Federal Regulators Criticize Bank Executives and Pledge Reviews

WASHINGTON — A top regulator at the Federal Reserve on Tuesday blamed Silicon Valley Bank’s executives for its collapse and provided little explanation for why supervisors had failed to stop its demise, saying that the central bank was examining what went wrong.

Michael S. Barr, the Fed’s vice chair for supervision, testified for more than two hours before the Senate Banking Committee alongside Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance.

They faced skeptical questioning from lawmakers about why their agencies — in particular the Fed, which was Silicon Valley Bank’s main regulator — had not done more to stop the bank from imploding. Democrats pressed the officials on whether gaps in regulation had allowed problems in the banking system to build after rollbacks under the Trump administration. Republicans, by contrast, blasted Fed supervisors for either missing obvious risks or not addressing them effectively.

It is unclear whether the intense scrutiny will spur any new laws or changes to existing ones, especially in a divided Congress. But the episode is likely to prompt regulatory and supervisory changes at the Fed. The central bank is conducting an investigation into how it failed to stop growing vulnerabilities at the bank. Mr. Barr suggested repeatedly on Tuesday that tighter regulation and supervision would most likely be the result of that inquiry, which is set to conclude by May 1.

Fed supervisors were aware of at least some of the problems plaguing Silicon Valley Bank beginning in late 2021, though it was unclear how detailed of a grasp they had on the risks. Mr. Barr said on Tuesday that he learned of some of the worst vulnerabilities at the bank only in February, just ahead of its collapse.

Lawmakers from both parties questioned why the Fed wasn’t more successful at forcing the bank’s leadership team to change its practices, which included a misguided and unprotected bet that interest rates would remain low. Even as the Fed was still vetting what happened, Mr. Barr said, poor management at Silicon Valley Bank allowed its weaknesses to build to a point that the bank failed on March 10.

“Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risk and clear liquidity risk,” Mr. Barr said. “The Federal Reserve Bank brought forward these problems to the bank, and they failed to address them in a timely way — that exposure led the firm to be highly vulnerable to a shock.”

Silicon Valley Bank invested heavily in long-term bonds that became less valuable as interest rates rose last year. And it did not hold protection against higher borrowing costs. When it sold some of its assets and disclosed losses in early March, the announcement spooked depositors — many of whom had accounts in excess of the $250,000 that is guaranteed by the F.D.I.C.

Customers, afraid of losing their money, raced to pull out their deposits: $42 billion left the bank on Thursday, March 9, and Mr. Barr said another $100 billion was about to head out the door the next day, when the bank collapsed and was seized by the F.D.I.C.

The bank’s failure set off a chain reaction that has coursed through the global banking system in the weeks since. Regulators tried to find a buyer for SVB that weekend but could not: Of two bids from interested banks, Mr. Gruenberg said, one was ineligible because the bank’s board had not approved the offer, and the other was not a good enough deal for the government to legally accept it.

To contain the fallout, that Sunday evening officials made a sweeping rescue — announcing that another firm, Signature Bank, had failed but promising that the government would make sure depositors were paid back in full. The Fed simultaneously set up an emergency lending program that gives banks access to cash in a pinch in exchange for bonds and other securities.

The efforts to stop depositors from pulling their cash did not immediately stem the bleeding. First Republic took an injection of capital from other banks, and in Europe, the Swiss lender Credit Suisse was rushed through a takeover by UBS.

But in recent days, government officials have said deposit outflows are stabilizing in the United States. Regulators reiterated on Tuesday that the banking system was sound — and said the actions they had taken were necessary to ensure that it remained so.

“I think there would have been a contagion,” Mr. Gruenberg of the F.D.I.C. said.

The turmoil brought to light a number of problems in the American financial system, including the question of whether federal deposit insurance is correctly calibrated.

A big share of U.S. deposits are not protected by the government, and the businesses or individuals holding those accounts are more likely to pull their money at the first sign of trouble. The F.D.I.C. explicitly insures up to $250,000, but the government’s rescue calls into question whether it is implicitly backing all deposits.

In the case of the two failed banks, officials invoked a rule that allowed regulators to pay out even uninsured depositors — something they would not usually be able to do — if the fallout otherwise posed a risk to the entire system. Ms. Liang reiterated on Tuesday that the government would be prepared to take such steps again, if they were deemed necessary.

“We have used important tools to act quickly to prevent contagion,” Ms. Liang said. “And they are tools we would use again if warranted to ensure that Americans’ deposits are safe.”

Mr. Gruenberg said regulators would also be looking at a longer-term fix to the way deposits were insured, including coverage levels.

“The decision to cover uninsured depositors at these two institutions was a highly consequential one that has implications for the system,” Mr. Gruenberg said. “We want to try to be responsive on that.”

Still, much of the hearing focused not on deposit insurance, but on bank oversight.

Senators wanted to know whether Silicon Valley Bank failed because supervisors and regulators at the Federal Reserve Bank of San Francisco and the Fed’s board in Washington dropped the ball, or whether they lacked the authority to react aggressively enough.

Democrats suggested on Tuesday that the problems tied back to deregulation under the Trump administration and greed on the part of Silicon Valley Bank’s executives.

“Monday morning quarterbacking aimed only at the actions of regulators this month is as convenient as it is misplaced,” Senator Sherrod Brown, Democrat of Ohio, said at the start of the hearing.

Republicans also fired shots at bank managers, but said Fed supervisors were to blame for allowing problems to slip through the cracks.

“What were the supervisors thinking?” Senator Tim Scott, Republican of South Carolina, said during the hearing. He implied, with no evidence, that the San Francisco Fed might have overlooked risks at Silicon Valley Bank because they shared a focus on climate change.

Republicans and bank lobbying groups have tried to minimize the role that regulatory changes made during the Trump administration — which relaxed rules for midsize banks — played in Silicon Valley Bank’s demise. But Mr. Barr made it clear on Tuesday that the episode was likely to result in tougher oversight.

Randal K. Quarles, Mr. Barr’s predecessor, carried out a number of changes to bank oversight before stepping down in October 2021. Without the tweaks, Silicon Valley Bank would almost certainly have come under more intense scrutiny from Fed supervisors earlier.

Mr. Barr, who was nominated by President Biden and took his post in July, said those changes would get a second look.

“The decision to set those lines by asset size and other risk factors was made back in 2019,” Mr. Barr said. “I believe we have substantial discretion to alter that framework.”

He said the Fed would revisit how firms were bucketed by size when it came to supervision and regulation. And he acknowledged that the Fed would look into whether its bank examiners had taken reasonable actions to address problems at the bank.

He added that “the staff are reviewing the steps that supervisors took, and whether they should have taken more aggressive action.”

The F.D.I.C. is reviewing the collapse of Signature Bank, which it oversaw, and the Fed’s inspector general on March 14 opened a review of the conduct of the Fed Board of Governors and the Federal Reserve Bank of San Francisco’s supervision.

Some lawmakers want more. A group of Democrats on Tuesday asked the Government Accountability Office to examine the supervisory practices of bank regulators.

“The collapse of these banks brings into focus matters related to the supervision and examination of our nation’s large banks,” the letter said.

Emily Flitter, Alan Rappeport and Jim Tankersley contributed reporting.