Fed regulator accuses Silicon Valley Bank of “terrible” risk management under Senate grilling 

YEREVAN (CoinChapter.com) — A top regulator in the United States Federal Reserve has criticized the management of the now-defunct Silicon Valley Bank (SVB) for failing to prevent the bank’s collapse. During a US Senate panel hearing, Michael Barr accused the bank’s executives of doing a “terrible” job at managing the evident risks faced by the lender. Moreover, he also criticized the bank for failing to have a chief risk officer. Barr is the Fed’s vice chair for supervision.

The widely-unexpected collapse of the SVB, has caused concern in the country. Another major lender, Signature Bank, unfolded shortly after. The US Congress had called summoned to explain why they did not see the collapse coming. 

Michael S. Barr was not the only regulator present before the Senate Banking Committee. Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation was there too. Nellie Liang, Under Secretary of the Treasury for Domestic Finance, also attended the hearing.

During the two-hour grilling, several Senators accused the regulators of being complicit in the collapse by failing to act on time. 

“It looks like regulators knew the problem, but no one dropped the hammer,” 

 Democratic party Senator from Montana, Jon Tester, said. 

In a bid to defend himself and the Fed, Barr quickly pointed the entire blame at the SVB. According to him, they, as regulators, had warned the bank of wrongdoings and the potential risks. However, the bank management opted to ignore them. 

“Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risk and clear liquidity risk… The Federal Reserve brought forward these problems to the bank, and they failed to address them in a timely way, 

he said

Republican Senators criticize regulators for SVB collapse 

Even though Barr and his colleagues argued that the Silicon Valley Bank was solely responsible for its collapse, the lawmakers were reluctant to buy the story. 

The Senators were particularly interested to know why the agencies, especially the Federal Reserve, had not done everything required to prevent the bank from crumbling. The Fed was the main regulator of the SVB and was supposed to have predicted its collapse. 

The Republicans attacked the Fed for not doing their job properly, which would, in turn, prevent the bank from collapsing. 

“The warning signs should have been flashing red. 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?” 

Republican Senator Tim Scott hit out.

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The Democrats point fingers at Donald Trump 

The Democrats, meanwhile, addressed the possible regulatory gaps that were caused after former US President Donald Trump rolled back parts of the vital Dodd-Frank Act in 2018. Senator Elizabeth Warren was among the critics. 

Under the act, any bank with over $50 billion in assets was classified as a “systemically important” financial institution. Because their collapse would come with grave financial consequences, it was opined that their failure should be prevented. 

This gave the Federal Reserve powers to strictly regulate these banks. Among those that protested this regulatory power were the executives of the Silicon Valley Bank. 

Under pressure, the Congress under Trump passed a law recalling these provisions on some banks. One significant change was that the threshold for categorizing a bank as a “systemically important” institution increased from $50 billion to $250 billion. 

“The scene of the crime does not start with the regulators before us. Instead, we must look inside the bank, at the bank CEOs, and at the Trump-era banking regulators, who made it their mission to give Wall Street everything it wanted,” 

Senator Sherrod Brown, who chairs the Senate Banking Committee, said. 

More banking regulations coming 

As the regulators blamed the bank executives for the collapse, and the Senators blamed the Fed for it, one thing became evident. The banking system in the United States will see stronger regulations.

Michael Barr promised to review the way Silicon Valley Bank was supervised before its collapse. FDIC Chairman Martin Gruenberg, meanwhile, promised to work closely with Congress to draft policies that will prevent such disasters from happening in the future. 

“The circumstances surrounding the failures of SVB and Signature Bank merit further thorough review by both regulators and policymakers... The FDIC is committed to working cooperatively with our counterparts at the other federal regulators as well as with policymakers in the Congress to better understand what brought these institutions to failure and what measures can be taken to prevent similar failures in the future,” 

Gruenberg said.

While the debate about who is to blame will continue, other major banks should expect to feel the heat coming from regulators in the weeks to come.