The Senate hearings on bank failures will be interesting

The Second Largest Bank Meltdown in US History: An Investigation of the Silicon Valley Bank and Signature Bank Inclusive Bankruptcy

Fears that a more widespread bank run would occur after Silicon Valley bank was taken over led regulators to guarantee all deposits at both Signature Bank and Silicon Valley bank, not just the $250,000 per account that is typically insured.

The three findings in May 2022, related to “ineffective” board oversight, “risk management weaknesses” and internal audit function lapses, were issued by the supervisors. Last year, bank supervisors took further steps to show that regulators were aware of problems at SVB.

“The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure,” said Barr, adding that there was “inadequate” risk management and internal controls.

Depositors yanked $42 billion from SVB on March 9 alone in a bank run, a panic that appeared to be fueled in part by venture capitalists urging tech startups to pull their funds.

Barr said the banking system is sound and resilient. They are committed to making sure all deposits are safe. We are prepared to use all of our tools for smaller institutions to keep the banking system safe and sound.

Barr said the recent events have underscored how regulators must change rules to better protect banks from the effects of social media and other developments.

Now, lawmakers are set to begin their investigation into what led to the second-largest bank collapse in US history — and how to prevent something similar from happening again.

The Senate Banking Committee will conduct a probe on Tuesday of the heads of federal regulators: Michael Barr, vice chair of supervision at the Federal Reserve, and Martin Gruenberg, chairman of the board of directors of the Federal Deposit Insurance Corporation.

The former CEO of Signature Bank, Joseph DePaolo, has been asked to testify at a later date, as has Greg Becker, the former CEO of SVB.

Panelists will be questioned by elected officials about the details of the bank failures and what can be done to prevent another crisis. They’ll also want to know why no one was able to predict and prevent the meltdown.

“It is critical that we get to the bottom of how Silicon Valley Bank and Signature Bank collapsed so that we can maintain a strong banking system, protect Americans’ hard-earned money, and hold those responsible accountable, including the CEOs,” said Senator Sherrod Brown, chairman of the Senate Banking Committee, in a letter to the financial regulators testifying Tuesday. Sen. Brown has called for the executives of Silicon Valley Bank to be held accountable for the bank’s failure.

One preliminary lesson learned from the collapses, wrote Gruenberg, is that “heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.”

Congressman Patrick McHenry, chairman of the House Financial Services Committee, said earlier this month the collapse of SVB was “the first Twitter-fueled bank run.”

The role played by both bank managers and regulators has been under scrutiny as a result of the collapse of the SVB. Policy makers will debate if laws, rules or attitudes are necessary to keep other banks from collapsing.

The bank recognized the problem only belatedly and tried to raise cash by selling some of its bonds at a loss earlier this month. That caused an unprecedented run on the bank.

The Senate Banking Committee from both parties were frustrated by the fact that the Fed stopped short of ordering changes because of the risks.

The problems developed during a time when the Fed was generally pursuing a light touch in bank regulation. In 2021, for example, the Fed issued a rule — at the urging of bank lobbyists — noting that guidance from bank supervisors does not carry the force of law.

That led some senators to call out colleagues who pushed for lighter rules, only to turn around and blame a lack of regulatory muscle for the bank’s failure.

“We’ve got a lot of people that have been saying for a long time that we should rein in the bank supervisors, and now it’s like, where were they?” “Why were they not being more aggressive?” said Sen. Chris Van Hollen.

The bank needed more money overnight, but couldn’t keep up. By the following morning, it was clear that the bank’s ability to absorb the additional $100 billion in deposits would not be enough.

FDIC and the Board of Directors: Investigations into Mismanagement at Financial Organizations by a New Tax Cut and Fines Measured by the Internal Revenue Agency

The agency has the power to split insurance costs among different types of banks, according to the chairman of the agency. In May, a formula will be announced.

Although the government doesn’t have explicit authority to claw back compensation, it does have the power to levy fines, order restitution and prohibit those executives from working at other banks, if wrongdoing is found.

“Almost every American would agree it’s simply wrong for the CEO and top executives to profit from their own mismanagement and then leave FDIC holding the bag,” Van Hollen said.

President Biden this month urged Congress to pass legislation to increase the penalties on bank executives when mismanagement leads to bank failures, though it’s unclear whether lawmakers will act.