WASHINGTON — In his first public comments since the onset of a panic that led to the failure of Silicon Valley Bank and Signature Bank, Federal Deposit Insurance Corp. Chairman Martin Gruenberg will testify that capital treatment for unrealized losses on securities and resolution plans for banks over $100 billion in assets "merits serious attention."
"The two bank failures also demonstrate the implications that banks with assets over $100 billion can have for financial stability," Gruenberg wrote in his prepared testimony. "The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk. This would include the capital treatment associated with unrealized losses in banks' securities portfolios. Resolution plan requirements for these institutions also merit review, including a long-term debt requirement to facilitate orderly resolution."
The pile of unrealized losses on securities that Gruenberg
"One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today's environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels," he said.
Gruenberg will testify alongside Federal Reserve Vice Chairman for Supervision Michael Barr and top Treasury official Nellie Liang at the
The hearings are expected to be contentious, with some Democratic lawmakers building the case that oversight requirements for midsize banks are too lax and the $250,000 deposit insurance limit is too low. Republicans, meanwhile, will likely
Gruenberg said that the FDIC received only two bids for Silicon Valley Bank before federal regulators declared a systemic risk exception for the bank and for Signature Bank. One of those bids was invalid, Gruenberg said, because the institution didn't submit a resolution from its board of directors authorizing its offer.
"The costs associated with the sole valid offer would have resulted in recoveries significantly below the estimated recoveries in liquidation," he said.
The FDIC's chief risk officer will review the FDIC's supervision of Signature Bank, which, unlike Silicon Valley Bank, was under the FDIC's regulatory purview (Silicon Valley Bank was overseen by the Fed). The FDIC's report will include policy options related to deposit insurance coverage levels, excess deposit insurance and the "implications for risk based pricing and deposit insurance fund adequacy."
The Fed previously announced that Barr would review the central bank's oversight of Silicon Valley Bank.
Gruenberg also addressed regulators' decision to deem both the failure of Silicon Valley Bank and Signature bank as systemically risky.
"With the failure of SVB and the impending failure of Signature Bank, concerns had also begun to emerge that a least-cost resolution of the banks, absent more immediate assistance for uninsured depositors, could have negative knock-on consequences for depositors and the financial system more broadly," Gruenberg said in his written testimony. "With uninsured depositors at the two banks likely to face an undetermined amount of losses, depositors at other banks began to move some or all of their deposits to other banks to diversify their exposures and increase their deposit insurance coverage. There were also concerns that investors could begin to doubt the financial strength of similarly situated institutions making it difficult and more expensive for these banks to obtain needed capital and wholesale funding."
The agencies were also concerned that a "significant" number of the depositors of Silicon Valley Bank and Signature Bank were, according to Gruenberg's testimony, small and medium-size businesses.
"As a result, there were concerns that losses to these depositors would put them at risk of not being able to make payroll and pay suppliers," according to Gruenberg's written testimony. "Moreover, with the liquidity of banking organizations further reduced and their funding costs increased, banking organizations could become even less willing to lend to businesses and households. These effects would contribute to weaker economic performance, further damage financial markets, and have other material negative effects."
But the depositors at Silicon Valley Bank also included those with extremely large account balances. Together, the ten largest accounts at Silicon Valley Bank held $13.3 billion.
The FDIC can investigate directors, officers and other professional service providers for the bank for any losses they caused the institution, and for their misconduct in the management of the bank. The agency has already begun those investigations, Gruenberg said.
While estimates could still be adjusted, the agency estimates that the cost to the Deposit Insurance Fund of resolving Silicon Valley Bank to be $20 billion, while the cost of resolving Signature Bank should fall around $2.5 billion, Gruenberg said. Of those losses, about 88% — or $18 billion — is due to covering uninsured deposits at Silicon Valley Bank, while two-thirds, or $1.6 billion, covers uninsured deposits at Signature Bank.
As far as covering those losses via a special assessment fee on banks, Gruenberg notes that the FDIC has "discretion in the design and time frame."
"Specifically, the law requires the FDIC to consider: the types of entities that benefit from the action taken, economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant," he said. "Finally, the FDI Act requires that a special assessment be prescribed through regulation. The FDIC intends to seek input on any special assessment from all stakeholders through notice-and-comment rulemaking and expects to issue a notice of proposed rulemaking for a special assessment related to the failures of SVB and Signature Bank in May 2023."
