Silicon Valley Bank’s Risks Went Deep. Congress Wants to Know Why.
WASHINGTON — The nation’s top financial regulators will face a grilling from lawmakers on Tuesday over the collapse of Silicon Valley Bank as they push to understand why the firm was allowed to grow so rapidly and build up so much risk that it failed, requiring a government rescue for depositors and sending shock waves across global markets.
Michael S. Barr, the Federal Reserve’s vice chair for supervision, will testify before the Senate Banking Committee on Tuesday alongside Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury’s under secretary for domestic finance. The same officials are set to testify before the House Financial Services Committee on Wednesday.
Lawmakers are expected to focus on what went wrong. The picture that has emerged so far is of a bank that grew ravenously and ran itself more like a start-up than a 40-year-old lender. The bank took in a large share of big — and uninsured — depositors even as it used its assets to double down on a bet that interest rates would stay low.
Instead, the Fed raised rates sharply to slow rapid inflation, reducing the market value of Silicon Valley Bank’s large holdings of longer-term bonds and making them less attractive as new securities offered higher returns. When SVB sold some of its holdings to shore up its balance sheet, it incurred big losses.
That spooked its customers, many of whom had deposits far above the $250,000 limit on what the government would guarantee in the event the bank failed. They raced to pull their money out, and the bank collapsed on March 10.
The question is why supervisors at the Fed failed to stop the bank from making dangerous mistakes that seem obvious in hindsight. And the answer is important: If the Fed missed the problems because of widespread flaws in the ways banks are overseen and regulated, it could mean other weak spots in the industry are slipping through the cracks.
Here is a rundown of what is already known, and where lawmakers could push for firmer answers this week.
As Silicon Valley Bank grew, the Fed found problems.
Silicon Valley Bank went to just above $115 billion in assets at the end of 2020 from $71 billion at the end of 2019. That growth catapulted it to a new level of oversight at the Fed by late 2021 — into the purview the Large and Foreign Banking Organization Management Group.
That group includes a mix of staff members from the Fed’s regional reserve banks and its Board of Governors in Washington. Banks that are large enough to fall under its remit get more scrutiny than smaller organizations.
Silicon Valley Bank would most likely have moved to that more onerous oversight rung at least a couple of years earlier had it not been for a watering-down of rules that the Fed carried out under Randal K. Quarles, who was its supervisory vice chair during the Trump administration.
By the time the bank had come under intense scrutiny, problems had already started: Fed officials found big issues in their first sweeping review.
Supervisors promptly issued six citations — called matters requiring attention or matters requiring immediate attention — that amounted to a warning that SVB was doing a faulty job of managing its ability to raise cash in a pinch if needed.
It is not clear precisely what those citations said, because the Fed has not released them. By the time the bank went through a full supervisory review in 2022, supervisors were seeing glimmers of progress on the issues, a person familiar with the matter said.
Silicon Valley Bank was given a ‘satisfactory’ rating despite its issues.
Perhaps in part because of that progress, SVB’s liquidity — its ability to come up with money quickly in the face of trouble — was rated satisfactory last year.
Around that time, bank management was intensifying its bet that rates would stop climbing. SVB had been maintaining protection against rising rates on a sliver of its bond portfolio — but began to drop even those in early 2022, booking millions in profits by selling off the protection. According to a company presentation, SVB was newly focused on a scenario in which borrowing costs fell.
That was a bad call. The Fed raised interest rates at the fastest pace since the 1980s last year as it tried to control rapid inflation — and Silicon Valley Bank was suddenly staring down huge losses.
The bank’s demise set off cascading concerns.
By mid-2022, Fed supervisors had focused a skeptical eye on SVB’s management, and it was barred from growing by buying other institutions. But by the time Fed officials had reviewed the bank’s liquidity fully again in 2023, its problems had turned crippling.
SVB had been borrowing heavily from the Federal Home Loan Bank of San Francisco for months to raise cash. On March 8, the bank announced that it would need to raise capital after selling its bond portfolio at a loss.
On March 9, customers tried to pull $42 billion from SVB in one day — the fastest bank run in history — and it had to scramble to tap the Fed’s backup funding source, the discount window. What loans it could get in exchange for its assets were not enough. On March 10, it failed.
That only started the problems for the broader banking system. Uninsured depositors at other banks began to nervously eye their own institutions. On March 12 — a Sunday evening — regulators announced that they were closing another firm, Signature Bank.
To forestall a nationwide bank run, regulators said they would make sure even the failed banks’ big depositors were paid back in full, and the Fed opened a new program to help banks get cash in a pinch.
But that did not immediately stem the bleeding: Fed data showed that bank deposits fell by $98 billion to $17.5 trillion in the week that ended March 15, the biggest decline in nearly a year. But even those numbers hid a trend playing out under the surface: People moved their money away from smaller banks to banking giants that they thought were less likely to fail.
Deposits at small banks dropped by $120 billion, while those at the 25 largest banks shot up by about $67 billion. Government officials have said those flows have abated.
As customers and investors began to probe for weak spots in the financial system, other banks found themselves in tumult — including Credit Suisse in Switzerland, which was taken over, and First Republic, which took a capital injection from other banks.
Lawmakers from both parties want answers.
“It is concerning that Federal Reserve staff did not intervene in a timely manner and use the powerful supervisory and enforcement tools available to prevent the firm’s failure and subsequent market uncertainty,” Republicans on the House Financial Services Committee wrote in a letter released Friday.
Senator Rick Scott, Republican of Florida, and Senator Elizabeth Warren, Democrat of Massachusetts, have introduced legislation to require a presidentially appointed and Senate-confirmed inspector general at the Fed and the Consumer Financial Protection Bureau. The Fed already has an internal watchdog, but this one would be appointed by the president.
Recent bank failures “serve as a clear reminder that banks cannot be left to supervise themselves,” Ms. Warren warned. She has also pushed for an inspector general review of what went wrong with Silicon Valley Bank.
Congress wants to know whom to blame.
Much of the focus in recent weeks has been on who at the Fed is to blame. Mr. Barr started in his role midway through 2022, so he has mostly been left out of the finger-pointing.
Some have pointed to Mary C. Daly, president of the Federal Reserve Bank of San Francisco. Presidents of regional Fed banks typically do not play a leading role in bank oversight, though they can flag gaping problems to the Federal Reserve Board in extreme cases.
Others have pointed to Mr. Barr’s predecessor, Mr. Quarles, who left his supervisory vice chair post in October 2021. Mr. Quarles helped to roll back regulations, and people familiar with his time at the Fed have said his tone when it came to supervision — which he thought should be more transparent and predictable — led many bank overseers to take a less strict approach.
And some critics have suggested that Jerome H. Powell, the Fed chair, helped to enable the problems by voting for Mr. Quarles’s deregulatory changes in 2018 and 2019.
An internal Fed review of what went awry is set for release on May 1. And the central bank has expressed an openness to an outside inquiry.
“It’s 100 percent certainty that there will be independent investigations and outside investigations and all that,” Mr. Powell said at news conference last week. “Of course we welcome that.”
