WASHINGTON — During a Senate Banking hearing with regulators, some centrist Democrats bristled at the idea of making sweeping
The comments, made during a Senate Banking Committee hearing Thursday morning, raise questions about
Sen. John Tester, D-Mont., said the Fed has the discretion it needs under the current framework to "drop the hammer" on banks that are mismanaging risks. He also nodded to
"There ain't a lot of banks on every other block. It ain't like walking down the street in L.A. or New York City, OK?" Tester said of his home state. "And my concern is that these community banks that don't have a risky portfolio will end up paying the price for a CEO [that mismanages risks]."
Tester said the last time lawmakers pushed regulators to be more aggressive, following the subprime mortgage crisis of 2008, it resulted in agencies "regulating the hell out of banks to the point where we made the biggest banks bigger." He and fellow committee member Sen. Thom Tillis, R-N.C., are calling for an
Sen. Mark Warner, D-Va., questioned whether higher levels of capital at Silicon Valley Bank, Signature Bank and First Republic Bank would have prevented their failures.
Echoing
"In the case of SVB, $42 billion 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 complimented Barr's report on the failure of Silicon Valley Bank and the Fed's role as the bank's primary federal regulator. But he suggested changes to rules around short sellers — traders who profit off falling value of a stock's prices — could be the best regulatory response, noting the potential for bipartisan support.
Barr declined to comment, noting that oversight of short sellers is in the domain of the Securities and Exchange Commission.
Some Democrats on the committee embraced Barr's call for strengthening capital and liquidity rules after the recent bank failures.
Sen. Sherrod Brown, D-Ohio, who chairs the committee, said he agrees with the finding from Barr's report that policy changes under the previous administration led to lighter touch regulation on banks between $100 billion and $250 billion.
"The purpose of these hearings isn't just to place blame, it's to actually fix what went wrong," Brown said in his opening remarks. "We need to undo the damage the last administration did as they weakened rules — and preached about it, I might add. We need to strengthen our guardrails, like capital and liquidity and stress testing."
Republicans, meanwhile, were critical of regulators' handling of the failed banks, noting that they had the tools to force them to address critical issues but chose not to use them.
Sen. J.D. Vance, R-Ohio, argued that the Federal Reserve Bank of San Francisco — the regional reserve bank tasked with overseeing Silicon Valley Bank — was "distracted" by its research efforts on the financial impact of climate change and broad inequalities in the banking system.
"There's only so much cognitive bandwidth the average human being has," Vance said. "I really worry that the more that the regulators are focused on things that have nothing to do with systemic or individual financial risks, the less and less safe our financial system is going to be."
Barr said reserve banks have the right to set their own research agenda and those efforts did not prevent the San Francisco Fed from flagging critical issues at Silicon Valley Bank, including its handling of interest rate risks.
"The review did not find any evidence that the supervisors were distracted by other activities. They were focused on the right set of risks in the bank with respect to liquidity risk management and interest rate risks," Barr said. "But the findings were that they didn't act forcefully enough to get the bank to move quickly enough to change those factors."
One topic that seemed to garner bipartisan support from the committee was the need for enhanced regulations on executive compensation and action from regulators to claw back bonuses collected by executives at the failed banks.
Sen. Bob Menendez, D-N.J., asked the regulators to pledge to act "quickly" to implement Section 956 of the Dodd-Frank Act, which
Sen. Mike Rounds, R-S.D., encouraged Gruenberg to pursue clawing back bonuses paid to Silicon Valley Bank leaders — some of which went out the day the bank failed — before the two-year statute of limitations is reached.
"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."
Rounds said clawbacks were important as a "deterrent to others who might think this is a cool way to make a lot of money, like millions of dollars."
The hearing also revealed that some of the statements made by former Silicon Valley Bank CEO Greg Becker
Sen. Bill Hagerty, R-Tenn., asked Gruenberg if it was true that the FDIC did not consult with anyone from Silicon Valley Bank while attempting to find a buyer for the failed bank, as Becker had testified on Tuesday. Gruenberg said contrary to the CEO's claims, FDIC officials did in fact directly communicate with the chief executive.
"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."
Similarly, Barr pushed back against Becker's assertion that he was never informed directly about the issues Fed regulators identified with his firm's modeling of interest rate risks.
"That's simply not true," Barr said before reading a letter from November 15 of last year addressed directly to Becker.
The hearing also yielded a fiery exchange between Sen. Elizabeth Warren, D-Mass., and Hsu. The senator lambasted Hsu for signing off on JP Morgan's acquisition of a majority of Silicon Valley Bank's assets earlier this month, inflating the size of what is already the largest bank in the country. She had
"You are the one person who was supposed to use judgment on the question of, between multiple sales, which one was the right one to go with and which one presented more risk to the banking system," she said. "According to your own metric, you chose the one that gives us more concentration in the system. I'm very troubled by that decision."
