The Senate Banking, Housing, and Urban Affairs Committee, which consists of 23 senators, including cryptocurrency advocates like Cynthia Lummis (R — WY) and haters like Sherrod Brown (D — OH), convened to discuss the collapse of Silicon Valley Bank (SVB).
Representatives from three of the most important regulators appeared to answer questions (Martin Greunberg, chairman of the FDIC, Michael Barr, vice-chair for supervision of the Federal Reserve, and Nellie Liang, undersecretary for domestic finance of the Treasury).
Unfortunately, instead of discussing how best to allay banking fears and concerns, hedging systemic risk, and setting up new rules and regulations, the senators used their time to yell at regulators to get a good soundbite for the next time they run for office.
What could have been a useful educational experience turned into a stereotypical display of the circus that is American politics.
Quality start, all downhill from there
Brown began the hearing with some points regarding the public perception of the SVB bailout — points that, while perhaps not pivotal to altering regulations, were important for framing the discussion.
Unfortunately, that was about as good as the hearing got.
Tim Scott (R — SC) used his opening statement to suggest that Jerome Powell and Janet Yellen should’ve been present, that SVB’s investments in climate-related companies gave them a longer leash with regulators, and that Biden’s spending made inflation an issue and forced rate raises.
Next, the regulators got their first chance to speak. Greunberg did his best to frame the collapse of SVB and Signature and the promise to back all deposits as anything but bailouts (“these banks were allowed to fail”). He stated that a review of the FDIC’s procedures and provisions regarding SVB would be published by May 1.
Michael Barr from the Federal Reserve was next in line, stating that regulators from the Fed moved in swiftly and sufficiently. Barr attempted to focus the conversation on management practices at SVB and whether or not liquidity and capital standards for a bank with a business model like SVB’s were inadequate.
He stated that a review of the Federal Reserve’s procedures and provisions regarding SVB would also be published by May 1.
Lastly, Nellie Liang spoke from the Treasury’s perspective, which presented small, mid, and large banks as being equally important. Liang framed the moves to liquidate SVB and Signature and subsequently back all deposits as successful attempts to stem systemic banking failures and shore up the entire banking system.
Question and answer is bread and circuses
After opening statements came the question and answer portion of the hearing, which is, at its heart, broken. Each senator is only allotted five minutes for both questions and answers, many senators don’t know anything whatsoever about the banking industry, and all of them refused to cede time to get more prolonged question and answer sessions without interruption, simply because attacking bank regulators is a great soundbite.
Here are the most interesting tidbits:
- According to Barr: “Supervisors had rated the bank at a very low rating… It was rated three in the CAMELS scale (capital adequacy, assets, management capability, earnings, liquidity, sensitivity) which is ‘not well-managed.’”
- Barr also pointed out that, under current rules, SVB was categorized as ‘well-capitalized.’”
- Greunberg told the hearing that there would have been a contagion had the FDIC not fully-backed deposits.
- He also highlighted that regional banks remain a source of strength for the system.
- Senator Mark Warner claimed that: “Some of the very VCs who banked at SVB may have started this run.”
- Barr warned that contagion across the banking system is threatening to put at risk depositors and banks across the country.
- He added that the Fed “didn’t take enough action.”
Likewise, there were a number of fascinating points acknowledged by regulators (despite some pretty inept questioning):
- $42 billion in withdrawals from SVB was scheduled for the first day of the emergency, and $100 billion in withdrawals was scheduled for day two. Bank runs happen at a very large scale, much faster now than in 2008.
- Penalties for individuals found to be violating their fiduciary duty by the Federal Reserve will face penalties including “prohibition from banking, civil money penalties, or the payment of restitution.”
- SVB had no chief risk officer for at least six months, and possibly no CFO for a substantial amount of time.
- The Federal Reserve was flagging SVB for serious concerns as far back as 2021. Despite this, no civil actions were taken.
For what it’s worth, Barr’s testimony sounds about right for the Federal Reserve. It seems more than willing to accept its failure to realize risks and problems before they appear. “You learn new things about people after taking action. You act based on available information you have at the time, and that’s not to say that something might not be known later,” said a Federal Reserve representative in November last year.
For the doomers, regulators claimed that the banking structure was “safe and sound” or “sound and resilient,” at least eight times. This isn’t exactly a vote of confidence when you’re considering bank runs.
“Stay calm,” said SVB CEO George Becker in the days leading up to its collapse. We have “ample liquidity,” he said. Okay.
As for the politicians, it was a normal tedious, inconsequential badminton battle, with Republicans trying to ensure that people understood that no abilities were taken away from regulators during Trump’s term in office, while Democrats pushed for more stringent regulation of banks and pointed out regulatory failure.
We’re watching the regional failure of the US banking system and politicians are trying to take victory laps. Bummer.