WASHINGTON — The nation’s top financial regulators are met with a grilling from lawmakers Tuesday over the collapse of Silicon Valley Bank, as they urge to understand why the company was allowed to grow so quickly and take on so many risks that it failed and requiring a government bailout for depositors and sending shockwaves across global markets.
Michael S. Barr, the Federal Reserve’s vice chairman of the supervisory board, will testify before the Senate Banking Committee Tuesday along with Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury Department’s undersecretary for domestic finance. The same officials are scheduled to testify before the House Financial Services Committee on Wednesday.
Lawmakers are expected to focus on what went wrong. So far, the picture that has emerged is of a bank that has grown rapidly and conducted itself more like a start-up than a 40-year-old lender. The bank took a large chunk of large — and uninsured — depositors, though it used its fortune to double down on a bet that interest rates would stay low.
Instead, the Fed hiked rates sharply to curb rapid inflation, reducing the market value of Silicon Valley Bank’s large holdings of longer-dated bonds and making them less attractive as new securities offered higher yields. When SVB sold part of its holdings to shore up its balance sheet, it suffered huge losses.
This spooked its customers, many of whom had deposits well in excess of the $250,000 limit the government would guarantee in the event of a bank failure. They ran to get their money and the bank collapsed on March 10th.
The question is why the Fed’s regulators failed to stop the bank from making dangerous mistakes that seem obvious in hindsight. And the answer is important: if the Fed has overlooked the issues due to widespread failings in bank oversight and regulation, it could mean other vulnerabilities in the industry are falling through the cracks.
Here’s a rundown of what’s already known and where lawmakers could be pushing for tougher answers this week.
As Silicon Valley Bank grew, the Fed ran into problems.
Silicon Valley Bank’s assets increased to just over $115 billion at the end of 2020 from $71 billion at the end of 2019. That growth catapulted them to a new level of Fed oversight by the end of 2021 — under the purview of the Large and Foreign Banking Organizing Group.
This group includes a mix of employees from the Fed’s regional reserve banks and its Board of Governors in Washington. Banks that are large enough to fall within their remit receive more scrutiny than smaller organizations.
Silicon Valley Bank would most likely have moved to this more onerous level of oversight at least a couple of years earlier if the Fed hadn’t watered down the rules under Randal K. Quarles, who was its deputy overseer during the Trump administration.
By the time the bank came under intense scrutiny, problems had already begun: Fed officials found major problems in their first comprehensive review.
Supervisors promptly issued six subpoenas — so-called matters requiring attention or matters requiring immediate attention — which amounted to a warning that the SVB had failed in its ability to raise funds in an emergency.
It’s not clear exactly what these quotes are saying because the Fed didn’t release them. When the bank underwent a full supervisory review in 2022, regulators saw progress on the issues, a person familiar with the matter said.
Despite its problems, Silicon Valley Bank was rated “fair”.
Perhaps partly due to this progress, the SVB’s liquidity – its ability to raise funds quickly in the face of difficulties – was rated as satisfactory over the past year.
At that time, bank management increased bets that interest rates would stop rising. SVB had maintained protection against rising interest rates on part of its bond portfolio – but began cutting even those in early 2022, posting millions of dollars in profits from the sale of protection. According to a company presentation, SVB has been refocused on a scenario in which borrowing costs are falling.
That was a bad call. The Fed raised interest rates last year at the fastest rate since the 1980s as it tried to control rapid inflation — and the Silicon Valley bank suddenly faced huge losses.
The bank’s demise sparked cascading concerns.
By mid-2022, Fed regulators had cast a skeptical eye on SVB’s management, and it was being prevented from growing by buying other institutions. But by the time Fed officials had another full review of the bank’s liquidity in 2023, its problems had become crippling.
The SVB had been borrowing heavily from the Federal Home Loan Bank in San Francisco for months to raise cash. On March 8, the bank said it needed to raise capital after selling its bond portfolio at a loss.
On March 9, customers attempted to withdraw $42 billion from SVB in one day — the fastest bank run in history — and it struggled to tap the Fed’s backup funding source, the discount window. What loans it could get in exchange for its wealth was not enough. On March 10 it failed.
That only started the problems for the broader banking system. Uninsured depositors at other banks began to eye their own institutions nervously. On March 12 – a Sunday evening – regulators announced they were shutting down another firm, Signature Bank.
To prevent a nationwide bank run, regulators said they would make sure even the failed banks’ large depositors were repaid in full, and the Fed opened a new program to help banks get cash in an emergency.
But that didn’t stop the bleeding immediately: Fed data showed bank deposits fell $98 billion to $17.5 trillion in the week ended March 15, the largest drop in nearly a year. But even those numbers masked a trend that was playing beneath the surface: people were moving their money from smaller banks to banking giants they believed were less likely to fail.
Deposits at small banks fell by $120 billion, while those at the 25 largest banks surged by about $67 billion. Government officials have said these flows have subsided.
As customers and investors began looking for vulnerabilities in the financial system, other banks were in turmoil – including Credit Suisse in Switzerland, which was taken over, and First Republic, which received a capital injection from other banks.
Lawmakers from both parties want answers.
“It is concerning that Federal Reserve officials failed to step in in a timely manner and employ powerful oversight and enforcement tools to prevent the company’s collapse and the resulting market uncertainty,” Republicans on the House Financial Services Committee wrote in a statement released Friday Letter.
Senator Rick Scott, a Florida Republican, and Senator Elizabeth Warren, a Massachusetts Democrat, have introduced legislation requiring a president-appointed and Senate-approved inspector general at the Fed and the Consumer Financial Protection Bureau. The Fed already has an internal watchdog, but this would be appointed by the President.
Recent bank failures “serve as a stark reminder that banks cannot be left to their own devices,” Ms Warren warned. She has also pushed for an inspector general review of what went wrong at Silicon Valley Bank.
Congress wants to know who is to blame.
In recent weeks, much of the focus has been on who is to blame at the Fed. Mr. Barr began his role in mid-2022, so he was mostly left out of the blame game.
Some have pointed to Mary C. Daly, President of the Federal Reserve Bank of San Francisco. The governors of regional Fed banks do not usually play a leading role in banking supervision, although in extreme cases they can point out gaping problems to the Federal Reserve Board.
Others have pointed to Mr. Barr’s predecessor, Mr. Quarles, who resigned as vice chairman of the board in October 2021. Mr. Quarles helped reverse the regulations, and people familiar with his time at the Fed have set his tone when it came to oversight – which he believes should be more transparent and predictable – prompted many bank supervisors to a less rigorous approach.
And some critics have suggested that Fed Chair Jerome H. Powell helped solve the problems by voting for Mr Quarles’ deregulating changes in 2018 and 2019.
An internal Fed review of what went wrong is due to be released on May 1st. And the central bank has expressed openness to an external inquiry.
“It’s 100 percent certain that there’s going to be an independent investigation and an outside investigation and all that,” Mr. Powell said at a news conference last week. “Of course we welcome that.”