on securities portfolios. Their testimony came just a day after First Citizens announced a deal to take over Silicon Valley Bank’s loans and deposits from the FDIC, which had been in charge of the bank since March 10.
The bank’s fall was swift. It happened just two days after disclosing it would take a $1.8 billion loss on the sale of some bonds that had fallen in value because of rising interest rates and would look to raise an additional $2.25 billion in capital to bolster its balance sheet. More than $40 billion was pulled from the bank on March 9, coinciding with the failed capital raise which ultimately doomed the bank.
Silicon Valley Bank “failed because its management failed to appropriately address clear interest-rate risk and clear liquidity risk,” Barr said.
Barr said he first became aware of the interest rate risks taken by Silicon Valley Bank in the middle part of last month, when Fed staff gave a presentation that highlighted the bank as part of a larger discussion about such dangers across the system. He said staff members indicated they were in the middle of a review and expected to come back to the bank shortly on that issue.
“That was the first time I was told about interest rate risk at Silicon Valley Bank,” he said.
Fed supervisors, according to his testimony, first found deficiencies in the bank’s liquidity risk management near the end of 2021, resulting in six supervisory findings related to the bank’s liquidity stress testing, contingency funding, and liquidity risk management. In May 2022, supervisors issued three findings related to ineffective board oversight, risk management weaknesses, and the bank’s internal audit function.
In October 2022, supervisors met with the bank’s senior management to express concern with the bank’s interest rate risk profile. The following month supervisors delivered a supervisory finding on interest rate risk management to the bank.
As it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9. Barr told lawmakers on Tuesday that by the evening of March 9 more than $42 billion had left the bank, and that on the morning of March 10 the bank expected the outflow “to be vastly larger,” he said. “A total of $100 billion was scheduled to go out the door that day.” It was seized hours later.
Several lawmakers wanted to know why the FDIC had been not able to find a private buyer for Silicon Valley Bank sooner. “Better private sector engagement with quicker action” would have potentially reduced investor fears surrounding regional banks, Scott said.
Gruenberg of the FDIC said one of the bids it received during the weekend following the failure wasn’t valid because the company’s board had not signed off on the bid, and a second bid would have been more costly to the FDIC than an outright liquidation of Silicon Valley Bank’s assets.
On March 12 Treasury Secretary Janet Yellen, with recommendations from the Fed and the FDIC, approved systemic risk exceptions for the failures of Silicon Valley Bank and New York’s Signature Bank, enabling the FDIC to guarantee all of the deposits of both banks. That guarantee is backed by the FDIC’s Deposit Insurance Fund, which is funded by assessments from all banks.
Senator Cynthia Lummis, a Republican, said she worried the banks in her state of Wyoming may end up paying for these collapses through higher FDIC assessments. Gruenberg said community banks could be exempt from higher payments. “We have some discretion here and will consider that,” Gruenberg said.
Lummis told Barr the Fed had the power to change how it oversees banks the size of Silicon Valley and could do so now. “I can’t think of another additional rule or regulation or law that you needed,” she said. Senator Thom Tillis, another Republican, cautioned that any changes that increasing requirements for banks “by default” could hamper institutions that didn’t engage in the same risky practices as Silicon Valley Bank.
Barr and Gruenberg both agreed the rules for banks smaller than $250 billion in assets set in place in 2019 would be reviewed closely. Gruenberg, in fact, voted against them in 2019 when he was a FDIC board member. “You still think they were a bad idea?” Warren asked him Tuesday.
“I do,” Gruenberg said.
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