Fed Casts Failures As Isolated Management Errors

Topline

Top federal banking regulators took the stand Tuesday before the Senate’s banking committee, answering questions on what led to the second- and third-biggest bank failures in the nation’s history and ongoing turmoil elsewhere in the banking industry.

The Fed’s Michael Barr testified Tuesday to discuss his agency’s oversight of the banking crisis.

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Key Facts

Michael Barr, the vice chairman of the Federal Reserve’s supervision and regulation panel who directly oversees the U.S. central bank’s regulatory policy, began to testify at about 10:25 a.m. ET.

Barr characterized the recent failure of Silicon Valley Bank as a “textbook case of mismanagement” in prepared testimony previously released Monday by the Fed.

Declining to attribute Silicon Valley Bank’s failure to banking regulation rolled back in 2018, Barr disclosed the Fed rated the institution a 3 on its five-point CAMEL rating system, a grade which recommended the bank re-evaluate its risk profile but fell short of determining the bank’s viability was seriously in question.

Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, the Treasury Department’s undersecretary for domestic finance, also delivered their prepared statements before the hearing opened to questioning.

Stocks were little changed early in the hearing, with the Dow Jones Industrial Average and S&P 500 each moving less than 0.2% in early trading.

Key Background

Barr blamed bank leadership for failing to “effectively” manage interest rate risks in his prepared statement, deflecting blame from the Fed after it raised interest rates at the fastest pace in decades in 2022 and 2023, and failed to identify Silicon Valley Bank’s liquidity issues before California regulators closed the institution, leading Washington to safeguard depositors even above the federal $250,000 limit for Silicon Valley Bank and also-failed Signature Bank. Startup-focused Silicon Valley Bank and crypto-focused Signature Bank failed March 10 and March 12, respectively. First Citiziens BancShares subsequently bought most of Silicon Valley Bank, while New York Community Bancorp acquired Signature Bank.

Crucial Quote

“Wealthy elites do anything to make a quick profit and pocket the rewards. And when their risky behavior leads to catastrophic failures, they turn to the government…expecting taxpayers to pay the price,” Sen. Sherrod Brown (D-Ohio) said to open the session.

What To Watch For

Barr, Gruenberg and Liang will also testify Wednesday before the House’s financial services committee.

Tangent

Brown accused Signature Bank of ignoring “red flag after red flag” while conducting significant business with FTX, the crypto exchange led by Sam Bankman-Fried, who faces 13 federal charges for illegal practices at the company.

This story will be updated throughout Tuesday’s hearing…