Federal regulators who fell asleep at the wheel and failed to do their job of preventing distress in the banking system need to be held accountable, lawmakers argued at a Senate hearing.
The Senate Banking, Housing, and Urban Affairs Committee held a hearing last week to hold executives accountable after the three bank failures this year.
There was chatter about how banking executives and deregulatory efforts in Washington contributed to the latest banking turmoil; there was bipartisan agreement that federal regulators must also be held responsible because they did not employ their authority to stop the meltdowns at Silicon Valley Bank and Signature Bank.
“This was a failure in three parts, and we must discuss accountability across the board for bank executives, bank regulators, and this administration’s inflationary spending policies,” Sen. Tim Scott (R-S.C.), the ranking Republican on the panel, said in his opening remarks on May 4.
Many Republican officials have asserted that President Joe Biden’s inflationary policies forced the central bank to become more aggressive on monetary policy, resulting in pressures in the financial sector.
It was reported that when Silicon Valley Bank collapsed, it had 31 open supervisory findings, including “matters requiring attention” and “matters requiring immediate attention,” which were all flagged to the bank’s management. Moreover, these findings dated as far back as June 2019, but the more egregious ones started occurring in the summer of 2021, such as “weak risk management,” “enhanced liquidity risk management,” and deficient “contingency funding plan.”
The central bank concluded in its report that the failures resulted from bad management and the Fed failing to do its job.
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Michael S. Barr, the Fed’s vice chair for supervision, said. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation.”
Over the past two months, there have been renewed calls to add more regulation to the financial sector to prevent that from happening again. However, some have suggested that the Fed and other regulatory agencies should not be granted additional power.
Scott noted that if restaurants in Charleston, in his home state of South Carolina, had 31 health and safety violations, they would be shut down immediately.
“But what’s more, if an inspector failed to take note of those 31 safety or health issues in the first place, they would lose all credibility and their jobs,” he said.
‘Bank Lobbyists’
“I know we often hear about all these rules and all these regulations on banks, but we also know this town swarms with bank lobbyists, so often getting their way in weakening those rules and intimidating regulators,” said Sen. Sherrod Brown (D-Ohio), who is the committee chair.But Thomas Quaadman, the executive vice president of the Center for Capital Market Competitiveness, wasn’t so quick to advocate for new or more regulatory authority in Washington.
The Federal Deposit Insurance Corp., for example, presently maintains the authority to hold senior leadership and directors accountable.
“We think the authorities are there,” Quaadman said, adding that with the information currently given to the public, it’s clear that “sufficient action was not taken” by federal regulators.
He cited one issue as an example of what wasn’t done. SVB management refrained from communicating with the board of directors about the company’s problems.
“That’s a red flag that should have been jumped on immediately and wasn’t,” he said.
The new worry among lawmakers is that regulators might try to overregulate and potentially threaten small and mid-sized banks, many of which are struggling in the current rising-rate climate.
Sen. Jon Tester (D-Mont.) said, “My concern is—similar to what happened in 2008—that the regulators will respond in a way where they put the screws to the banks who are following the rules, and the board is paying attention, and the executives are doing a good job.”
