Rep. Josh Gottheimer is calling for a bipartisan investigation into financial regulators’ failure to properly oversee Silicon Valley Bank (SVB) and Signature Bank.
Gottheimer, a member of the House Financial Services Committee, released a statement March 16 urging committee Chairman Patrick McHenry (R-NC) and Ranking Member Maxine Waters (D-CA) for a review of why the Federal Reserve did not use the tools to identify the conditions that led to SVB’s collapse.
“In addition to clear oversight failures, the Federal Reserve did not apply basic safety and soundness standards nor heightened standards that could have been used to sound the alarm at SVB,” said Gottheimer. “We need to learn why the federal and state officials did not step in sooner, and instead let SVB grow rapidly while bank management made egregious failures to manage what should have been obvious risks.”
Questioning Federal Reserve
The North Jersey lawmaker believes the Federal Reserve should have applied more rigorous standards, allowed for in existing law, including annual stress tests and capital requirements accounting for unrealized gains and losses.
“For some reason, which we must understand, it chose not to.” he said. “This enhanced supervision may have flagged SVB’s perilous asset mix, including its significant holdings of long-term treasuries.”
Week of Uncertainty
The SVB crisis began March 8 when bank leadership said it needed to raise $2.25 billion to shore up its balance sheet. Following depositors starting to pull their money out and start a bank run after the announcement, federal regulators shuttered the bank March 10. The shutdown is considered the largest U.S. banking failure since the 2008 financial crisis and the second largest in U.S. history.
After SVB, New York state regulators shut down Signature Bank, which had become an important lender in the crypto industry, on March 12. Signature Bank, which provided lending services for law firms and real estate companies, had assets of less than $100 billion across 40 branches in the country.
After a week of worries of another bank failing, the biggest banks in the U.S. swooped in to rescue First Republic Bank with a flood of cash totaling $30 billion, in an effort to stop a spreading panic following a pair of recent bank failures. JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. are each making a $5 billion uninsured deposit into First Republic; Morgan Stanley and Goldman Sachs Group Inc. are kicking in $2.5 billion apiece, while five other banks are contributing $1 billion each.
Gottheimer says the focus of lawmakers in the short term is to protect depositors at other institutions, and to deter runs on small, medium, and regional banks nationwide that do not suffer from the same management failures that plagued SVB.
“The failures of SVB’s management cannot cause a crisis of confidence in our banking system,” he stated. “In 2008, we had banks that were ‘too big to fail.’ Today, we cannot encourage a system where banks are ‘too small to survive’ and big banks are more concentrated.”
“Congress and federal regulators must take steps to backstop depositors, prevent contagion, and ensure proper oversight of our financial system to assure depositors at well-managed institutions that their funds are secure. We cannot end up in a situation where Americans only have access to the biggest banks.”
The proposed commission would to be tasked to learn why the federal and state officials did not step in sooner, and instead let SVB grow rapidly while bank management made “egregious failures to manage what should have been obvious risks.”
Gottheimer added that the Federal Reserve current review of its oversight of SVB “is too little, too late.”
“It is concerning that the risk management failures of SVB did not catch the attention of state and federal regulators during routine examinations,” he said. “Regulators failed to identify significant risk management issues at SVB that should have received scrutiny during the bank’s rapid growth.
“A high percentage of uninsured deposits, a significant mismatch in duration between assets and liabilities, a lack of client diversity, and the bank’s lack of a permanent Chief Risk Officer for nearly eight months should have been clear indications for banking regulators to take action.”
JOSH; Josh, save yourn effort’s, since this has been all done many a times before!! AND; Now has become a song of Broken Record’s; JOSH, This is Another Lesson in Futility’s!! SEE; These Huge Banking Magistrates do continue to push their poison on a Nation’s Economy by using & enticing them with GREED!! They keep saying,” AND; The money, money makes, Makes more Money’s”, But it’s usually for’n ‘THEM’; So they’ll be continuously spewing their very Toxic Poison’s about the whole World!! While raking in, reaping & reeking with Huge Profit’s, while the Global Economy’s sink deeper into tan abyss of Poverty’s..//
Risk management is complicated. For example, we need to know how an increase in capital ratios would affect lending capacity. The speed at which deposit withdrawals can be made is unprecedented, even in comparison to 2008. Is there a regulatory answer to that? How much can we really expect from regulators? SVB deposits grew very fast. Should the growth rate of deposits be limited? With what ripple effects? How do we assess the moral hazard of government intervention? Will raising the insurance limits on deposits increase risk-taking by banks?
Congress has its work cut out to produce any constructive response to the issue. Beware of the law of unintended consequences.