FDIC knew and did nothing about SVB collapse; executives looted millions

The Senate panel hearing on the collapse of SVB and the stability of the US banking system was held today (3-28-2023). Both senate Republicans and democrats lashed the 2 main witnesses testifying who were Michael Barr (Vice Chair of the Federal Reserve) and Martin Gruenberg (Chairman of the FDIC).

You can watch the PBS live stream here:

FDIC in bed with the banks

Sen. Tester suggested as far back as 1 year ago, FDIC regulators were aware that SVB had “viability issues.”. Sen. Warren pointed out that the FDIC, under its predecessor, weakened capital and liquidity requirements, stress tests and told the banks if FDIC examiners were asking too many questions they should let us know.

Senator Vance pointed out that there are private insurers of deposits whose business is undermined when the Federal government goes above and beyond to ensure that all deposits are protected in all cases. Sen. Britt pointed out that JP Morgan Chase knew 6 months before SVB’s failure that there were “capital issues with the bank”.

“If 6-months ahead of time the private sector knew SVB was at great risk, so did we.”

Sen. Britt

Regulation is indaqueate

Michael Barr answered that he “did not know” if regulators were ever in the building of SVB over the past year. Michale Barr pushed back, saying he did not have the full supervisory record and did not know. This is surprising given the time that has passed since SVB’s failure and Michael Barr’s position in the Federal Reserve.

“I am not a banker, I am a dirt farmer. When I look back at what happened in SVB – you don’t need to be an accountant to figure out what happened. It better be fixed. […] It looks to me like regulators knew the problem and no one dropped the hammer”

Sen. Tester

SVB executives looted millions in bonuses before the bank’s failure

Sen. Warren announced she is introducing a bill to hold the executives accountable for their risk-taking and looting of the bank. Multiple Senators across the aisle expressed consternation over the complete lack of business management at SVB and the fact that they were concerned an increase in FDIC insurance rates would hurt their community banks. Sen. Warren pointed out there is a scenario where these executives get away scot-free with millions of dollars. He continued, “I want the FDIC to stop executives from taking these risks and punish the current risk-takers.”

More regulation is bipartisan; some things are regulations are definitely coming

Senate Republicans and Democrats both pounced on the FDICs obvious failures to regulate and prevent the collapse of SVB. Given their roles in regulation, Sen. Warren asked each of the witnesses if they believe banks need to be regulated more and down to the threshold of any bank with assets exceeding 100 billion dollars.

Regulators short on answers point to SVB’s business model and unique risk profile. Martin Gruenberg pointed out that aligning the Dodd-Frank act with the FDIC insurance act would make sense to remove inconsistencies in FDIC’s authority to regulate banks.