Fed Was in Talks With Silicon Valley Bank to Use Discount Window Before Collapse

Michael Barr testifies at the Senate Banking, Housing, and Urban Affairs at the U.S. Capitol in Washington, on May 19, 2022. Tasos Katopodis/Getty Images

Federal Reserve officials were reportedly in discussions with Silicon Valley Bank (SVB) to use its discount window, right before its collapse earlier this month.

The Fed’s top enforcer testified in front of Congress on March 29, as the elected representatives demanded answers for the California-based lender’s collapse.

House lawmakers questioned the regulators’ competency and accused their enforcers of being asleep at the switch.

The blame for sudden collapse of SVB can be spread around to the bank’s executives, Fed supervisors, and other government regulators, Michael Barr, the Fed’s vice chair for supervision, told the House Financial Services Committee, for the second round of hearings regarding the crisis, after an appearance in front of the Senate Banking Committee the previous day.

The bipartisan committee grilled top regulators like Barr, Federal Deposit Insurance Corp (FDIC) chief Martin Gruenberg, and Treasury Undersecretary for Domestic Finance Nellie Liang on why no one acted harder to investigate the looming crisis, even though supervisors at the Fed were alerting superiors over issues with the bank for months.

“I think that any time you have a bank failure like this, bank management clearly failed, supervisors failed, and our regulatory system failed,” Barr told Congress, adding, “We’re looking at all of that.”

The collapse of SVB on March 10, and Signature Bank on March 12, set off a chain reaction that caused investors to suddenly lose confidence in the U.S. banking sector, after many feared that regional bank deposits would not be protected by insurance in the case of more failures.

This led to tumbling bank stocks and fears of a full-blown financial crisis until regulators stepped in.

SVB and Signature Bank became the second and third-largest bank failures in U.S. history since Washington Mutual in 2008.

Top Federal Regulators Testify in Their Second Hearing on the Hill

Worried depositors attempted to pull more than $42 billion the day before SVB collapsed in early March, after the CEO at the time said the bank was attempting to acquire additional liquidity to offset recent losses.

Investors fled to safe havens like bonds, while depositors moved their funds to bigger institutions and money market funds.

This event took regulators by surprise, as a mass emptying of deposits spread to other regional banks throughout the country.

“That’s just an extraordinary scale and speed of a run that I had not ever seen,” Barr said, adding, “I think all of us were caught incredibly off-guard by the massive bank run that occurred when it did.”

Barr blamed executives SVB for operating without a chief risk officer for months and for neglecting interest rate risks.

“There is still much we need to understand of what you knew when and how you responded,” said Republican Patrick McHenry of North Carolina, the chairman of the House committee.

“The bottom line for you as the panel, there’s bipartisan frustration with many of your answers. There’s a question of accountability and appearance of lack of accountability,” he said.

“We need competent financial supervisors, but Congress can’t legislate competence,” McHenry continued.

Lawmakers like House Democrat Juan Vargas of California said that regulators should have been more aggressive with enforcement, telling Barr, “It seems like they blew you guys off and you didn’t do anything.”

The committee’s ranking member, Rep. Maxine Waters (D-Calif.), also questioned whether the repeated warnings from regulators to SVB executives about its balance sheet and long-term interest risks were ignored.

“The light touch cautions from the Fed to SVB management are clearly not what Congress intended for bank supervision,” Waters said.

Several members of the House committee asked Barr to provide them with the Fed’s confidential communications over its supervision of the SVB crisis.

The central bank and FDIC are expected to release their reports on the failure of Silicon Valley Bank by May 1.

The Fed’s report will focus on weaknesses regarding supervision and regulation, while the FDIC study will look at bank deposit insurance.

Fed Supervisors Failed to Warn SVB Executives Over Lapses

Supervisory staff at the Fed had previously raised serious concerns over the bank’s interest-rate risk and liquidity management and demanded improvements in November 2021.

Barr explained that in mid-2022, Fed supervisors deemed the bank’s management to be deficient and barred the bank from growing through mergers or acquisitions.

They later warned SVB’s senior management both in October and in November about their concerns, but Barr said the issues were not brought to his attention until a staff presentation last month.

“To the best of my knowledge, I first learned about the issues at Silicon Valley Bank with respect to interest rate risk in mid-February of 2023,” Barr said.

He told the Senate Banking Committee the previous day that Fed supervisors finally informed the central bank’s board in mid-February and told them that they would advise SVB on risks related to rising interest rates.

“The staff highlighted the interest-rate risk that was present at Silicon Valley Bank and indicated that they were in the middle of a further review,” Barr said.

“I believe that is the first time that I was told about interest-rate risk at Silicon Valley Bank.”

Barr testified that he was first informed about the deposit crisis at SVB on the afternoon of March 9 but that the bank told regulators that morning that their money was safe.

Meanwhile, FDIC chief Gruenberg told lawmakers he also became aware of SVB’s liquidity crisis later that evening.

Deregulation Blamed for Bank Deposit Crisis

Treasury Secretary Janet Yellen, with recommendations from the Fed and the FDIC, approved systemic risk exceptions for the failures of the two banks, enabling the FDIC to guarantee all of their deposits.

The guarantee is backed by the FDIC’s Deposit Insurance Fund, which is funded by assessments from all banks.

The three top regulator chiefs said that they had sufficient tools to deal with the crisis once it happened, but Barr admitted that the Fed should have done better when it came to supervision.

Barr said the Fed was in discussions with SVB executives the day before its collapse, to move pledged assets to the discount window, which is used to provide emergency loans to banks.

“(Fed) staff were working with Silicon Valley Bank basically all afternoon and evening and through the morning the next day to pledge as much collateral as humanly possible to the discount (window) on Friday,” Barr said.

Investors Still Wary

Crises in financial markets have eased since Swiss regulators forced UBS to buy its failing rival Credit Suisse, the emergency monetary lifeline to First Republic Bank, and after SVB’s assets were sold to First Citizens Bancshares.

Many investors still remain wary of further problems regarding the solidity of the banking sector.

The White House has asked Congress to reinstate the regulations on midsize banks that were removed five years ago, The Washington Post reported.

Some Democrats have blamed a law which loosened bank regulations in 2018 for the crisis, with Barr and Gruenberg both agreeing that the new rules for banks smaller than $250 billion in assets be reviewed.

The changes were backed by Republicans and moderate Democrats at the time, and relaxed oversight for lenders holding between $100 billion and $250 billion in assets.

The Fed exempted banks with assets in that range from maintaining a standardized “liquidity coverage ratio” that was designed to show whether a lender had enough high-quality liquid assets to survive a crisis.

READ MORE

• Troubled US Bank’s Ties to China Raise More Red Flags

It also gave permission for most small and mid-sized lenders to opt out of deducting paper losses on bonds from key regulatory capital levels.

SVB and Signature were among the banks that benefitted from those two changes. However, SVB was also unique in that its business model was highly concentrated in the tech and start-up sectors, including those in China.

Reuters contributed to this report.