The nation’s top financial regulator is asserting that Silicon Valley Bank’s own management was largely to blame for the bank’s failure earlier this month and says the Federal Reserve will review whether a 2018 law that weakened stricter bank rules also contributed to its collapse.
“SVB’s failure is a textbook case of mismanagement,” Michael Barr, the Fed’s vice chair for supervision, said in written testimony that will be delivered Tuesday at a hearing of the Senate Banking Committee.
The Senate Banking Committee will hold the first formal congressional hearing Tuesday on the failures of Silicon Valley Bank and New York-based Signature Bank and the shortcomings of supervision and regulation, by the Fed and other agencies, that preceded them. The committee will also likely question Barr and other officials about the government’s response, including its emergency decision to insure all the deposits at both banks, even as the vast majority exceeded the $250,000 limit.
Members of Congress will surely use the hearings to stake out their positions on issues raised by the bank failures. These issues include whether the $250,000 limit on federal deposit insurance should be raised, a change that would require Congress’ approval. The 2018 law exempted banks with assets between $100 billion to $250 billion — Silicon Valley’s size — from requirements that it maintain sufficient cash, or liquidity, to cover 30 days of withdrawals. It also meant that banks of that size were subject less often to so-called “stress tests,” which sought to evaluate how they would fare in a sharp recession or a financial meltdown.
But Steven Kelly, senior research associate at the Yale program on financial stability, said he believed that Silicon Valley Bank’s business model was so flawed that requiring it to hold more liquidity wouldn’t have helped it withstand the lightning-fast bank run that toppled it. On Thursday, March 9, depositors - many of them operating swiftly, using smartphones - withdrew $42 billion, or 20% of its assets, in a single day.
The Fed has come under harsh criticism by groups advocating tighter financial regulation for failing to adequately supervise Silicon Valley Bank and prevent its collapse, and Barr will likely face tough questioning by members of both parties.
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