On Tuesday, the Senate Banking Committee held its first hearing into Silicon Valley Bank’s and Signature Bank’s failures, with a lineup of critical actors in the 2024 election focusing on how the government should respond to two of the most significant bank failures in U.S. history.
The hearing was chaired by Sherrod Brown, D-Ohio, and featured Martin Gruenberg, chair of the Federal Deposit Insurance Corporation; Michael Barr, deputy chair of the Federal Reserve Board of Governors for supervision; and Nellie Liang, treasury undersecretary for domestic finance.
“We’re left with many questions — and a lot of justified anger —toward bank executives and boards, venture capitalists, federal and state bank regulators, and policymakers,” Brown said.
“Just as there are no atheists in foxholes,” Brown explained, “it appears that when there is a financial catastrophe, there are no libertarians in Silicon Valley.” “I hope that those who have no problem with government action to protect their livelihoods will think twice about what their twisted interpretation of the free market has done to employees in Ohio from now on.”
Brown also mentioned the 2018 repeal of additional oversight for midsize banks like Silicon Valley Bank under the 2010 Dodd-Frank Act, sponsored by Republicans, supported by a faction of Democrats, and signed by then-President Donald Trump. In addition, he urged regulators to “evaluate the harm,” impose accountability, and “repair what is broken.”
Republicans on the panel focused on regulators, suggesting they had more outstanding capabilities to prevent SVB’s demise and wondering why they hadn’t acted more aggressively.
“How — how can you ask Congress for greater authority with a straight face if you can’t stay on task and enforce the laws already on the books?” Tim Scott, R-South Carolina, raised the question. “Our regulators appear to have been dozing off.”
Sen. Katie Britt, R-Ala, said in an interview before the hearing: “The regulators failed here. There were many red flags, and I want answers as to why they looked the other way. I mean, sheer indicators show that they didn’t do their job. So this is mismanagement on their part.
“The tools were present, but they were not employed.” “I’m curious why,” Britt added.
The demise of SVB was followed by the failure of the New York-based Signature Bank. Since then, the financial industry has worked to reestablish trust. A coalition of 11 financial institutions promised $30 billion in deposits to help keep First Republic Bank viable, while UBS paid $3.2 billion for Credit Suisse.
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A Spotlight On Regulators
Barr, the Federal Reserve official, cited “the unusual nature of this bank” as one of the reasons for its failure and noted several difficulties that were the responsibility of bank managers, not Fed supervisors.
“SVB’s failure is a textbook example of mismanagement,” Barr testified, citing the bank’s “concentrated business model” in technology and venture capital, rapid growth from 2019 to 2022, and failure to “effectively manage the interest rate risk” of its instruments.
Barr also discussed the bank’s reliance on depositors who were “linked by a network of venture capital firms and other links” and how “when stress occurred, they effectively acted together to precipitate a bank run.” In addition, he stated that regulators are looking into whether the 2018 deregulation bill contributed to SVB’s failure.
Barr committed to be forthright with Congress if the investigation revealed tighter laws would have rescued SVB.
Nevertheless, Sen. Michael Crapo, R-Idaho, defended the bill he championed in 2018, leaving little agreement among lawmakers and regulators on the core causes of the disaster beyond bank mismanagement.
The panel’s lineup is stacked with critical actors in the 2024 race, which throws a wild card into its response.
Brown and Montana Sen. Jon Tester are red-state Democrats seeking re-election. Sen. Kyrsten Sinema, D-Ariz., has not declared if she will seek re-election. Senator Steve Daines, R-Mont., is the chairman of the Senate GOP campaign arm. Now Scott appears to be planning a presidential candidacy.
On Wednesday, the House will hold its hearing on bank failures, with the same panel appearing before the Financial Services Committee.
Without a consensus on what caused the bank collapses, it’s unclear whether Congress will enact legislation to avoid future bank failures. Republicans mostly blame regulators, while Democrats are divided between those who favor Sen. Elizabeth Warren, D-Mass., legislation to restore the restrictions removed in 2018 and those who are hesitant to go there.
Senate Majority Whip Dick Durbin, D-Ill., said Monday the chamber should act to reimpose the enhanced scrutiny on banks, noting that he voted against rolling back the regulations in 2018.
“I think I was right then,” he said. “And I think I’m right now.”
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