The stock market was mixed on Tuesday, as top bank regulators from across the country testified in front of the Senate Banking Committee. Top officials from Federal Reserve, Federal Deposit Insurance Corp., and Treasury Department answered questions about the collapse of Silicon Valley Bank & Signature Bank. Fox Business reported that First Republic Bank has ceased its pursuit of a sale.
All three testified: Michael Barr, Fed Vice-Chairman for Supervision, Martin Gruenberg, FDIC Chair, and Nellie Ling, Treasury Undersecretary for Domestic Finance. On Wednesday, regulators will appear before the House Financial Services Committee.
SVB Senate Hearing
In his opening remarks, Gruenberg noted that as institutions were under stress after the failures of SVB and Signature Bank, "serious concern arose regarding a wider economic spillover" from these failures.
After consulting with the President, the FDIC, Fed and Treasury secretary determined that the FDIC would use the emergency systemic risks authorities under the Federal Deposit Insurance Act.
Liang said that the FDIC guaranteed deposits in failed banks and that the Treasury had created a new facility to lend cash to banks experiencing withdrawal rushes. She stated that the actions helped "stabilize deposit throughout the country, and gave depositors confidence that their money is safe."
Gruenberg and Liang agreed that the contagion and bank run would have been more severe without these actions.
Gruenberg, in a reference to SVB and Signature Bank, said: "It's worth noting that the two institutions were allowed fail." "Shareholders have lost their investments. Unsecured creditors suffered losses. "The board and the top executives were removed." The FDIC also launched investigations into executive misconduct.
Barr admitted that the Fed failed to stress-test Silicon Valley Bank by 2022.
Barr stated in his prepared remarks that "Our banking system has strong capital and liquidity." The Federal Reserve, in collaboration with the Treasury Department, and the Federal Deposit Insurance Corporation took decisive action to protect the U.S. banking system and strengthen public confidence.
Silicon Valley Bank Was A 'Textbook Case Of Mismanagement'
Barr stated in his prepared remarks that "SVB’s failure is textbook mismanagement." He claimed that Silicon Valley Bank grew its business too rapidly, and assets tripled between 2019-2022. In late 2021, supervisors started sending warnings about governance and control deficiencies.
Barr stated that "fundamentally the bank failed due to its management's failure to adequately address clear interest rate risk and clear liquid risk." He criticised SVB for not having a chief risks officer and for failing to prepare itself for higher interest rates. This led to a drop in the value of its assets.
Barr stated that "the bank suffered a devastating, unexpected and unplanned run by its non-insured depositors within a time period of less than 24 hour."
Barr stated during questioning that supervisors had given the bank a "very poor rating" before the bank run.
The republicans suggested that regulators were more concerned about other policy matters. "Our regulators seem to have been asleep at the wheel," said Senator Tim Scott, R-S.C. during the hearing.
Additional Bank Oversight
The Federal Reserve will review the stress-testing standards for smaller banks such as Silicon Valley Bank. The FDIC is also planning to release its review of bank failures, and the deposit insurance systems by May 1, 2009. The report will contain policy recommendations on deposit insurance coverage, excess deposit insurance, and implications for risk based pricing.
The Fed and FDIC intend to use the authority they have to recover executive compensation and pursue clawbacks.
Sherrod Brown (D-Ohio) said that he would introduce legislation to increase penalties for bank executives for failures of banks and risky investments.
Gruenberg and Barr welcome independent reviews of the Fed's activities and supervision.
All three agreed that regulation needed to be tightened to prevent this type of failure. Barr suggested that banks with assets exceeding $100 billion may require more capital and liquidity.
First Republic is no longer for sale
Fox Business reported Tuesday night that First Republic Bank, one of the most troubled regional banks in the country, was no longer up for sale. After the news broke, shares dipped after hours on Tuesday. FRC shares closed down 2.45% for the day after dropping almost 5% before the announcement. First Republic's stock rose nearly 12% on Monday after weekend reports that officials were considering expanding the Fed’s liquidity offerings in order to help First Republic.
Silvergate Capital (SI MicroStrategy (MSTR).
Both the Financial Select SPDR ETF(XLF) as well as SPDR S&P Regional Banking ETF(KRE) were flat on Tuesday after the hearings.
Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley, and other large banks have traded in a range. Bank of America (BAC), a large bank, declined by 1.3%.