A top Fed official said on Tuesday that Silicon Valley Bank’s managers were warned of dangers associated with the bank’s unique business strategy as early as the fall of 2021, but they did not take the necessary action to address the issues.
The nation’s top banking regulator, Michael Barr of the Fed, stated during a Senate Banking Committee hearing that the Fed is debating whether stricter bank regulations are necessary to prevent another bank failure of a similar nature in the future.
Barr stated that “supervisors have rated the bank very low.” It was given an inadequate rating at the holding company level, which indicates poor management.
Barr’s timetable for when the Fed informed Silicon Valley Bank’s management of the threats it faced is earlier than when the central bank claimed the bank was on its radar.
The Silicon Valley Bank failure on March 10 and the subsequent failure of the New York-based Signature Bank, the second-and third-largest bank failures in American history, are the subjects of the first official congressional hearing, which will take place on Tuesday.
Due to the failures, which caused financial tremors throughout the US and Europe, the Fed and other governmental organizations decided to guarantee all deposits at the two banks, even though roughly 90% of deposits at each bank were more significant than the $250,000 insurance level.
Also, the Fed launched a new lending initiative to give banks more easily raise cash if needed.
The Federal Deposit Insurance Corp. announced late Sunday that the cost of resolving the two banks, including compensating depositors, would be $20 billion, the highest expense in its history.
With a tax on all banks, which will probably be passed on to customers, the FDIC hopes to recover those funds.
Sen. Sherrod Brown, an Ohio Democrat who chairs the committee, claimed that many People felt “legitimate indignation” due to Silicon Valley Bank’s failure and the government’s rescue of its depositors, who included affluent venture capitalists and significant-tech businesses.
When a group of elites in California demanded that the government mobilize, Brown stated, “I understand why many Americans are furious, if not appalled, by how swiftly the government responded.”
Silicon Valley was especially vulnerable to a slump in a single industry because its deposits expanded quickly and were heavily concentrated in the high-tech sector. With such money, it had purchased long-term Treasury bonds and other bonds.
As interest rates increased, the value of the bonds decreased. Silicon Valley suffered significant losses and could not compensate its clients when the bank was obliged to sell those bonds to pay depositors as they withdrew money.
According to Barr, the Fed will examine what transpired in Silicon Valley to determine whether additional restrictions are necessary and whether supervisors have the resources to act on their concerns.
The Fed will also consider whether stricter regulations on liquidity or the bank’s ability to access funds are necessary.
According to Barr, a review will examine whether supervisory warnings were enough and whether managers had the right tools to escalate situations. Companies with a market valuation greater than $100 billion, including SVB, will need more robust capital and liquidity rules.
Jerome Powell, the chair of the Fed, has declared that he will accept any regulatory adjustments that Barr suggests.
Barr had stated he was conducting a “holistic assessment” of the government’s capital requirements in September last year, before the banks’ collapse. He said he might favor making such criteria more stringent, which drew condemnation from the banking sector and Republican senators.