Regs call SVB's collapse a "textbook case of mismanagement"
When examining the causes of Silicon Valley Bank's (SVB) and Signature Bank's collapses before lawmakers on Tuesday, banking regulators defended their supervisory activities and promised to determine what went wrong.
Democrats said at a hearing before the Senate Committee on Banking, Housing, and Urban Affairs that relaxed banking rules significantly contributed to the crisis, including committee chairman Sherrod Brown (D-Ohio).
"The officials sitting before us today know that their predecessors rolled back protections like capital and liquidity standards, stress tests, brokered deposit limits, and even basic supervision. They greenlighted these banks to grow too big, too fast," Brown claimed in his statement.
Republican senators criticized regulators' supervision of banks and their operations, including ranking member Tim Scott (S.C.).
"By all accounts, our regulators appear to have been asleep at the wheel," Scott added.
Regulators blamed SVB's executives and boards mostly for the company's downfall.
In his opening remarks, Michael Barr, vice chair for supervision at the Federal Reserve Board, said that SVB's bankruptcy was "a textbook case of mismanagement." He said that the bank expanded too quickly, had inadequate risk management and internal controls, was overly focused on the technology sector, and had an exceptionally high number of uninsured deposits that exceeded the $250,000 threshold.
On March 9, depositors requested more than $42 billion in deposits, but the bank was unable to immediately convert its long-term securities into cash to meet demand. The following day, it failed.
Barr described the steps the Fed has taken to try and reign in SVB's dangerous business practices. Barr is overseeing a study of the supervision and regulation of SVB and will submit his findings on May 1. Since 2021, the agency has often published supervisory conclusions citing SVB's inadequate risk management procedures, but the bank did not sufficiently resolve the problems, according to him.
According to Barr, the Fed's managers "told SVB they had deficiencies in governance and controls at the board and management level and an inability to manage risk. They didn’t respond promptly enough or strongly enough. "
When Fed staff reported its findings to the Board of Governors in February, Barr said he first became aware of the issues at SVB. The agency would look into why it took so long to inform the board, he said.
In response to questions from senators, Barr stated that he supports tightening the capital and liquidity requirements for mid-sized banks like SVB, which have assets between $100 billion and $250 billion.
SVB and Signature Bank were "allowed to fail," according to Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), in his opening remarks.
"Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed ," the speaker claimed.
The FDIC can attempt to impose civil monetary penalties, restitution, and banking profession restrictions on the executives of the two banks, according to Gruenberg, even if it lacks the jurisdiction to recover bonuses and other rewards given to bank executives. According to Barr, the Fed may pursue penalties for breaking banking regulations, engaging in risky banking operations, or failing to meet fiduciary obligations.
Scott asked Gruenberg to provide further details regarding the offers made by the two banks on March 10, the day when SVB's acquisition attempt failed. "The panic and the shock to the market and to market confidence we’ve seen over the past 2 1/2 weeks may have been avoided," he claimed if the purchases had been approved.
Gruenberg acknowledged the existence of two bids. The other was ineligible because it lacked the support of the acquiring bank's board of directors and only offered to buy a portion of SVB's assets, which was judged to be more expensive to the FDIC than liquidating the bank, he added.
By fLEXI tEAM