Many are to blame for SVB bankruptcy, says Fed regulatory official – 03/29/2023 – Market

Silicon Valley Bank executives, Federal Reserve supervisors and the regulatory system all failed in the process that led to the U.S. bank’s failure, the Fed’s top banking supervisor said at a congressional hearing on Wednesday.

“I think every time you have a bank failure like this, the bank’s management has clearly failed, the supervisors have failed, and our regulatory system has failed,” Fed Vice President for Supervision Michael Barr told Congress on the second day of hearings on the bankruptcy of SVB. “So we’re looking at all of that.”

The failures of SVB and, days later, of Signature Bank triggered a broader loss of investor confidence in the banking sector, sending stocks lower and fueling fears of a full-blown financial crisis. Lawmakers pressed regulators on whether the Fed should have been more aggressive in its oversight at the second congressional hearing on the collapse of the two creditors.

“Our entire economy has been hurt. It’s been rocked by what happened this month. Our banking regulatory system has some real flaws,” said Democrat Brad Sherman of California.

Barr told the House Financial Services Committee that he learned of the issue at Silicon Valley Bank on the afternoon of March 9, but that the bank informed supervisors that morning that deposits were stable. Martin Gruenberg, head of the FDIC, the US agency responsible for guaranteeing bank deposits, told lawmakers that he too became aware of the SVB situation that Thursday night.

The Fed was in talks with Silicon Valley Bank the day before its collapse to move pledgeable collateral into the discount window, an important facility long associated with providing banks with emergency loans, Barr said on Wednesday.

“The (Fed) team worked with Silicon Valley Bank essentially throughout the afternoon and evening and into the morning of the next day to provide as much security as humanly possible for the Friday discount,” Barr said.

The deal to rescue Swiss giant Credit Suisse last week and the sale of SVB’s assets to First Citizens this week helped restore some calm to markets, but investors remain wary of more trouble lurking in the financial system.

Barr on Tuesday criticized SVB for going months without a chief risk officer and how the bank modeled interest rate risk, which he said was “not in line with reality”.

Barr told the Senate Banking Committee that he first became aware of the interest rate risk issues at the SVB in mid-February, as Fed supervisors had been raising concerns directly with the bank in previous months.

Some Democrats have also argued that a 2018 Banking Deregulation Act is to blame. That bill, backed mostly by Republicans but also by some moderate Democrats, relaxed tighter oversight for companies with assets between $100 billion and $250 billion dollars, which included SVB and Signature.

The White House is preparing plans for legislation that would reinstate those regulations on midsize banks, the Washington Post reported on Wednesday, citing two sources familiar with the matter.

Additional reporting by Pete Schroeder and Ann Saphir