Tuesday will mark the first hearing into the collapse of California’s Silicon Valley Bank (SVB) and New York’s Signature Bank, which prompted fears of a broader economic meltdown.
Michael Barr, the Federal Reserve’s vice chair for supervision, will tell lawmakers that SVB’s collapse could have been prevented by the bank itself, which failed to account for the damaging impact of interest rate hikes on its balance sheet.
“SVB’s failure is a textbook case of mismanagement,” Barr’s testimony reads.
Barr will also point to lackluster regulations on midsize banks such as SVB. Congress weakened oversight of those banks in a 2018 law, and the Fed opted not to implement stricter standards that were opposed by the banking industry.
“Specifically, we are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure,” Barr will say, adding he’s investigating whether stricter capital requirements would have bolstered SVB’s position.
The Federal Deposit Insurance Corp. (FDIC) oversaw the sale of SVB to First-Citizens Bank on Sunday. FDIC Chair Martin Gruenberg will testify that the bank’s failure — and decision to protect all depositors — will cost the agency $20 billion.
Gruenberg noted that the FDIC will replenish the fund by implementing new fees on banks, adding the agency considers the types of entities that benefit from the decision to protect depositors.
Lawmakers are likely to debate whether the FDIC made the right call in bailing out SVB and Signature Bank depositors to prevent further contagion in the banking sector. The 10 largest accounts held a combined $13.3 billion in SVB, Gruenberg noted.
“It is worth noting that these two institutions were allowed to fail. Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed,” Gruenberg said in his testimony.