SBV risk model not at aligned with reality, Fed’s Michael Barr tells hearing

Washington  — The Federal Reserve’s Michael Barr told a Senate panel on Tuesday that Silicon Valley Bank (SBV) executives did a “terrible” job of managing risk before the lender collapsed, as legislators demanded to know why warning signs of trouble were missed.

In the first congressional hearing into the sudden collapse of two US regional lenders and the ensuing chaos in markets, the top banking regulator at the Federal Reserve criticised SVB for its risk modelling and lack of a chief risk officer.

“They were issued a matter requiring immediate attention based on the inaccuracy of their interest rate risk modelling,” Barr, the Fed’s vice-chair for supervision, told the Senate Banking Committee. “Essentially, the risk model was not at all aligned with reality.”

The failures of SVB, and days later, Signature Bank, set off a broader loss of investor confidence in the banking sector that pummelled stocks and stoked fears of a full-blown financial crisis.

Barr said he was first made aware of the interest rate risk-related issues at SVB in mid-February, just weeks before its failure. Supervisory staff at the Fed had previously raised serious concerns over SVB’s interest-rate risk and liquidity management and demanded fixes from the bank in November 2021, Barr said. In mid-2022, Fed staff deemed the bank's management to be deficient and barred the bank from growing through mergers or acquisitions, Barr said.

Fed supervisors brought those issues to SVB’s CFO in October 2022, he said, and raised additional concerns to SVB management in November. But Barr said the issues were not brought to his attention until a staff presentation last month.”

Political pressure has grown for better oversight of banks and the executives running them. Senior members of the Senate Banking Committee wanted to know how the firms ended up in such a precarious position, even as they agreed the banks had been mismanaged.

“The scene of the crime does not start with the regulators before us. Instead, we must look inside the bank, at the bank CEOs, and at the Trump-era banking regulators, who made it their mission to give Wall Street everything it wanted,” said senator Sherrod Brown, who chairs the panel.

While legislators in both parties agreed the banks were mismanaged, Republicans reserved ire for regulators as well, who they said should have identified and addressed the problems sooner. Senator Tim Scott, the panel’s top Republican, cast doubt on giving regulators more authority in the wake of the crisis.

“The warning signs should have been flashing red,” said Scott, the panel’s top Republican. “If you can't stay on mission and enforce the laws as they already are on the books, how can you ask Congress for more authority with a straight face?”

Regulators have vowed to review their rules and procedures after the twin failures while insisting the overall system remains sound.

Barr said he welcomed outside independent reviews of the Fed’s supervision of SVB, in addition to the central bank's own internal review.

In opening remarks, officials from the Fed and FDIC said depositor funds are safe and sound. But they both said they are reviewing what led to the bank failures, and what rules need to be changed to prevent such collapses in the future.

Critics have noted how both firms, but particularly SVB, rapidly grew in size and ended up with huge amounts of uninsured deposits. Those funds quickly fled at signs of trouble, according to Barr.

“It may be tempting to look at all this and say, we don’t need new rules. The real problem was these arrogant executives,” said Brown. “But there will always be arrogant executives. That’s exactly why we need strong rules.”

Barr promised an “unflinching” look at how SVB was supervised, but also noted it ultimately falls to bank management to address shortcomings, not supervisors.

Some Democrats, including major bank critic senator Elizabeth Warren, have also argued a 2018 bank deregulation law is to blame. That law, mostly backed by Republicans but also some moderate Democrats, relaxed the strictest oversight for firms holding between $100bn and $250bn in assets, which included SVB and Signature.

In their remarks, both Barr and FDIC chair Martin Gruenberg indicated they are looking into tightening rules for banks and applying stricter oversight for firms similar to SVB.

The hearing is the first of what is expected to be several hearings into the banking tumult. The House financial services committee will hear from the same regulators Wednesday, and congressional leaders have already said they want to question former CEOs of the two banks on what went wrong.

Reuters