Fed official: Bank rules under review in wake of SVB failure

The Federal Reserve’s bank supervisors warned Silicon Valley Bank’s management as early as the fall of 2021 of risks stemming from its unusual business model, a top Fed official said Tuesday, but its managers failed to take the steps necessary to fix the problems.

The Fed official, Michael Barr, the nation’s top banking regulator, said during a Senate Banking Committee hearing that the Fed is considering whether stronger bank rules are needed to prevent a similar failure in the future.

Silicon Valley Bank’s management was deficient, Barr said. In particular, he said, the interest rate model the bank used “was not at all aligned with reality.”

The timeline that Barr laid out for when the Fed had alerted Silicon Valley’s management to the risks it faced is earlier than the central bank has previously said the bank was on its radar screen.

Tuesday’s hearing was the first formal congressional inquiry into the March 10 collapse of Silicon Valley Bank and the subsequent failure of New York-based Signature Bank, the second- and third-largest bank failures in U.S. history.

The failures set off financial tremors in the U.S. and Europe and led the Fed and other government agencies to back all deposits at the two banks, even though nearly 90% of both banks’ deposits exceeded the $250,000 insurance threshold. The Fed also established a new lending program to enable banks to more easily raise cash if needed.

Late Sunday, the Federal Deposit Insurance Corp. said that resolving the two banks, including reimbursing depositors, would cost its insurance fund $20 billion, the largest such impact in its history. The FDIC plans to recoup those funds through a levy on all banks, which will likely be passed on to consumers.

Sen. Sherrod Brown, the Ohio Democrat who leads the committee, suggested that the government’s rescue of SVB’s depositors, which included wealthy venture capitalists and large tech companies, had caused “justified anger” among many Americans.

“I understand why many Americans are angry — even disgusted — at how quickly the government mobilized, when a bunch of elites in California were demanding it,” Brown said.

Republican members of the committee focused their fire on the Fed and other regulators for failing to prevent SVB’s failure. The Fed has been criticized by advocacy groups for not adequately responding to red flags about the bank’s management.

“I hope to learn how the Federal Reserve could know about such risky practices for more than a year and failed to take definitive, corrective action,” said Sen. Tim Scott, Republican from South Carolina. “By all accounts, our regulators appear to have been asleep at the wheel.”

Several senators have introduced bills that would tighten bank regulation or raise the FDIC’s $250,000 threshold. But given the partisan divisions in Congress on those issues, few expect such proposals to become law.

Silicon Valley’s deposits were heavily concentrated in the high-tech sector, which made it particularly vulnerable to a downturn in a single industry. It had bought long-term Treasurys and other bonds with those funds.

The value of those bonds fell as interest rates rose. When the bank was forced to sell those bonds to repay depositors as they withdrew funds, Silicon Valley absorbed heavy losses and couldn’t pay its customers.

Barr said that depositors withdrew $42 billion — equal to about a quarter of the bank’s assets — on the Thursday before the bank failed. On Friday morning, it faced an additional $100 billion in withdrawal requests.

Barr said the Fed’s review of Silicon Valley’s collapse will consider whether stricter regulations are needed, including whether supervisors have the tools needed to follow up on their warnings. The Fed will also consider whether tougher rules are needed on liquidity — the ability of the bank to access cash — and capital requirements, which govern the level of funds a bank needs to hold.

Source: Orange County Register