House lawmakers ripped into top U.S. banking regulators on Wednesday, questioning their competence and saying examiners were asleep at the wheel, in a second day of congressional hearings this week into how Silicon Valley Bank and Signature Bank collapsed virtually overnight on March 10 and 12.
“We need competent financial supervisors, but Congress cannot legislate competence,” said House Financial Services Rep. Patrick McHenry, RN.C., to senior Federal Reserve, Treasury and FDIC officials at the start of the hearing.
Ranking committee member Rep. Maxine Waters, D-California, questioned whether regulators’ repeated warnings to SVB about its balance sheet and long-term interest risks were enough.
“The Fed’s soft warnings to SVB management are clearly not what Congress intended for banking supervision,” Waters said.
Rep. Juan Vargas, D-California, puts it more bluntly. “It seems like [SVB] you guys blew it up, and you did nothing.”
Federal Reserve Vice Chairman Michael Barr did not disagree with that assessment. “I expect we will find that we need to put more emphasis on supervisors using the tools they have more quickly and putting in place mitigating measures more quickly when they see problems in banks that they have. ‘they oversee,’ he said.
McHenry criticized the panel for its lack of transparency during that fateful weekend when the three regulators hastily arranged relief funding to ensure depositors at the two banks would not lose money in their collapse.
There are no publicly available notes from regulators’ emergency meetings over the weekend when the banks collapsed, McHenry said. “This lack of transparency has a negative effect on public opinion on the security of the financial arena,” he added.
The question of what records would be handed over to Congress was raised several times during the contentious hearing.
Rep. Brad Sherman, D-California, called for a broad investigation of undercapitalized banks similar to SVB.
“Are there any banks, and roughly how many, that have less than 5% capital if you subtract from their stated capital their uncovered and unrealized losses on long-term debt?” Sherman asked regulators.
“Let us get back to you on that,” said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp. “We will get the numbers and share them with you very quickly.”
Republican Rep. Bill Huizenga of Michigan demanded raw, confidential supervisory information about banks, available to regulators before the meltdowns.
Gruenberg did not explicitly agree to provide confidential information, suggesting instead that the committee should issue a subpoena for that information. “I think you have the power to demand this information,” he said, “and [the FDIC] will listen to you.”
Republican-majority House members challenged numerous decisions made by regulators in the hours and days that followed SVB collapsed and Signature Bank follow-up 48 hours later. Chief among them was what regulators did, or did not do, in the three days after they each learned of SVB’s impending collapse, from Thursday to Sunday, when they decided that the bankruptcies of SVB and Signature Bank posed a systemic risk to the financial system.
“Although US regulators have clear knowledge of insufficient risk management, it appears examiners and your supervisors were asleep at the wheel as signs that Silicon Valley Bank was headed for collapse stared them in the face for years. many, many months,” the rep said. Ann Wagner, R-Mo., told Barr.
On Tuesday, bank stocks turned negative following a similar hearing before the Senate Banking Committee. Investors may have been spooked by the three main regulators, each saying they favor tougher rules for banks with more than $100 billion in assets.
Nellie Liang, undersecretary for internal finance at the Treasury Department, testified alongside Gruenberg and Barr before the House committee after appearing before the Senate Banking Committee on Tuesday.
Sense. Elizabeth Warren, D-Mass., and Catherine Cortez Masto, D-Nev., both members of the Banking Senate, introduced bipartisan legislation Wednesday, it would force federal regulators to claw back some or all of the compensation earned by bank executives in the five-year period before a bank failure.
“Americans are tired of fat bankers paying themselves lavishly while risking other people’s hard-earned money,” Warren said in a statement. “It’s time for Congress to step up and strengthen the law so that bank executives bear the cost of failure, don’t line their pockets, and walk away unscathed.”
Sens Josh Hawley, R-Mo., and Mike Braun, R-Ind., also sponsored the bill.