Members of the Senate Banking Committee wrote to Federal Reserve chairman Jerome Powell if he and his fellow board members were lax in supervising Silicon Valley Bank (SVB), which failed earlier this month.
The bipartisan group of lawmakers included senators Bob Menendez (D-N.J.), Mike Rounds (R-S.D.), Catherine Cortez Masto (D-Nev.), Thom Tillis (R-N.C.), and Cynthia Lummis (R-Wy.).
This comes as the nation’s top bank regulators spoke in front of the Senate committee for its first hearing on March 28 to explain how the collapses of Silicon Valley Bank and Signature Bank were allowed to happen overnight in early March.
Powell Asked If Fed Utilized All of Its Powers to Prevent SVB Failure
“We write to request information from the Federal Reserve regarding its authority provided by 12 U.S.C. 5365(a)(2)(C) to apply enhanced supervision and prudential standards to banks,” wrote the senators.“Specifically, we request further information on what, if any, actions the Fed took to apply these enhanced standards to Silicon Valley Bank (SVB) Financial Group.”
The code empowers the the Fed to act in order “to prevent or mitigate risks to the financial stability” of the United States and “to promote the safety and soundness of the bank.”
The letter asked whether the Fed used its full powers under U.S. law to apply an “enhanced supervision and prudential standard” for Silicon Valley Bank, or any bank holding between $100 billion and $250 billion in deposits.
The senators also asked if the Fed ever exercise its authority under the code to “apply or consider applying enhanced supervision or prudential standards to the SVB Financial Group” at any time over the past five years.
Lawmakers Place Blame on Failure of Regulators to Act
The lawmakers insist on knowing whether the central bank ever used its authority to apply stricter oversight standards on SVB or any other midsize bank.The senators implied that the Fed failed to subject SVB to more stringent standards applied on the largest banks, including higher capital and liquidity requirements and annual stress tests.
However, prior to its failure this month, SVB controlled $211.79 billion in assets, which fell short of the statutory threshold that designates any institution with total assets over $250 billion as systemically important; but still, the bank fell well within the statute’s prescribed jurisdiction.
A major issue is a item in a 2018 reform legislation that encouraged federal regulators to tailor their supervision of lending institutions by the amount of total assets.
The changes in the law increased the asset threshold in which enhanced prudential standards apply, from $50 billion to $250 billion, and gave regulators the discretion to make a decision once a bank crossed the $100 billion threshold, while granting them authority to step up oversight on smaller, riskier banks.
Powell’s answer is a key part of finding what went wrong with SVB.
Several Democrats have attempted to pass the blame on the recent bank crisis on the 2018 legislative changes and former president Donald Trump, but most experts have blamed an apparent failure by the banks’ supervisors.
“Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risks and clear liquidity risks,” said Barr, in response to Banking Committee chair Sherrod Brown (D-Ohio), and accused regulators of having “dropped the ball” for failing to see the growing risks before SVB ultimate collapse.
“We must evolve our understanding of banking in light of changing technologies and emerging risks,” said Barr.
“To that end, we are analyzing what recent events have taught us about banking, customer behavior, social media, concentrated and novel business models, rapid growth, deposit runs, interest rate risk, and other factors ... And for how we think about financial stability,” he added.
