House lawmakers roast regulators over failed banks

Anger at both individual regulators and a lack of sufficient banking regulation boiled over from the Senate to the House on Wednesday, as officials from the Federal Deposit Insurance Corporation (FDIC), Treasury Department and Federal Reserve took heat from the Financial Services Committee in the wake of recent bank failures.

The government responded to the failures of Silicon Valley Bank (SVB) and Signature Bank earlier this month by stepping in and bailing out depositors well above the FDIC’s standard $250,000 insurance limit, with some account holders getting billions of dollars from the government’s deposit insurance fund (DIF).

Officials are justifying this move by citing a “systemic risk” to the U.S. banking business.

In response, House Democrats said Wednesday that banks need to have higher liquidity requirements and their own type of insurance policies in place, known as contingent convertible bonds, in order to avoid using money from the DIF.

“We have a lot to learn from the two side-by-side failures of Silicon Valley Bank, with total assets of less than 1 percent of GDP, and Credit Suisse, with total assets greater than 100 percent of Swiss GDP, and the difference, I believe, is contingent capital,” Rep. Bill Foster (D-Ill.) said.

“Had we followed Congress’s direction to include contingent capital into the stacks of U.S. large banks, we would have been able to resolve the SVB without hitting the deposit insurance fund,” he added.

Federal Reserve Vice Chairman For Supervision Michael Barr
Federal Reserve Vice Chairman For Supervision Michael Barr answers a question during a Senate Banking, Housing, and Urban Affairs Committee hearing on Tuesday, March 28, 2023 to discuss the recent bank failures of Silicon Valley Bank and Signature Bank along the federal response.

GOP and Democrats take on regulator actions in wake of banking crisis

Meanwhile, Republicans said Federal Reserve regulators were asleep at the wheel and that they knew about the problems with SVB and somehow failed to act in spite of their knowledge.

The Fed’s boss of supervision, Michael Barr, is leading the regulatory investigation into why Silicon Valley Bank failed.

“The FDIC, the primary bank regulator, the state can do whatever they want to a bank that’s not operating in a safe and sound manner. Isn’t that right, Mr. Barr?” Republican Rep. French Hill (Ark.) said.

Barr responded that the Fed has a lot of power to act when things don’t look right at a bank.

Regulators had given the bank a grade of 3, which in the Fed’s rating system indicates a bank that is not at all well managed, in a scale that ranges from a grade of 1, which is considered optimal, up to a grade of 5.

“The bank regulators have substantial discretion to use those authorities when banks are operating in an unsafe and unsound manner. I agree with that,” Barr said.

Biden says banking conditions are improving

President Biden said Tuesday that he believed conditions in the U.S. banking business were improving.

“I think we’ve done what we need to do executively. I feel confident things are settling out. The markets seem to be responding,” he said. “I think it’s pretty much under control now. It remains to be seen, but we’re looking to see whether it needs any further legislation.”

“I’m not sure whether we get much legislative change. But we’re looking at that as well,” Biden added in regard to new laws that may be passed in response to the latest bank failures.

While bad management is widely being blamed for the collapse of SVB and the crypto-focused Signature Bank, former SVB CEO Greg Becker, who was also a board member of the San Francisco Fed branch that was supposed to oversee his own bank, has not appeared before Congress, nor has he made any statements about what went wrong.

Silicon Valley Bank
An employee hands out papers to customers queued up for admittance at the collapsed Silicon Valley Bank in Santa Clara, Calif., on Monday, March 13, 2023. President Biden spoke assuring Americans that the U.S. banking system is safe.

How would wealthy depositors be reimbursed for bank failures?

It’s also not clear if the funds from the DIF used to save wealthy depositors will be charged an insurance premium or if they got reimbursed for free.

“The FDIC charges a fee on the first $250,000 in an account based on the size and strength of the bank. This fee ranges from 0.015 percent to 0.40 percent annually, depending on the size and riskiness of the bank,” economist Dean Baker of the Center for Economic Policy wrote in a Wednesday blog post.

Peter Thiel
Tech billionaire Peter Thiel was a Silicon Valley Bank depositor who says he had $50 billion held at the bank.

“Most people would not see the insurance fee directly, because it is charged to [the] bank, but we can be sure that the bank passes this cost on to its depositors,” Baker said

“However, these fees only apply to the first $250,000 in an account. This means that people who had more than $250,000 in an account were not paying for insurance. Nonetheless, when they needed insurance from the government, they got it, even though they didn’t pay for it,” he added.

Any losses to the deposit insurance fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

The bailed-out depositors include the digital media hardware company Roku, as well as other tech businesses in Silicon Valley, according to Sen. J.D. Vance (R-Ohio).

“There are some outrageous examples there. I think, you know, had had deposits of over $3 billion, and I think Roku had deposits of over $500 million, but there are a lot of people, a lot of firms in Silicon Valley Bank that had deposits well over $1 million, over $5 million,” Vance said Tuesday during a hearing of the Senate Banking Committee.

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