Watch Live: Senate Banking Committee Hunts For Bank Failure Scapegoats
The US Senate Banking Committee has convened a hearing on the regulatory response to the recent string of bank failures that has upended the finance industry and roiled markets. Among those asked to appear is Michael Barr, the Federal Reserve’s vice chair for supervision.
Watch Live here:
Democrat Sherrod Brown gavels the hearing in, and starts off by applauding regulators for acting swiftly to protect depositors of SVB.
“Ohio small-business owners simply wanted to make payroll,” he said. Then he blames a panic by venture capitalists on Twitter in part for the bank run.
Brown blames Trump-era bank regulators, bank executives and others.
He dings the other side of the aisle for never seeing a “Wall Street wish list” they didn’t want to grant.
“When there’s a bank crash, there’s no libertarians in Silicon Valley,” Brown adds.
Senator Tim Scott, the top Republican on the Banking Committee, starts giving his opening remarks. “By all accounts, this was a classic tale of negligence.”
He says Barr and San Francisco Fed President Mary Daly were focused on climate change and asks whether that enabled SVB to take more risks.
“Our regulators appear to have been asleep at the wheel.”
“What were the supervisors thinking?” Scott asks.
Scott blames the bank, regulators and inflation under Biden for the failures.
Scott wants more information about why FDIC didn’t sell SVB successfully in the first few days, calling the auction process “a black hole.” He questions whether it was because of a White House aversion to all mergers.
So business as usual - all politics and no action.
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In his prepared remarks, released yesterday, Fed Vice Chair for Supervision Michael Barr says regulators “will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.”
But, Barr had plenty of blame to spread around in his prepared remarks ahead of today's Senat Banking Committee hearing.
Primarily, Barr notes the bank's management was a disaster (our words not his):
"SVB failed because the bank's management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours. "
"SVB's failure is a textbook case of mismanagement."
"At the same time, the bank failed to manage the risks of its liabilities."
"The bank waited too long to address its problems..."
Then 'social media' exaggerated the risk...
"In response, social media saw a surge in talk about a run, and uninsured depositors acted quickly to flee. Depositors withdrew funds at an extraordinary rate..."
And finally, the deregulation efforts undertaken during Trump's presidency were highlighted as a potential trigger for why The Fed missed this huge screw up...
...was subject to a less stringent set of enhanced prudential standards than would have applied before 2019; they include less frequent stress testing by the Board, no bank-run capital stress testing requirements, and less rigorous capital planning and liquidity risk management standards.
... In addition, SVB was not subject to the supplementary leverage ratio, and its capital levels did not have to reflect unrealized losses on certain securities.
...we are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure.
Barr concludes by suggesting stiffer regulations are to come... which will 'cost' small and medium-sized banks far more - relatively speaking - than the 'Big 4'
"...we plan to propose a long-term debt requirement for large banks that are not G-SIBs, so that they have a cushion of loss-absorbing resources to support their stabilization and allow for resolution in a manner that does not pose systemic risk. We will need to enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events. We must also explore changes to our liquidity rules and other reforms to improve the resiliency of the financial system."
Very politically palatable for his audience today.
The US Treasury will be represented at today’s hearing by Nellie Liang, the department’s undersecretary for domestic finance. Liang has been a key player behind the scenes in coordinating the responses of different regulatory agencies to the banking crisis. Liang may, among other things, may be asked to clarify the administration’s approach to protecting uninsured bank deposits.
Another witness this morning will be Martin Gruenberg, chair of the Federal Deposit Insurance Corp., which seized SVB and Signature and is working on the sale of their assets. He’ll be grilled by senators on how the FDIC has handled that process.
Earlier, Erik Nelson, macro strategist at Wells Fargo Bank said on Bloomberg TV:
“Barr’s comments today will be very interesting. I do suspect he will be pressed on questions about deposit insurance and how the recent issues around the banking sector have been resolved and what that means for the playbook going forward.
“It’s certainly an important day today. We’ll really want to get sense of how is the market behaving around some of these banking whether in the credit market or equity market. That’s what I’m watching most closely, as opposed to looking at typical indicators like Fed pricing or what FX are doing.”