US Senator Elizabeth Warren (D-MA) speaks with Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg before the Senate Banking, Housing and Urban Affairs Committee hearing on “Recent Bank Failures and the Federal Regulatory Response” on Capitol Hill in Washington, March 28, 2023.
Evelyn Hockstein | Reuters
The nation’s top bank regulators faced tough questions from Congress for the first time Tuesday about how Silicon Valley Bank and Signature Bank nearly collapsed overnight earlier this month.
Regulators defended the decisions they made before and after the SVB collapse, especially their unanimous vote to implement the systemic risk exception to the FDIC’s deposit limit.
Bank stocks turned negative following a Senate Banking Committee hearing, potentially threatened by three top regulators who each say they favor tougher rules for banks with more than $100 billion in assets. The SPDR S&P Regional Banking ETF was down 1% in afternoon trading.
Sometimes, the hearing is contested. Committee Chair Sen accused Sherrod Brown, D-Ohio, said regulators “dropped the ball” because they did not foresee the ballooning risk that undermined SVB before its final collapse.
Michael Barr, vice chair for administration at the Federal Reserve, pushed his contention.
“Fundamentally the bank failed because its management failed to properly address obvious interest rate risks and obvious liquidity risks,” he said.
Sen. insisted. Elizabeth Warren, D-Mass., all three regulators about their views on tighter banking rules for mid-sized banks. Barr, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, undersecretary for domestic finance at the Treasury Department, said they support more banking rules.
“It might be tempting to look at all this and say, we don’t need new policies, when the real problem is these arrogant executives,” Brown said. “But there will always be arrogant executives. That’s why we need strong rules.”
Regulators say more rules aren’t all that’s needed to prevent the next SVB or Signature Bank.
“We must change our understanding of banking in light of changing technologies and emerging risks,” Barr said.
“To that end, we examine what recent events have taught us about banking, customer behavior, social media, concentrated and novel business models, rapid growth, deposit runs, rate risk of interest, and other factors… And for how we think about financial stability,” he added.
The FDIC’s Gruenberg said regulators need to review how they view uninsured deposits when calculating a bank’s risk profile.
“A clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, especially in today’s environment where money can flow out of institution with incredible speed in response to news that is amplified through social media channels,” he said.
Tuesday’s hearing was the first of two congressional committees hearing testimony from Gruenberg, Liang and Barr this week. The second hearing is on Wednesday at 10 am before the House Financial Services Committee.
— CNBC’s Jeff Cox contributed to this report.
