Federal Reserve Board of Supervisors Vice Chairman Michael Barr told the Senate Banking Committee on Tuesday that he expects the need to strengthen capital and liquidity rules for some regional banks in the wake of the dramatic collapse of Silicon Valley Bank.
He agreed during an exchange with Democratic Senator Elizabeth Warren, who told Barr, FDIC Chairman Martin Grunberg and Treasury Undersecretary Nellie Liang that tougher measures are needed to prevent similar failures in the future. Warren said the Fed has the authority to hold banks with $100-250 billion in assets to stricter standards. Silicon Valley Bank had $209 billion when it was seized by regulators on March 10, the second-largest bank failure in U.S. history.
“I anticipate the need to strengthen capital and liquidity standards for banks over $100 billion,” Barr said in response to Warren.
The comments are the strongest indication to date that the central bank’s top official in charge of banking supervision supports reworking rules governing regional lenders that were loosened at the end of the last decade. Those changes in 2018 and 2019 released financial institutions the size of Silicon Valley banks from some of the stricter requirements imposed after the 2008 financial crisis, which pushed the banking system to the brink.
A key amendment is the central bank decision Exemption from maintaining standardized “liquidity coverage ratio” for banks with $100-$250 billion in assets It is designed to show whether the lender has enough high-quality liquid assets to survive a crisis. Another is the decision to allow most small and medium-sized companies to opt out of deducting paper losses on securities from core regulatory capital levels. Silicon Valley Bank was one of the banks that benefited from both of those changes.
Lawmakers pressed Barr repeatedly on Tuesday on whether he believed the Fed had failed to do its job as a supervisor in the Silicon Valley bank case. “By all accounts, our regulators appear to be asleep at the wheel,” said Senator Tim Scott, the top Republican on the panel.
Barr argued instead that the bank’s collapse was a “textbook case of bank mismanagement”. He, Grunberg, and Liang cited mismanagement mistakes such as a high proportion of uninsured deposits and high losses on bond portfolios. Their testimony came a day after First Citizens announced a deal to acquire Silicon Valley Bank. Loans and Deposits from the FDICHe was in charge of the bank since March 10.
The bank’s decline was swift. It happened two days later expressesIt will lose $1.8 billion on the sale of certain bonds that have fallen in value due to rising interest rates and will need to raise an additional $2.25 billion in capital to shore up its balance sheet. More than $40 billion was withdrawn from the bank on March 9, a capital failure that ultimately led to the bank’s demise.
Silicon Valley Bank “failed because its management failed to properly address clear interest-rate risk and clear liquidity risk,” Barr said.
Barr said he first became aware of the interest rate risks taken by the Silicon Valley bank in the middle of last month, when Fed staff gave a presentation highlighting the bank as part of a larger discussion about such risks across the system. He said staff were in the middle of a review and expected to get back to the bank on the issue soon.
“The first time I was told about interest rate risk was at a Silicon Valley bank,” he said.
Fed supervisors, according to his testimony, first identified deficiencies in the bank’s liquidity risk management at 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 supervision, risk management weaknesses and the bank’s internal audit function.
In October 2022, supervisors met with the bank’s senior management and expressed concern about the bank’s interest rate risk profile. The following month supervisors issued a supervisory finding to the bank on interest rate risk management.
The damage to the bank was not fully known until an unexpected bank run on March 9. Barr told lawmakers on Tuesday that more than $42 billion had left the bank by the evening of March 9. He said the March 10 bank exodus “will be huge”. “A total of $100 billion was scheduled to go out that day.” It was captured after a few hours.
Many lawmakers wanted to know why the FDIC couldn’t find a private buyer for Silicon Valley Bank. Scott said “better private sector engagement with faster action” would ease investor fears around regional banks.
The FDIC’s Grunberg said one of the bids it received over the weekend following the failure was invalid because the company’s board did not sign off on the bid, and a second bid would have been more expensive than a direct liquidation to the FDIC. Properties of Silicon Valley Bank.
On March 12, Treasury Secretary Janet Yellen, with recommendations from the Fed and the FDIC, approved systemic risk exemptions for the failures of Silicon Valley Bank and Signature Bank of New York, allowing the FDIC to guarantee all deposits of the two banks. That guarantee is backed by the FDIC’s Deposit Insurance Fund, which is financed by the ratings of all banks.
Senator Cynthia Loomis, a Republican, said she was concerned that banks in her home state of Wyoming could end up paying for the declines through higher FDIC assessments. Grunberg said community banks may be exempt from higher payments. “We have some discretion here and will consider it,” Grunberg said.
Lummis said the Fed has the power to change how it oversees banks the size of Silicon Valley, and can do so now. “I can’t think of another additional rule or regulation or law that you would need,” he said. Senator Thom Tillis, another Republican, warned that any changes that increase requirements for banks “by default” could disrupt companies that don’t engage in risky practices like Silicon Valley Bank.
Both Barr and Grunberg agreed that the rules for banks with less than $250 billion in assets set for 2019 will be closely reviewed. Grunberg, in fact, voted against them in 2019 when he was an FDIC board member. “You still think they’re a bad idea?” Warren asked him Tuesday.
“I do,” Grunberg said.
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