Top banking regulators say stronger rules are needed in the wake of SVB collapse
Zachary Halaschak
Video Embed
Three top regulators testified on Tuesday that stricter rules need to be imposed on the banking system to prevent bank failures such as that of Silicon Valley Bank.
The three witnesses were the Federal Reserve’s Vice Chairman for Supervision Michael Barr, Federal Deposit Insurance Corporation Chairman Martin Gruenberg, and Nellie Liang, the undersecretary for domestic finance at the Treasury Department.
The trio faced a torrent of questions from Republicans and Democrats about what regulators should have done to prevent the collapses of SVB and Signature Bank, the second- and third-largest bank failures in the country’s history.
Testifying before the Senate Banking Committee, Barr, who was appointed by President Joe Biden last year, said he thinks the collapses necessitate more stringent banking rules.
BORROWING FROM EMERGENCY FED PROGRAM TO PREVENT BANKING CRISIS RISES TO $54 BILLION
“I anticipate the need to strengthen capital and liquidity standards,” Barr told lawmakers on the panel.
Sen. Elizabeth Warren (D-MA), a firebrand on the Left known for her disdain for lax banking regulation, used the hearing to put three regulators on the record about whether they support strengthening banking rules in the coming weeks and months to safeguard against further chaos in the banking system.
“I’d like to know if you believe that we need to strengthen our banking rules going forward to ensure the safety of our financial system,” Warren asked the three regulators.
All three agreed that they support stronger banking rules following the collapses of SVB and Signature Bank.
Gruenberg said that the failures of SVB and Signature Bank show the “implications that banks with assets of $100 billion or more can have for financial stability.”
“The prudential regulation of these institutions merits additional attention, particularly with respect to capital, liquidity, and interest-rate risk,” he added.
Still, lawmakers on the Right and the Left were split about the underlying cause of the SVB meltdown and subsequent chaos in the banking system. Some Republicans accused the regulators of not preventing the collapse by failing to enforce existing laws and procedures, while Democrats blamed the Trump-era easing of rules for banks with assets between $100 billion and $250 billion — a categorization that included the now-defunct SVB.
Sen. Sherrod Brown (D-OH), the chairman of the Banking Committee, blasted executives at the banks and emphasized that greed leads to risky behavior. He noted that at SVB, executive bonuses were tied to growth and that the bank went nearly a year without a senior risk officer. He said, though, that even with the bank’s actions in mind, more safeguards are needed in the banking system.
“It may be tempting to look at all this and say, we don’t need new rules. The real problem was these arrogant executives. But there will always be arrogant executives,” the Ohio Democrat said. “That’s exactly why we need strong rules and public servants with the courage to stand up to bank lobbyists and enforce them.”
Sen. Tim Scott (R-SC), the ranking member on the committee, said regulators should have done more to prevent the collapses. He said “warning signs were already flashing” prior to SVB’s failure and that reports indicate the central bank was aware of risky practices at SVB more than a year before its collapse.
Scott also said that with interest rates rapidly rising over the past year, the Fed should have been actively working to make sure banks under its purview were hedging and covering risk accordingly. He emphasized that existing laws make it clear the Fed can take any enforcement or supervisory action it deems appropriate to address unsafe practices.
“If you can’t stay on mission and enforce the laws as they already are on the books, how can you ask Congress for more authority with a straight face?” Scott told the regulators. “To that end, I hope to learn how the Federal Reserve could know about such risky practices for more than a year and fail to take definitive, corrective action. By all accounts, our regulators appear to have been asleep at the wheel.”
Centrist Sen. Jon Tester (D-MT) stressed to Barr it is crucial that financial regulators correct any problems they find during the Fed’s review of the circumstances and decisions leading up to SVB’s implosion.
“If it’s the regulator’s fault, it better be fixed,” Tester said. “If it’s a regulation fault, it better be fixed.”
Liang, the Treasury official, said she looks forward to the conclusions that will be made in reviewing the bank failures and hoped they would inform future rules and guidance moving forward.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
“We must ensure that our bank regulatory policies and supervision are appropriate for the risks and challenges that banks face today,” Liang told the panel.
The hearing came about 2 1/2 weeks after SVB failed. Barr, Gruenberg, and Liang are all scheduled to testify before the GOP-controlled House Financial Services Committee on Wednesday morning, during which they will face even more questions about SVB’s failure and its implications for future regulation and supervision.