The Upcoming Congressional Hearings on Silicon Valley Bank and Signature Bank
Next week Tuesday and Wednesday committees in the Senate and the House intend to hold hearings regarding the recent failures of Silicon Valley Bank and Signature Bank. Scheduled to testify are FDIC Chair Martin Gruenberg, Federal Reserve Board Vice Chair for Supervision Michael Barr, and Undersecretary for Domestic Finance Nellie Liang.
This post lays out a few topics that could be interesting areas of questioning at the upcoming hearings.1
Questions for Vice Chair for Supervision Barr
Revisions to Regulations
An area of focus following the collapse of Silicon Valley Bank has been whether the Federal Reserve Board and the other federal banking regulators erred when in 2019 they adopted revised versions of their regulations that relaxed certain requirements for banks in the $100 billion to $250 billion range, and also for certain banks in the $250 billion to $700 billion range. Some of these changes went further than what was required by the letter of the EGRRCPA, also referred to as S. 2155. Assuming the Board and its fellow regulators ultimately conclude that some or all of the 2019 tailoring changes not required by statute should be reversed, I’d like to ask you about the constraints, if any, that you believe S. 2155 would pose to that effort.
Among other things, S. 2155 amended the Dodd-Frank Act so that rather than saying the Board “may” tailor the application of its enhanced prudential standards the statute now says the Board “shall” tailor those standards. In 2018, you wrote that this change “hand[ed] large banks a litigation tool against stricter standards.” What did you mean by that?
How, if at all, will the specter of the use of this language as a “litigation tool” affect the Board’s approach to revising its regulations should it choose to do so?
S. 2155 does not technically prohibit the Federal Reserve Board from applying enhanced prudential standards to banking organizations in the $100 - $250 billion range, but it does require that the Board first determine that applying the standard is appropriate (1) to prevent or mitigate financial stability risks or (2) to promote the safety and soundness of the firm(s) in question. Any such regulation must then take into consideration the “capital structure, riskiness, complexity, financial activities [and] size" of the firm(s) in question, as well as any other risk-related factors the Board determines are appropriate.
How much of a barrier, if any, do you believe this statutory language would be to the Board revising its regulation of banking organizations in the below $250 billion asset category?
Do you believe this language permits the Board to take an across-the-board approach to firms in this category? For example, can the Board conclude that all firms above the $100 billion threshold should be subject to a particular standard? Or does the language require the Board to take into account even relatively small differences between firms?
I suppose what I’m getting at is, say the Board does seek to revise its regulations and certain banks push back by saying, “We aren’t like SVB because…” How different do two firms have to be before the statutory language poses an obstacle to applying the same standard to both firms?
One striking thing about the current instability in the banking system is that one failed bank, Signature Bank, and one bank that was (is?) apparently in significant distress, First Republic Bank, are each state nonmember banks that chose to operate without a holding company. Among other things, this means that these firms were or are not subject to Federal Reserve Board supervision. Nor were they subject to the full suite of requirements to which firms of comparable size that have chosen to do business through a holding company may be subject. Do you believe this is an area of concern? If so, is it one the Board and its fellow regulators can fix on their own, or would it require action from Congress?
In a speech last December, you suggested it could be worthwhile for the Board’s annual supervisory stress testing exercise to include “multiple scenarios.” A few months later, the Board announced that this year’s test would include an “exploratory scenario” which assumes a less severe recession than the severely adverse scenario but that features greater inflationary pressures. The Board has said this this exploratory scenario will be used to “assess the potential of multiple scenarios to capture a wider array of risks in future stress test exercises.”
Some have focused on the fact that as a result of the Board’s tailoring rules, SVB Financial had not yet been subject to the Board’s supervisory stress test. Others have argued, however, that interest rate risk is not necessarily something that is typically best evaluated through a stress test. How do you think about this question?
Do you think interest rate risk is one of the “wider array of risks” that could be captured by additional stress testing scenarios?
The Board’s existing policy statement on stress test scenario design contemplates that multiple scenarios (i.e., scenarios in addition to the baseline scenario and the severely adverse scenario) “could be needed in some years.” If the Board concludes that multiple scenarios should be standard practice going forward, would it need to revise this policy statement? Assuming the policy statement remains in effect, how would you intend to evaluate whether a given year is a year in which multiple scenarios are merited?
The Board, FDIC and OCC are working on revisions to the capital rules to implement the finalization of the Basel III reforms.
How have the recent events affected your thinking about the “holistic review” you have said you intended to conduct of those rules?
For example, are changes to the AOCI opt-out now under consideration if they were not before?
What effect will the recent events and the need to devote staff time and effort to such events have on the timing of the agencies’ forthcoming capital proposals?
Supervision
The Federal Reserve expects the boards of directors of the large banking organizations it supervises to direct senior management to provide them with “information that is sufficient in scope, detail, and analysis to enable the board to make sound, well-informed decisions and consider potential risks.” Further, if a banking organization’s board determines that the information it has received from management is insufficient or is of poor quality, supervisors expect the banking organization’s board to direct management to provide additional information or to provide different information that is of more appropriate content, quality, volume, etc.
How well would you say the Federal Reserve Board has done at managing its own information flow from senior staff relating to supervisory matters?
Was the full Board appropriately made aware of the issues at SVB Financial and SVB? For example, last month the Board disclosed that on February 14, 2023, the Board had a closed meeting to receive a “periodic supervisory update.” Were SVB Financial or SVB discussed at that meeting? What about at the previous periodic supervisory update in November 2022?
The Federal Reserve Board’s supervisory expectations for banking organization boards of directors also say that an effective board will, “outside of regular board and committee meetings,” seek information about emerging and ongoing risks, and other matters. Could you describe how your fellow Board members receive information on supervision outside of your regularly scheduled Board meetings?
The Federal Reserve Board has various committees, including a supervision and regulation committee that you chair, and of which Governor Bowman and Governor Jefferson are members. How often does this committee meet? On how many occasions, if any, were SVB Financial and SVB discussed at meetings of this committee? How does information received by this committee flow to the full Board of Governors?
In the Board’s supervision and regulation report, it describes how regional banking organizations, defined as those firms with between $10 billion and $100 billion in total assets, are supervised as part of the Board’s RBO supervision program.
Do you think this broad grouping of firms is appropriate, or does the Board try to create more granular subgroupings of firms within the RBO category?
For instance, I understand lines have to be drawn somewhere, but I wonder whether a banking organization with, for example, $80 billion in total assets is really best supervised in the same portfolio as a banking organization with, for example, $15 billion in total assets. Relatedly, is there any concern that asset size in general, even if a reasonable criterion for determining how firms should be regulated, is a poor criterion to use for determining how firms are supervised? The risk profile of a Silvergate, for example, looks pretty different to that of most banking organizations of similar size.
The Board’s most recent supervision and regulation report says that “nearly 97%” of RBO or CBO top-tier holding companies have supervisory ratings of satisfactory or stronger. Given that, based on public reports, SVB Financial crossed the $100 billion threshold and almost immediately was found to be in deficient supervisory condition, should that give us cause to doubt some of the ratings assigned to other firms in the RBO group that are large but have not yet crossed the threshold into LFI supervision?
Along similar lines, Figure 11 in the Board’s most recent supervision and regulation report states that total outstanding supervisory findings (such as MRAs and MRIAs) at the end of Q2 2022 for LBO firms totaled 157. Obviously the following math is silly, as it assumes that supervisory findings are evenly distributed across firms, but if per Table 2 in the same report there are 18 LBOs,2 this suggests each individual LBO as of Q2 2022 was subject to around 8-9 outstanding supervisory findings, give or take. In contrast, at the end of the same period, per Figure 12, the 99 RBOs in the Board’s RBO supervisory portfolio were subject to a total of 116 outstanding supervisory findings, or a little more than 1 per firm. How should the public interpret this? Are RBOs really doing eight times better than LBOs? If not, what explains the difference?
A few weeks ago, before the recent banking system stress, you talked about the Board’s “very light touch” approach to supervision of small firms and how that may have made it more difficult for the Board to spot some risks relating to crypto activities by such firms. Community banks have, thankfully, to this point held up pretty well under the recent bank stress. But given what you’ve said about the very light touch approach, should we be concerned that there are interest rate risk issues with these firms that the Board has not yet identified?
Failure of Credit Suisse
Last weekend supervisors in Switzerland forced UBS to acquire Credit Suisse. This despite the fact that FINMA had in 2022 said that it had produced a “global resolution plan for Credit Suisse” setting out “how the entire global banking group would be recapitalised, restructured and/or liquidated, or partially liquidated, in a crisis.” (Presumably the first option in this FINMA-designed plan for Credit Suisse was not a shotgun wedding with UBS.)
How, if at all, should this action by Swiss supervisors affect our assessment of whether, if it ever comes to that, the United States’s own systemically important banks would be permitted to be resolved in accordance with their resolution plans?
Do you agree with CFPB Director (and FDIC Board Member) Chopra that the U.S. G-SIB resolution plans are a “fairy tale”?
Should the events regarding Credit Suisse cause us to rethink what is required of foreign banks in their U.S. resolution plans? I understand this is required by the Board and FDIC’s interpretation of Section 165(d), but currently there is a tension in that foreign banks are asked to assume, often contrary to their global resolution plans, that the U.S. operations will be left to fend for themselves. Is there any way efforts could be better focused on global coordination?
How helpful to the Federal Reserve Board, if at all, was Credit Suisse’s U.S. resolution plan in the context of the Board’s discussions with Swiss regulators over the weekend?
Speaking of Credit Suisse’s U.S. resolution plan, last year the Board found serious issues with that plan and required Credit Suisse to submit a revised plan by the end of May 2023. Given that Credit Suisse is expected to exist as a standalone firm until at least the end of this year, is this revised plan still being required? If it is, what does the Board hope to gain from the exercise?
Swiss regulators decided to zero the holders of Credit Suisse’s AT1 capital, while at the same time giving a (small) recovery to the holders of Credit Suisse’s common stock. Regulators from the UK, EU, and other jurisdictions subsequently, with varying degrees of tact, criticized that decision, saying that in their jurisdictions holders of AT1 and Tier 2 capital instruments would bear losses only after holders of common equity.
For various reasons, contingent convertible capital securities have not been part of U.S. banking organizations’ regulatory capital issuances,3 so a U.S. resolution of a G-SIB would not necessarily present the same questions about the treatment of AT1 holders. But speaking generally, did you support the Swiss decision to treat AT1 holders in this way compared to the common?
Is there any scenario under which you could imagine something like this happening in the United States?
On the subject of international comity, what did you make of the Financial Times story quoting an unnamed senior European official describing what he or she viewed as the “total and utter incompetence” of U.S. regulators in their resolution of Silicon Valley Bank?
Merger Policy
During your tenure on the Federal Reserve Board, you along with the rest of the Board have unanimously voted to approve a few mergers by banking organizations that are quite large but not systemically important (at least in the United States). In its approval orders for each of these transactions, the Board concluded that “the combined organization would be significantly less complicated to resolve than the largest U.S. financial institutions.” One of these orders also said that the characteristics of the combined firm were such that it would not “pose significant risk to the financial system in the event of financial distress.”
In light of the recent resolutions of Silicon Valley Bank and Signature Bank, each of which resulted in the invocation of the systemic risk exception, do you continue to think these prior Board orders got the financial stability analysis right?
There is at least one large merger, TD’s acquisition of First Horizon, that is still pending. How, if at all, is the Board taking recent events into account in evaluating whether this proposed merger is consistent with approval?
Questions for Chair Gruenberg4
Supervision of Signature
Signature Bank was a state nonmember bank operating without a holding company. This meant from a federal regulatory perspective that the FDIC was the only prudential regulator with authority over Signature. What is the FDIC’s preliminary conclusion as to why Signature failed?
When it comes to the Federal Reserve Board’s supervision of SVB Financial and SVB, some have hypothesized that supervisors may have felt inhibited by actions the Board took under Vice Chair for Supervision Quarles to add what he regarded as more due process to bank supervision. Of course, Signature Bank as a firm supervised by the FDIC (and solely by the FDIC, at least a federal matter) would not have experienced any changes made by the Federal Reserve Board to its supervisory approach.
So do you think the FDIC’s examiners were similarly inhibited? If so, who or what inhibited them?
You’ve been on the Board of the FDIC in various capacities since
20122005.5 How in your view has the FDIC’s supervisory approach changed over that time?What did you do in your capacity as board member, Vice Chair, Acting Chair, or Chair, as applicable, to arrest any trends you saw as having the potential to inappropriately limit supervisors?
Some recent reporting has described (ultimately ineffective) supervisory actions taken by the Federal Reserve in respect of SVB Financial and SVB, dating back several years. Was the FDIC similarly concerned about Signature Bank and did it issue similar supervisory criticisms?
Last April Signature Bank’s management told investors on an earnings call that the bank was “nowhere near” being a troubled bank, and that they were “frankly embarrassed” that anyone might think they were. The bank’s CFO said, “We are not aware of any bank with capital ratios, credit metrics, growth, earnings like ours ever being anywhere near a troubled bank list.” The CEO supplemented this by saying, “I'm the CEO and I would know, and I know nothing.”
I assume Signature Bank was accurately stating that it did not have troubled bank status. But more generally, is this rosy description by management of how they were doing consistent with what the FDIC’s examinations were finding around the same time? If not, what steps did the FDIC take?
Signature Bank’s state regulator, the NYDFS, said that the bank’s leadership had lost the confidence of the DFS because Signature Bank had “failed to provide reliable and consistent data.”
Was this the FDIC’s experience as well?
Did these data issues arise only over the last weekend of Signature’s existence, or did the FDIC previously identify them as well? If so, what was done about them? If not, do you have any sense as to why these data issues were not identified earlier?
With a few notable exceptions, the typical bank supervised by the FDIC is pretty small. As of year-end 2022, only six state nonmember banks (including Signature) had more than $100 billion in total assets.
Do you believe the FDIC is appropriately equipped to supervise banks of this size? If not, is there something Congress can do to help?
How involved is the FDIC’s board of directors in the supervision of banks like Signature?
Source of Strength
Federal law requires a bank holding company to serve as a “source of financial strength” for its depository institution subsidiary. How does the FDIC intend to approach the application of this statute to the ongoing bankruptcy of SVB Financial Group?
For example, SVB Financial has indicated that it expects it may be able to realize value from the sale of its SVB Capital and SVB Securities businesses. Assume meaningful value is generated by such sales. Should that value go to the creditors of SVB Financial or is this money that you believe could belong to Silicon Valley Bank?
IDI Resolution Planning
SVB Financial Group was not subject to holding company resolution planning requirements under Section 165(d) of the Dodd-Frank Act. Silicon Valley Bank, however, as a bank with $100 billion or more in total assets, was required to file an IDI resolution plan with the FDIC. It did so for the first time on December 1, 2022.
How helpful, if at all, was SVB’s resolution plan in the FDIC’s resolution of SVB?
The public section of SVB’s plan does not reveal many details as to the bank’s specific resolution strategy, but it does (as required) identify material entities and core business lines. To what extent has SVB’s resolution strategy been followed by the FDIC? Do the core business lines identified by SVB correspond well to how the FDIC has approached the process of potentially selling off SVB in various pieces?
First Republic Bank has not failed, and everyone hopes it does not, but it too was required to file an IDI resolution plan with the FDIC. First Republic has done so since 2016, meaning that the FDIC has now received at least three resolution plans from First Republic. How useful does the FDIC expect these to be if the bank does need to be resolved?
Under the FDIC’s current approach to IDI resolution planning, only banks with $100 billion or more in total assets are required to file IDI resolution plans. This means that Signature Bank had not been, before its failure, required to file such a plan.
Do you think requiring Signature Bank to file such a plan would have helped?
How does the FDIC’s use, or not, of SVB’s resolution plan inform your answer to this question?
Does the FDIC have plans to again revise the IDI plan threshold?
Questions for Undersecretary Liang
Bloomberg reported earlier this week that, although authorities do not yet see it as necessary, Treasury is studying ways it could insure all U.S. bank deposits should doing so be required as an emergency measure. Secretary Yellen later testified before Congress that she had not considered or discussed “blanket insurance” of all deposits, but confirmed that Treasury stands ready to take additional actions if needed.
Could you clarify the status of Treasury’s review of this issue and the steps you are or are not considering?
The Bloomberg story noted that one option under consideration for providing temporary backing to bank deposits could involve the Exchange Stabilization Fund. Do you believe Treasury has the authority to use the ESF in this way? If so, could you say more about how such a program could be structured?
The most recent FSOC annual report includes a relatively brief discussion of interest rate risk for banking organizations. The report says, for example, that “a rapid increase in rates may decrease profitability for banks with larger shares of long duration holdings like longer-term fixed-income securities or mortgage loans. Further, higher rates cause mark-to-market losses on available-for-sale (AFS) fixed-income securities, reducing banks’ tangible equity capital. For some of the largest banks, these losses also reduce their regulatory capital.”
I understand it is impossible to focus in depth on every single potential financial stability issue, but in hindsight do you think this is an issue that should have drawn more attention in the FSOC annual report?
The report included sections of equal or even greater length on digital assets and climate-related financial risk. It even included a box across two pages on the use of AI in financial services. All important issues for sure, but as we think about the various things that may have gone wrong here, is there any merit to the view that Treasury and other regulators took their eyes off the ball, focusing too much on exciting emerging issues at the expense of more traditional concerns?
In December 2020 you co-authored a working paper on enhancing the liquidity of the U.S. Treasury market under stress.
In general, how do you think the U.S. Treasury market has held up in the face of the stresses of the past few weeks?
Your working paper recommended that reserves be permanently excluded from the denominator of the supplementary leverage ratio. Is this still your view?
Your working paper also said that, in contrast to your recommended treatment of reserves, you “do not support permanent exclusion of Treasuries, which have interest rate risk.” I am guessing recent events have not changed your view?
How about some of the other recommendations in your working paper, such as “replacing some of the higher static buffers of the enhanced SLR (eSLR) with a countercyclical component, which could be released in episodes of market-wide stress to support liquidity of Treasury markets and other bond markets” or “review[ing] certain elements of the methodology for determining the GSIB capital surcharge, which may be unnecessarily restraining market-making by bank-affiliated dealers in times of market stress.” Do you believe these would be appropriate changes for Vice Chair for Supervision Barr to make as part of his holistic review of bank capital?
In October 2019 you wrote about what you called the “risky mix” of monetary easing and financial deregulation. You cited as examples of financial deregulation (1) changes that had been made to the FSOC designation process, (2) Congressional efforts to repeal certain changes to the regulation of MMFs, (3) changes to the Federal Reserve Board’s stress tests, and (4) efforts to circumscribe the role of guidance that could have the effect of forcing supervisors to scale back their scrutiny of bank underwriting.
I want to focus today, though, on something else you said in the same piece, this time in praise of a regulatory change, rather than in criticism of it. With respect to the EGRRCPA and the federal banking regulators tailoring rules (which were finalized a few days before the column was published), you wrote: “a number of recent actions by regulators have usefully simplified and improved the efficiency of financial regulations, such as relaxing some regulations on and supervision of banking firms with assets of less than $250 billion.”
At the time, which specific changes to regulations applicable to banking organizations under $250 billion did you believe were useful improvements?
At the time, which specific changes to the supervision of banking organizations under $250 billion did you believe were useful improvements?
How, if at all, have recent events changed your views?
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com
I have tried with varying degrees of success to avoid questions similar to those I have seen already raised by others or that I have mentioned in prior posts.
Also, this post is current as of early Friday morning and so does not take into account any potential developments over the upcoming weekend such as the rumored conclusion of the SVB auction.
Defined by the report as non-LISCC U.S. firms with total assets $100 billion or more.
As a law firm explained in 2019, “No banks in the United States have issued contingent convertible capital securities to date. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act commissioned a study of such securities by the Financial Stability Oversight Council, the Federal Reserve has not introduced contingent capital requirements. Moreover, potentially unfavorable U.S. tax treatment in respect of interest payments also makes the issuance of such securities unattractive for U.S. banks.”
Some of these would work equally well for Vice Chair for Supervision Barr.
This post as originally published mixed up the date Mr. Gruenberg first became Chair (2012) with the date he first began serving on the FDIC’s board (2005). I apologize for the error.