After the failures of Silicon Valley Bank and Signature Bank, which prompted a mini crisis in banking, the relevant federal regulators at the Federal Reserve and Federal Deposit Insurance Corp. testified and produced reports looking at what went wrong. However, the limited and potentially self-serving nature of these efforts has not gone unnoticed. Members of Congress have openly questioned their validity, and a bipartisan group of senators is now calling on President Biden for an independent investigation.
Such independent review is essential not only to restore trust in the American banking system, but to maintain trust in key functions of American government. American banking regulators are uniquely insulated from democratic accountability because they do not rely on Congress for funding and are granted broad legal and regulatory discretion. This makes it all the more important that Congress and the American people get an independent and unvarnished understanding of what happened leading up to the failure of SVB, how the agencies (along with the Treasury and White House) determined what steps to take, who contributed or was excluded from those discussions, and how the decisions were implemented.
In managing the situation, the government abandoned most of the relevant strictures placed on it by the Dodd-Frank Act, claiming that the bank failures posed a systemic risk to the economy. The government views its invocation of the systemic risk exception, which it justified as necessary to stop a broader contagion, as a conclusive end to the debate over whether troubled regional banks pose such risks. But what if invoking this exception was unnecessary, used cynically to accomplish other objectives — such as backstopping the uninsured deposits of the politically powerful — or was the product of incompetence rather than necessity? These questions matter.
Supporters of the agencies' response have pointed out that invoking the systemic risk exception was unanimous at the FDIC and Fed, and therefore couldn't have been a partisan or political decision. Before we put stock in that argument, we need to know what information was available to, or withheld from, members of those agencies, and whether better choices could have been made before it got to that point. History is replete with examples of people feeling forced into a bad choice only to regret it when more facts came to light.
Likewise, how the FDIC handled the lead-up to and resolution of SVB's failure has implications far beyond one bank. There are
It's worth asking how much of the resulting panic was a product of SVB's failure, and how much was because of the perceived chaotic resolution. Did depositors at other banks run to "too big to fail" banks because they thought theirs might fail? Or because, after seeing the FDIC flounder with SVB, they thought a failure would have been similarly chaotic and put them at greater risk than had SVB simply been sold to a large bank?
The question is especially poignant since the FDIC ultimately ended up selling SVB to First Citizens BancShares, as well as First Republic Bank to JPMorgan Chase (the country's largest bank), on generous terms. The two resolutions are expected to result in a hit to the federal Deposit Insurance Fund of about $33 billion, the cost of which will be spread among at least some banks, and passed on to their customers, who had nothing to do with the failure.
Meaningful oversight is going to require an overseer with teeth and focus. Ideally, Congress could create a special inspector general or nonpartisan panel by law. This entity would need resources and the ability, if necessary, to compel sworn testimony and the production of documents. Failing that, the House and Senate oversight and financial committees must be willing to use their inherent subpoena power if the regulators prove to be less than fully cooperative.
While this should not be an inquisition, it must not become a passive and toothless exercise. Legitimate supervision must be exercised with proper diligence and urgency. It's all the more important here because unlike banks, which are at least subject to some market discipline from their customers, the government's only discipline comes from the people's elected officials. Those officials must now do their duty.
