Why did the country’s 16th-largest bank implode in a matter of days earlier this month? And how did federal regulators let it happen?
A top U.S. regulator told a Senate panel on Tuesday that Silicon Valley Bank executives did a "terrible" job of managing risk before the lender collapsed, as lawmakers demanded to know why warning signs of trouble were missed.
On Tuesday, lawmakers on the Senate’s banking committee will get a chance to interrogate officials in charge of regulating the nation’s banks about those topics as they probe the collapse of Silicon Valley and Signature banks. On the guest list for the hearing: Martin Gruenberg, chairman, Federal Deposit Insurance Corporation; Michael Barr, vice chairman for supervision at the Federal Reserve; and Nellie Liang, undersecretary for domestic finance, at the Department of the Treasury.
The hearing could shed light on the government’s efforts to understand why Silicon Valley Bank failed, and what it might do to prevent a repeat. It will also highlight the partisan divide on the banking debacle: While both parties have blasted the bank’s leadership, Democrats have blamed the Trump-era rollback of banking regulations for the failure, while Republicans have focused on accusing regulators of being asleep at the switch.
‘A Textbook Case of Mismanagement’
The Fed’s Barr will tell lawmakers Silicon Valley Bank’s collapse was a “ textbook case of mismanagement,” according to prepared remarks released Monday. Barr is expected to describe how the bank failed to adequately manage two major risks: its investments—largely held in long-term securities—would lose value if interest rates rose; and its deposits, which were mainly by venture capital firms and tech businesses, could be volatile.
The Fed’s ongoing investigation is also looking into whether the Fed’s own supervision of the bank was appropriate. Fed supervisors took several actions against the bank in 2021and 2022, and warned the bank in November 2022 about its interest rate risk management, according to Barr’s statement. Regulators did not realize the full extent of the bank’s vulnerability until the March 9 bank run that brought it down.
The Fed is also looking into whether the bank would have failed if the older, tougher Dodd-Frank regulations had remained in place instead of being weakened by the Crapo Act in 2018.
Fed’s Actions Under the Microscope
Lawmakers in both parties have voiced concerns about the Fed’s supervision of banks. Elizabeth Warren, a progressive Democrat from Massachusetts and a member of the banking committee, and Republican Rick Scott of Florida co-sponsored a bill to create an independent inspector-general to oversee the Fed.
Last week, Republican lawmakers including banking committee member Senator John Kennedy of Louisiana, wrote to Fed leaders demanding records about the San Francisco Fed’s supervision of Silicon Valley Bank.
“The American people deserve transparency and accountability from their government officials, and they are entitled to understand precisely what Federal Reserve officials knew about the apparent risks associated with SVB, when they knew it, and why they failed to act to prevent the bank failure from occurring,” the letter said.
Bank Executives Will Likely Be Absent
Two major figures involved in the banking crisis will likely not be involved: Gregory Becker, former CEO of Silicon Valley Bank, and Joseph DePaolo, former CEO of Signature Bank, have both told the committee they won’t attend Tuesday’s hearing, according to letters sent to the former executives by lawmakers.
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