Open questions from Congress' wall-to-wall failed-banks hearings

May 19, 2023 5:12 PM

WASHINGTON — Congress held a whirlwind of hearings in the last week related to the failures of Silicon Valley Bank, Signature Bank and First Republic, leaving lawmakers and policy watchers digesting a pile of new information about the turmoil still facing regional banks.

Lawmakers — for the first time — heard publicly from executives of the three failed banks, and questioned regulators about their roles in overseeing and unwinding those institutions. While Congress received testimony from Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Federal Reserve Vice Chairman for Supervision Michael Barr just weeks before, this is the first time lawmakers have been able to ask specific questions about the lengthy reports the two agencies put out on Signature Bank and Silicon Valley Bank, respectively.

While lawmakers, regulators and executives covered familiar ground throughout the hearings, some actionable threads began to emerge around executive compensation for failed banks and further investigation into root causes of the banks' failures. A bipartisan pair of senators called on the Biden administration to put an independent investigation into the failures in motion.

Here's four threads to watch as the regulatory process around the bank failures gains steam:

Greg Becker, former chief executive officer of Silicon Valley Bank, during a House Financial Services Committee hearing May 17. Becker's testimony that he was not consulted about the sale of Silicon Valley Bank contradicts testimony from Federal Deposit Insurance Corp. Chair Martin Gruenberg that same week.

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Did the FDIC involve former CEO Greg Becker in the sale process of Silicon Valley Bank?

Former Silicon Valley Bank CEO Greg Becker found himself in the hot seat during his two days of testimony, once in front of the Senate Banking Committee, and again before two subcommittees of the House Financial Services Committee.

Lawmakers targeted everything from his compensation — particularly his bonuses — to the decisions around interest rate risk the bank made during his tenure. On a couple of occasions, senators flagged what they saw as discrepancies between Becker's testimony and regulators' version of events.

The most explicit of these took place over Becker's involvement, or lack thereof, into the sale process of Silicon Valley Bank. Becker said he offered to help with the process of finding an acquirer for the bank.

"I offered several times to engage potential acquirers to run through a list of the names or priorities who I believe would be the most likely," he said in response to a question from Sen. Bill Haggerty, R-Tenn.

"Did they ever consult you?" Haggerty followed up. "You said you offered, but did the FDIC consult with you?"

"They did not," Becker replied.

A few days later, Gruenberg said that the FDIC did get input from Becker.

"It's my understanding that FDIC staff actually did meet with Mr. Becker on what I believe was Saturday, getting input from him on the condition of the institution, as well as on potential acquirers of the institution," Gruenberg said.

Hagerty said the discrepancy could merit further exploration by the committee.

"We'll need to get to the bottom of this conflict," he said. "I'm very interested."

There's a chance that these two accounts are both accurate, said Ian Katz, a managing director at Capital Alpha Partners.

"It's possible that those two accounts aren't inconsistent," Katz said. "Perhaps the FDIC meeting happened but didn't go over specific potential buyers at that moment. Or perhaps Becker wasn't in that meeting. Or perhaps there was a meeting but Becker doesn't consider that being 'consulted.' Who knows?"

Regardless, it's likely to be a point that lawmakers double down on, particularly with Republican interest in both the House and the Senate in the FDIC's process for finding a private-sector solution for Silicon Valley Bank.

When contacted by American Banker, an FDIC spokesperson said "we will let the Chairman's statement speak for itself."

What was the status of Silicon Valley Bank's regulatory warnings?

Another potential conflict, according to one lawmaker, between the Fed's account of Silicon Valley Bank's oversight and Becker's took place over the status of "matters requiring attention," that the Fed brought up to the bank involving its risk management practices.

Becker responded to a question from Sen. Thom Tillis, R-N.C., on how many matters requiring attention and matters requiring immediate attention were outstanding on the days of the bank's failure:

"There were 31 that I think had been clearly reported by the Federal Reserve," Becker said. "The ones that specifically related to liquidity risk, that actually were given in roughly November of '21, they were immediately reacted to by our CFO, by our Treasury team, and overseen by our [Asset-Liability] Committee and our Finance Committee of the board of directors. And to my memory, by the middle of 2022, the vast majority of those findings had already been remediated. And I believe even in early 2023, my recollection is there was roughly one of those findings that were outstanding. So the team, again from my standpoint, was very responsive to the regulatory feedback specifically in the area of liquidity; overall they were, but specifically in the area of liquidity."

Sen. Mike Rounds, R-S.D., followed up with Barr on that answer days later during the regulators' turn in the Senate Banking Committee.

"Former SVB CEO [Becker] claimed that as of early 2023, all but one supervisory finding was remediated," Rounds said to Barr. "Is this true, and if so, was this interest rate risk one of those that was remediated?"

"That is not true, Senator Rounds," Barr replied. "At the time the institution failed, they had 31 outstanding matters requiring attention or immediate attention, including those that are related to interest rate risk and liquidity risk, as well as broad issues of risk management at the bank."

A representative for Becker said that Becker, in his response during the hearing, was "referring to feedback he received from the internal team at SVB."

Centrist Democrats skeptical that regulation would have stopped bank failure

Republicans, who have traditionally pushed for less bank regulation, voiced resistance to any new legislation that ratchets up supervision. They say the agencies had ample authority to prevent the recent bank failures but failed to utilize it — and it seems like some moderate Democrats agree.

Moderate Democrats — many of whom voted for S. 2155, which ultimately relaxed regulation on midsize banks like Silicon Valley Bank — de-emphasized the bill's deregulatory effects in this week's hearings, painting the failures as an idiosyncratic event regulators were sluggish to address.

While he praised Barr's report, Sen. Mark Warner, D-Va., said that regardless of the amount of capital the bank had, no bank could have withstood a deposit run scale of which SVB faced in March. This runs contrary to statements by administration officials and some fellow Democrats, who say deregulation was a precursor for the bank runs.

"Forty-two billion [dollars] in six hours on that run, I don't know what regulatory structure at that point — at least by the calculations that I saw, that was equivalent to 25 cents on every dollar," Warner said. "Nothing would have stopped that."

Warner did entertain the idea of reeling in short sellers, who profit from declining stock prices. The Virginia Democrat also introduced a bipartisan bill in March which would claw back executive compensation.

"I think regulation needs to fit the risk," said Sen. Jon Tester, D-Mont. "When S. 2155 was put up, it was put up with the idea that if you had a risky portfolio, regardless of size, that the Fed and the other agencies had the ability to tailor those to whatever threat that those risky business dealings [posed]."

The failed banks' primary supervisors have admitted some shortcomings on their part, but argue that midsize regionals like Silicon Valley Bank had safety nets in place prior to the 2018 law, when banks like Silicon Valley Bank were automatically subject to enhanced prudential standards, including higher capital. FDIC and the Fed's reports both indicate the original higher prudential threshold could have nipped the bank's poor management in the bud, well before a run seemed imminent.

Some of the most progressive banking committee members, such as Sen. Elizabeth Warren, D-Mass., want to restore the pre-2018 Dodd-Frank framework. Warren introduced a bill to repeal the heart of the 2018 bill, and restore the "too big to fail" limit back to banks above $50 billion in assets.

This week's hearings indicate that broad regulatory overhaul is unlikely, but that there is potential for bipartisan support on issues of holding executives accountable.

Executive compensation reform has bipartisan support

Senators on both sides of the aisle expressed disdain during the week's hearings that bank officials walked away with massive bonuses and profits in the days leading up to the historic bank failures.

Sen. Bob Menendez, D-N.J., asked regulators to quickly implement Section 956 of the Dodd-Frank Act, which would establish rules on executive compensation. Sen. Mike Rounds, R-S.D., echoed similar interest in clawing back money executives earned at the expense of undue risk, saying the compensation structure was such that bonuses came at the expense of risk management.

"You've got executive officers in a bank who … received bonuses for showing a better rate of return because, in part, they eliminated the hedging, which was protecting those deposits," Rounds said. "By eliminating the expense of protecting the assets of these depositors, they bumped their bonuses."

Soon after the failures, President Joe Biden urged Congress to enact tougher punishments for executives of failed banks, and since then a bipartisan coalition of senators have introduced bills to expand regulators' authority to claw back executive compensation. Banking Committee Chairman Sen. Sherrod Brown, D-Ohio., has introduced a bill, as have Sens. Elizabeth Warren, D-Mass., Catherine Cortez Masto, D-Nev., Jack Reed, D-R.I., and Chuck Grassley, R-Iowa.

While major regulatory overhauls are still forthcoming, one clear area of consensus is around preventing executives of failed banks from profiting off their banks' failures.