By Thursday, nearly a week had passed since the Federal Deposit Insurance Corp. had taken over Silicon Valley Bank.
The public digested the magnitude of three bank failures and weathered a spasm of withdrawals from several regional banks. (Eleven of the nation’s largest banks even came together to prop one up for a bit.)
With that in the rear-view mirror, and as if on cue, several lawmakers weighed in on what they think should happen next and who should be accountable.
The CEOs of the failed banks were an early easy target. The timing of a $3.6 million stock trade by former SVB CEO Greg Becker raised eyebrows. So did Becker’s position on the board of directors of the Federal Reserve Bank of San Francisco.
Sen. Elizabeth Warren, D-MA, raised that specter Wednesday in a letter to Fed Chair Jerome Powell.
“In particular, do you believe the conflict of interest posed by [Becker] may have played a role in the SF Fed’s supervision of SVB?” she wrote. “Have you acted to limit conflicts of interest like those posed by Mr. Becker’s dual role as SVB CEO and SF Fed board member?”
Warren sought answers from Powell on that and 10 other questions by March 29 — which is also the day the Fed’s vice chair for supervision, Michael Barr, is set to testify alongside FDIC Chair Martin Gruenberg in front of the House Financial Services Committee. A Senate panel hearing has yet to be scheduled.
“This hearing will allow us to begin to get to the bottom of why these banks failed,” the House panel’s chair, Maxine Waters, D-CA, and ranking member, Patrick McHenry, R-NC, said in a joint statement Friday. More witnesses may be added, they said.
Powell ‘had two jobs …’
Warren’s pressure on Powell didn’t stop with questions about Becker. In her Thursday letter, she asked the Fed chair if he would say the central bank’s weakening of stress tests, living will requirements and lowering of capital requirements — all during Powell’s tenure — created condition ripe for SVB and Signature’s failures.
“Look, I don’t think he should be chairman of the Federal Reserve. I have said it as publicly as I know how to say it,” Warren told NBC’s “Meet the Press” on Sunday. “He has had two jobs. One is to deal with monetary policy. One is to deal with regulation. He has failed at both.”
Warren wrote a second letter Saturday to the inspectors general of the Treasury Department, FDIC and Fed board, asking them to investigate the bank management, regulatory and supervisory issues that spurred the bank failures and, within 30 days, give Congress an unredacted preliminary report on their findings.
However, she noted it’s “critical” that the investigation be “free of influence from the bank executives or regulators” who may have been at fault.
“I am particularly concerned that you avoid any interference from Fed Chair Jerome Powell, who bears direct responsibility for — and has a long record of failure involving — regulatory and supervisory matters involving these two banks,” Warren wrote.
Too focused on ESG?
Across the political aisle, Sen. Ted Cruz, R-TX, also raised concerns regarding the San Francisco Fed as relates to SVB’s failure — but for an entirely different reason.
“Instead of fulfilling its statutory mandate to supervise SVB, the SF Fed has been distracted with engaging in politically charged research and advocacy on environmental, social and governance, and diversity, equity and inclusion topics, like global warming and racial justice,” Cruz wrote Thursday.
To be sure, the San Francisco Fed does serve as a front-line supervisor for SVB. But because the bank had more than $100 billion in assets, it also is overseen by the Fed’s Large and Foreign Banking Organization program.
Regulatory reform
Calls for regulatory reform stretched past the legislative branch. President Joe Biden on Friday asked Congress to bolster the FDIC’s authority to claw back compensation, including from stock sales, from the executives of failed banks with asset totals similar to SVB and Signature. Under the Dodd-Frank Act, the FDIC can only use its special resolution authority to get clawbacks from the largest category of financial institutions.
“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” Biden said Friday in a statement. “When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties and to ban executives from working in the banking industry again.”
The FDIC now can only bar executives from the industry if they engage in “willful or continuing disregard for the safety and soundness” of a bank. Biden wants the regulator to be able to institute a ban for executives whose banks have gone into receivership.
Also as of now, the FDIC can only seek monetary damages when bank executives “recklessly” engage in a pattern of “unsafe or sound” practices. Biden wants that expanded to include “negligent executives of failed banks when their actions contribute to the failure of their firms,” according to American Banker.
A banking trade group, too, wants a tweak to FDIC rules. The Mid-Size Bank Coalition of America asked the regulator to extend deposit insurance to all deposits — not just those less than $250,000 — for the next two years, according to a letter seen by Bloomberg.
Such a change “will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce chances of more bank failures,” the group wrote. “Confidence has been eroded in all but the largest banks … and must be immediately restored.”
Adjacent banks
Still one set of lawmakers has set their focus not on regulators but on banks adjacent to recent failures.
Twenty House Democrats from California, led by Rep. Adam Schiff, are asking the Justice Department, the Securities and Exchange Commission and the FDIC to look into Goldman Sachs’ dual role as both an adviser to SVB and as the buyer — at “negotiated prices,” SVB disclosed in an SEC filing — of a securities portfolio worth nearly $21.5 billion.
SVB, at the time, was bracing for a downgrade from credit rating agency Moody’s. The portfolio sale, however, generated a $1.8 billion loss for SVB. After customers learned of that, they tried to withdraw $42 billion from SVB within a day.
“Goldman Sachs stands to be paid more than $100 million for its role in a bond purchase that ultimately failed to save SVB from collapse,” the California lawmakers said, according to Bloomberg. “As Goldman Sachs is poised to profit from SVB’s failure, we strongly urge you to analyze whether Goldman Sachs operated at ‘arm’s length’ in their role as adviser for SVB.”
Goldman Sachs and the FDIC declined to comment to the Financial Times. The DOJ did not immediately respond to a request for comment. An SEC spokesperson told the publication the agency’s chair, Gary Gensler, would respond directly to lawmakers rather than through the media.
“We … hope that unlike 2008, we hold bank executives accountable by ensuring they are held responsible — the burden of their actions should not land on the shoulders of consumers or taxpayers,” Schiff and the lawmakers said.
