Fed supervisors repeatedly warned the bank that it had major issues. But the prepared remarks from Michael Barr, the Fed’s vice chair for supervision, also underscore what the central bank’s senior leadership knew about how policies designed to slow the economy could have unexpected consequences.
“Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9,” Barr will tell the Senate Banking Committee on Tuesday, according to his prepared written testimony. “SVB’s failure is a textbook case of mismanagement.”
Barr will appear alongside Martin Gruenberg, who chairs the Federal Deposit Insurance Corp., and Nellie Liang, undersecretary for domestic finance at the Treasury Department, at 10 a.m. Eastern before the Senate Banking Committee. The same witnesses will testify on Wednesday before the House Financial Services Committee.
The failure of SVB — which was sold Sunday to First Citizens bank — and Signature Bank have ignited fresh political scrutiny of the Fed and other bank regulators, with lawmakers expected to investigate. Both parties are pushing for tougher oversight of the central bank, and Democrats are pressing for stricter bank regulations. Meanwhile, the Fed and the FDIC have launched their own probes that are expected to yield new rules meant to avoid a disastrous repeat of the past few weeks. Barr is running the Fed’s investigation.
Many members of Congress are pinning this month’s episode on the Fed, despite a bipartisan vote in 2018 to ease regulations on midsize institutions like SVB. That push, known as “tailoring,” was championed during the Trump administration as a way to pare back parts of Dodd-Frank, the historic legislation passed in the wake of the financial crisis in 2007 and 2008. Under Barr’s Republican predecessor, the Fed implemented changes in response to that 2018 vote that loosened rules for banks with assets totaling $100 billion to $250 billion, which included SVB at the time it failed.
Barr was extremely critical of those moves before President Biden nominated him to the Fed board last year. As a former top Treasury staffer and expert on financial regulation, he was instrumental in crafting Dodd-Frank and routinely warned regulators against getting too complacent and reversing the steps deemed necessary to prevent another financial crisis after the Great Recession.
Now he is leading the Fed’s investigation and will take a lead role in explaining how the most recent crisis forced a government scramble to prevent a full-blown meltdown. Banking regulators feared that SVB’s and Signature Bank’s collapses could lead to more bank runs and other problems in the financial system. The FDIC used a special emergency authority to protect all depositors in the winding down of those two banks, even those with accounts well over the usual limit of $250,000. And the Fed created a temporary lending facility and coordinated with other major central banks to ease strains in dollar funding markets.
In his own prepared remarks, Gruenberg said the banking system “remains sound” despite this month’s shock. But it is too soon to tell how much the broader economy will be affected.
“[T]he financial system continues to face significant downside risks from the effects of inflation, rising market interest rates, and continuing geopolitical uncertainties,” Gruenberg wrote in his prepared testimony. “Credit quality and profitability may weaken due to these risks, potentially resulting in tighter loan underwriting, slower loan growth, higher provision expenses, and liquidity constraints.”
(Last week, after the Fed raised interest rates for the ninth time in a year, Chair Jerome H. Powell also said that bank turmoil should slow the economy down and effectively do the work of a rate hike.)
A full account of what happened has yet to emerge. But an initial outline is becoming clearer. SVB held an unusually high percentage of its assets in Treasury bonds. As the Fed hoisted rates, the value of those bonds, which are normally a safe investment, went down. The bank couldn’t sell those bonds and make good on customers’ deposits as anxiety spread.
SVB and Signature Bank also relied heavily on uninsured deposits: By the end of 2022, 90 percent of Signature’s deposits were uninsured, according to Gruenberg. That figure was 88 percent for SVB. That didn’t only include small and medium-sized customers, but also those with massive balances. The 10 largest deposit accounts at SVB held a total of $13.3 billion, according to Gruenberg.
SVB’s internal controls also couldn’t keep up with the bank’s gangbuster growth. Supervisors cited the bank repeatedly from the end of 2021 until shortly before the bank’s demise. But SVB never did enough to prevent its failure.
That collapse threatened to be the first of many more. In a matter of hours after SVB shut down on March 10, Signature lost 20 percent of its deposits, according to Gruenberg. It then held a negative balance at the Fed, and the bank’s managers couldn’t provide accurate data on the size of that deficit.
In her own prepared remarks, Liang said that on the evening of March 12, it was clear to regulators that they needed to step in before the next day, a Monday, to calm the financial system. That spurred the announcement of a slew of actions from Treasury, the Fed and the FDIC to stem runs on uninsured deposits and “prevent significant disruptions to households and businesses.”
“We have used important tools to act quickly to prevent contagion,” Liang will tell lawmakers. “And they are tools we would use again if warranted to ensure that Americans’ deposits are safe.”
Lawmakers and regulators probably will also take a closer look at social media’s ability to amplify financial stress. In SVB’s case, uninsured depositors began looking at the bank’s weak balance sheet and turned to social media to start talking about a bank run. Depositors fled, pulling more than $40 billion in deposits from the bank on March 9, according to Barr. The bank failed the next day.
Rep. Patrick T. McHenry (R-N.C.), who chairs the House Financial Services Committee, told The Washington Post that SVB’s failure marked the “first Twitter-fueled bank run.”
“This debate is not new,” McHenry said. “It is just different today because of the speed and ability of a Twitter mob to exacerbate and fan the flames of a bank run.”
Tony Romm contributed to this report.
