Sen. Kyrsten Sinema asks Fed how it missed Silicon Valley Bank's risks

Sen. Kyrsten Sinema on Thursday sent the No. 2 person at the Federal Reserve Bank a stern letter, suggesting his team missed clear warning signs with Silicon Valley Bank that should have triggered enhanced scrutiny.

The letter from Sinema, I-Ariz., and Sen. Thom Tillis, R-N.C., and a bipartisan mix of 10 other senators helps lay out a view that the bank’s failure last week owed less to changes in 2018 to a key regulatory law than the Fed’s blind spots on risk.

“It is gravely concerning that retail participants, utilizing only publicly available information, were able to identify clear and compelling examples of financial mismanagement and asset over-concentration at SVB, while the Fed, which can draw even deeper from non-public supervisory information, was unable to ascertain a similar conclusion,” the letter said.

Beyond Sinema and Tillis, the letter is joined by Sens. Michael Bennet, D-Colo.; Katie Britt, R-Ala.; Catherine Cortez Masto, D-Nev.; Kevin Cramer, R-N.D.; Bill Hagerty, R-Tenn.; John Hickenlooper, D-Colo.; Cynthia Lummis, R-Wyo.; Chris Murphy, D-Conn.; Mike Rounds, R-S.D.; and J.D. Vance, R-Ohio.

Rep. Raúl Grijalva:'More questions than answers' about Biden's SVB bank response

The collapse of Silicon Valley Bank has buckled financial markets and led President Joe Biden, the Fed and the Federal Deposit Insurance Corp. to take steps to reassure the public that deposits will be covered to prevent a wider run on the banks.

Even so, on Wednesday Swiss banking giant Credit Suisse reached for a financial lifeline after its top investor sparked concerns about putting more cash into its operations. In the U.S., bank stocks have skidded. The New York Times reported Thursday that First Republic Bank was close to securing a $30 billion deal with other banks to head off collapse.

On Capitol Hill and in Arizona, Democrats have pounced on Republican-led changes to the 2010 banking overhaul known as Dodd-Frank that loosened some banking regulations. Sinema, then a Democratic member of the House of Representatives, voted for that measure.

Those changes, passed in 2018, raised the financial threshold for the most frequent “stress tests” that gauge the financial soundness of banks. It meant that only a few banks automatically fell under the Fed’s most stringent reviews.

Silicon Valley Bank, a business-centered bank favored by venture capitalists, did not meet the $250 billion in assets for the most-frequent inspections.

But the Fed still could have required such reviews specifically for Silicon Valley Bank even under the revised Dodd-Frank, a point that is implicit in the senators’ letter to the Fed’s vice chairman, Michael Barr.

“The fact that the San Francisco Fed, among other regulatory agencies, found no reason to take appropriate regulatory action or even investigate SVB further in the months, weeks, and days prior to the bank’s collapse must be addressed in a manner that restores public confidence in Fed supervision,” the letter said.

Sinema, banking panel expected to focus on failure

The collapse of Silicon Valley Bank, which has hundreds of employees in Arizona, is of special significance to Sinema. Beyond its local impact, Sinema is a member of the Senate Banking Committee, along with Cortez Masto and all seven of the Republican signatories to the letter. That committee is expected to focus on how Silicon Valley Bank failed and what, if anything, Washington can do to avert similar problems moving forward.

A spokesman for Sen. Mark Kelly, D-Ariz., who is a member of the Joint Economic Committee, said that is the approach Kelly is taking for now.

“Senator Kelly has been closely monitoring the situation with Silicon Valley Bank and the U.S. banking system. Right now, he’s focused on ensuring confidence and stability in the banking system, and that deposits of hard-working Arizonans remain protected. He believes there should be an investigation into what caused this failure to hold those responsible accountable and determine next steps Congress should take to keep it from happening again.”

Gallego, Sinema's likely challenger, targets her actions

Sinema’s term expires next year, and while she has taken preliminary steps needed to run for reelection, she has not formally announced she will do so.

Rep. Ruben Gallego, D-Ariz., is running for her seat and has pointed to the 2018 changes to Dodd-Frank as a glaring example of the differences between them.

On Tuesday, he stood outside the Tempe offices of Silicon Valley Bank and noted that he and Sinema both faced the same lobbying pressure to join Republicans in changing Dodd-Frank under a GOP-controlled Congress and Republican President Donald Trump.

She was one of 33 House Democrats who joined with nearly every House Republican to change that law.

“Simply put, she voted to give banks free rein, and I did not,” Gallego said Tuesday. “When these lobbyists asked us to support their deregulation, all I could think about was 2008, when family savings were wiped out. … It took eight years for this state to recover, and some parts of our state are still hurting.”

Related:Silicon Valley Bank failure could affect employees at large Tempe operation

It is in line with a leading complaint about Sinema from her most outspoken Democratic critics, who cast her as beholden to the financial industry she oversees in the Senate.

In 2022, the Associated Press reported that Sinema had taken in nearly $1 million in a year from the kind of wealthy financial managers whose taxes would have gone up under a tax hike proposal Sinema helped kill.

Changes under consideration on Capitol Hill

The letter sent on Thursday suggests the Fed didn’t use regulatory tools it still had and could have deployed in the case of Silicon Valley Bank.

“As widely reported, SVB’s customer base consisted heavily of venture capital funds, venture investors, and start-ups, many of whom have or have had financial relationships or business partnerships with one another,” the letter said.

“If true, this constitutes a unique level of financial interdependency among a customer base that is also particularly prone to interest rate risk. … Allowing such a high concentration of these rate-sensitive customers with primarily uninsured deposits at any single bank strikes us as a compelling risk to the stability of the bank, the banking system and to taxpayers writ-large that merits further inquiry.”

The letter asks Barr at the Fed to respond by March 24.

It comes as legislative proposals are also circulating on Capitol Hill.

Sen. Elizabeth Warren, D-Mass., has introduced a bill that would roll back the 2018 changes. Sinema has not joined that bill. Gallego has cosponsored the House version of that bill.

Sen. Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee, has suggested to reporters that such an effort will fail in the Republican-controlled House.

Separately, Sen. Richard Blumenthal, D-Conn., has introduced a bill that would create a new tax to claw back nearly all bonuses and profits from stock sales for executives at institutions that fail within 60 days. Those proceeds would go to the FDIC to limit public losses, under the bill. Sinema is joining it as a cosponsor.

Reach the reporter Ronald J. Hansen at ronald.hansen@arizonarepublic.com or 602-444-4493. Follow him on Twitter @ronaldjhansen.

Subscribe to our free political podcast, The Gaggle.

This article originally appeared on Arizona Republic: Sen. Kyrsten Sinema asks why Fed missed Silicon Valley Bank signs