The fight over who bears the blame for the recent US bank failures will turn ever more political on Tuesday when lawmakers grill the lenders’ former senior managers and top regulators.
(Bloomberg) — The fight over who bears the blame for the recent US bank failures will turn ever more political on Tuesday when lawmakers grill the lenders’ former senior managers and top regulators.
Greg Becker, ex-chief executive officer of Silicon Valley Bank, and Scott Shay, who served as chairman of Signature Bank, are among those set to testify in the Senate Banking Committee. US lawmakers and regulators have accused leadership at both banks of mismanagement.
Tuesday’s hearings in Washington, which also feature top banking regulators testifying before the House Financial Services Committee, are the latest twist in a months-long saga that has taken down four midsized lenders and has put Americans on edge over the banking system. In addition to leadership at the firms, some have blamed US watchdogs for not doing more to prevent the turmoil.
Arthur Wilmarth, professor emeritus at George Washington University Law School, said GOP lawmakers will likely go hard on the banking agencies during the hearings, arguing they didn’t do enough to enforce existing rules.
“Republicans will be beating the regulators over the head significantly and saying: ‘You’re the reason that all this happened,” he said, adding that they’ll push back against any Democratic calls for new strictures.
Blaming the Fed
Meanwhile, Becker, the ex-SVB CEO, is poised to also blame regulators for the bank’s demise. In prepared remarks, he argued that the fast pace of interest-rate hikes by the Federal Reserve and negative social media commentary helped fuel the collapse.
“The messaging from the Federal Reserve was that interest rates would remain low and that the inflation that was starting to bubble up would only be ‘transitory,’” Becker said. Instead, it pursued hikes that would become “the steepest rate increase over a 12-month period in almost 40 years,” he said.
However, there are signs that SVB managers were aware of risks long before the Fed started raising rates and the lender became the biggest US bank failure in more than a decade on March 10.
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, Bloomberg News has reported. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked, and, instead, the company continued to plow cash into higher-yielding assets.
The Regulators
Reports from the Fed and Federal Deposit Insurance Corp. released last month said mismanagement was the root cause of the bank failures.
Still, some government officials have acknowledged that regulators bear some of the responsibility.
Michael Barr, the Federal Reserve’s vice chair for supervision, in prepared remarks said regulators “must do better.” Other officials that will appear at the House hearing include FDIC Chairman Martin Gruenberg, National Credit Union Administration Chairman Todd Harper and Acting Comptroller of the Currency Michael Hsu.
Tuesday is the first of three days of oversight hearings. Lawmakers in the GOP-led House will get a crack at the former executives on Wednesday, and the Senate committee, which is controlled by Democrats, will query the regulators on Thursday.
Executive Pay
One area where lawmakers may find common ground is around executive pay and compensation.
Becker, the ex-SVB CEO, for example, has drawn criticism for selling $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses ahead of its failure.
Becker has defended the sales and said they were approved by the bank’s legal team. He also said in his prepared remarks that there was “nothing irregular or accelerated” about bonuses certain employees received for 2022 performance shortly before the bank was seized.
‘Poor Incentives’
Meanwhile, Barr, the Fed’s vice chair for supervision, has said he wants more oversight of executive compensation in the wake of the bank failures.
Silicon Valley Bank’s managers responded to “poor incentives” approved by its board of directors and weren’t paid to keep risks in check, he said in his prepared remarks. “They were not compensated to manage the bank’s risk, and they did not do so effectively.”
Wilmarth, the George Washington law professor emeritus, said he expects part of the Senate hearing to focus on how best to hold executives at failed banks accountable — whether it be barring them from the industry, levying civil monetary penalties or taking some other type of enforcement action.
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