SVB Hearing: Lawmakers Allege Top Banking Regulators Asleep at the Wheel


House lawmakers showed that their teeth can just bite as tough as their Senate counterparts during the second day of congressional hearings about how Silicon Valley Bank (SVB) and Signature Bank collapsed practically overnight on March 10 and March 12.

Where questions remain for lawmakers, is if federal regulators have teeth themselves, why didn’t they think to use them during the lead-up to the bank failures?

“We know the bank was mismanaged — that much is clear. Now, we need insight into the decision making process of the financial regulators related to the second and third largest U.S. bank failures,” House Financial Services Committee Chairman Patrick McHenry (R-N.C.) said to begin the hours-long Wednesday (March 29) hearing which dwarfed the runtime of the Tuesday (March 28) Senate Banking session.

Rep. McHenry returned tens of thousands of dollars in political donations from SVB, Signature and its executives in advance of the hearing.

Top federal banking regulators, including U.S. Department of the Treasury Undersecretary for Domestic Finance Nellie Laing, Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System Michael Barr, and Chairman of the Federal Deposit Insurance Corporation (FDIC) Martin Gruenberg, all spoke as witnesses for the second day in a row.

“Bank management really failed, supervisors failed, and our regulatory system failed,” Barr told lawmakers.

Turmoil Easing Across Post-SVB Banking, but Rising in Washington

The sudden collapse of SVB was the second-largest bank failure in U.S. history, and its ensuing fallout has left the Fed and other regulatory agencies reckoning with how their oversight went wrong.

The House hearing on Wednesday tore into the lack of regulatory actions by federal agencies preceding the crisis and represented an elevation in tone from the earlier Senate Banking Committee session, where regulators were comparatively more successful in shifting blame to mismanagement by SVB and Signature executives.

Rep. French Hill (R-Ark.) highlighted the Fed’s lack of supervisory urgency in engaging SVB after uncovering risks, noting that from January 2021 to July of 2022, “precisely the time frame” when SVB’s strategy went awry, there was no vice chairman of supervision in office at the Federal Reserve prior to Barr taking the position.

“Twelve months of discussions … that doesn’t sound like a very urgent supervisory process,” Congressman Hill said, going on to press Barr on why his agency failed to exercise its given legal authority to comply SVB to properly address the acknowledged and known risks when they were first raised.

Read more: Regulators Tell Senate Lawmakers SVB Bank Leaders Ignored Warnings

“It seems like they blew you guys off, and you didn’t do anything,” said Rep. Juan Vargas (D-Calif.).

“How come no one is mad at the bank for not responding?” asked Rep. Rashida Tlaib (D-Mich.).

Rep. Pete Sessions (R-TX) said to the regulators of their responses to lawmaker questions, that, “I’ve heard none of the three of you accept responsibility for your role … there’s been no talk of a failure.”

Rep. Sessions went on to add that he hopes the banking crisis is a “wake up call” for the regulators and their organizations that, “evidently you could see these ‘bread and butter’ failures back in 2021 but decided to take no realistic actions to avoid their occurrence.”

“Accountability is one thing, but admitting you were part of a systemic failure is another thing,” Sessions emphasized.

“You are not running a consulting operation, you are running a regulatory operation that can enforce banks to follow your advice,” said Rep. Brad Sherman (D-Calif.).

Congresswoman Maxine Waters (D-Calif.) referred to comments Vice Chair Barr made yesterday making public the Fed’s poor rating of SVB, asking what it would take for a regulatory agency like the Fed to receive similar ranking regarding its own operations.

“It demonstrates a need for humility,” Barr told the assembled lawmakers, agreeing that regulators have “substantial authority” to act when banks are not operating in a safe and sound manner.

Lawmakers say Big Banks Should Foot the Big Bill

As PYMNTS reported Tuesday (March 28), many lawmakers are concerned that the Deposit Insurance Fund assessment used to repay the more than $20 billion cost of SVB and Signature’s failures will only serve to pass along the cost to the very same American taxpayers the FDIC is saying it won’t — consumers of small banks.

“Community banks should not be liable to pay for the rescue of larger banks that made risky bets,” Rep. Roger Williams (R-Texas) said.

“If you’re the little guy, you’re going to be the one to pick up the bill,” said Rep. Frank Lucas (R-Okla.), asking explicitly that his own state’s community banks be exempted from the assessment.

Rep. Andy Barr (R-Ky.) asked Vice Chair Barr (no relation) to establish separate risk-based assessments so that community banks don’t have to bail out SVB.

The regulators refused to verbally agree that they would exempt the community banks of specific states from the assessment.

“Anything we put out will be subject to public comment … we will be keenly sensitive to the impact on community banks,” Barr said while also emphasizing he does not want to front run his own agency.

Newly Proposed Legislation Takes Aim at Bank Executives

A new bill proposed Wednesday (March 29), The Failed Bank Executives Clawback Act of 2023, would require federal regulators to claw back compensation from executives whose banks fail.

“Americans are sick and tired of fat cat bankers paying themselves handsomely while risking other people’s hard-earned money,” said Sen. Elizabeth Warren (D-Mass.), a co-sponsor of the bill.

Another bill backer, Sen. Josh Hawley (R-Mo.), said the legislation “puts the executives’ own profits on the line, and that’s exactly as it should be.”