GOP lawmakers accuse Fed of being lax before bank collapse

WASHINGTON — Republican lawmakers on Wednesday accused top banking regulators of dallying as Silicon Valley Bank raced toward the second-largest banking collapse in U.S. history and questioned whether tighter regulations would have made a difference.

Regulators shut down the bank on March 10, shaking the US financial system and raising fears of a broader banking crisis. But Federal Reserve regulators had first raised questions about Silicon Valley’s risky practices much earlier — in 2021 — warning the bank’s management about them this fall.

“That doesn’t sound like a very urgent oversight process,” Republican French Hill said Wednesday at the House Financial Services Committee hearing on the March 12 collapse of Silicon Valley bank and New York’s Signature bank. The collapse of Signature bank was the third largest in the nation’s history.

In response to the crisis, some Democrats are calling for stricter banking regulations. In particular, they want to reverse a law the Trump administration lobbied five years ago that rolled back the most stringent regulations on all but the very largest banks — those with assets exceeding $250 billion.

The 2018 law allowed the Fed to tighten oversight only on a case-by-case basis for banks with assets between $100 billion and $250 billion, a category that included both Silicon Valley Bank and Signature Bank. Fed official in charge of banking regulation Michael Barr agreed Wednesday that the Fed had “significant discretion” to do business with Silicon Valley Bank.

The Fed is conducting its own review of its oversight of Silicon Valley Bank, due May 1st. Barr said the review will examine, among other things, why Fed officials couldn’t force the bank’s management to fix the problems.

PHOTOS: GOP lawmakers accuse Fed of being lax before bank collapse

Before enacting tough new rules for banks, Rep. Blaine Luetkemeyer, a Missouri Republican, said, “How about you enforce the existing ones first?”

Rep. Jim Himes, a Connecticut Democrat, also questioned Barr about the apparent lack of follow-up by Fed regulators after they found Silicon Valley Bank’s management “deficient” in July 2022. Himes suggested that Congress should consider requiring banks to respond to concerns raised by their supervisors in a timely manner.

“We need to streamline the process,” Himes said. “We need to think about automatic mechanisms that intervene when a deficiency is detected.”

Regulators have said Silicon Valley Bank, the go-to place for California tech startups, has been a “quirky” case and that the entire US banking system remains solid. Silicon Valley had made a risky bet that interest rates would fall. When they rose instead, as the Fed aggressively raised interest rates to fight inflation, the value of the bank’s huge bond portfolio plummeted.

News of the financial distress prompted panicked large depositors to pull money out of the bank – a staggering $42 billion on March 9th. Depositors were expected to withdraw another $100 billion the next day. In response, regulators stepped in to take control of the bank and stop the bank run.

The vast majority of Silicon Valley Bank’s deposits exceeded the federal deposit insurance limit of $250,000. Concerned that its failure could shake public confidence in American banks, the federal government decided to protect all deposits at Silicon Valley Bank and Signature Bank, even those exceeding $250,000.


Christopher Rugaber, author of AP Economics, contributed to this report.

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