Uh, concentrating in one industry an industry that I used to be part of Um. But the fact that there was such high concentration of counterparty risk my understanding 10 depositors alone at about 13 billion dollars of deposits. Again, it seemed to me interest rate mismanagement is banking 101 and again, even that five billion dollar bank they should have been called out. I Also think the speed I've often cited the fact that the largest bank failure we've seen was will move back in the crisis.

16 billion dollars left that bank over a 10-day period. In this case, 42 billion dollars, the equivalent of 25 cents on every deposit went out in six hours. I'm not sure at that point what regulatory structure could have prevented that, and at least from reports. It seems to me that Um and I say this is somebody that used to be in the VC industry.

Some of the very VCS who bank for a long time at Svb may have started this, run Um and demanded all of their ancillary countries companies all go out at once. So Vitamin Bar can you take us through with a little more detail starting Wednesday night through Friday afternoon, how this happened, how we got here, and what? you're what you've seen so far, thank you very much. Senator Uh, I'll start where you did, which is this is a textbook case of Bank mismanagement. Uh, the the risk the bank face interest rate risk and liquidity risk.

Those are better and better banking issues. The The Firm was quite aware of those issues they had been told by Regulators investors were talking about problems with interest rate and liquidity risk uh publicly and they didn't take the action necessary. They were quite vulnerable to risk uh to shocks, and they didn't take the actions necessary to meet that. What happened on Wednesday night is: they belatedly attempted to to improve their liquidity position and they did it in a way that that spooked investors, that spooked depositors that spooked the market.

Uh. Nonetheless, on Thursday morning, things appeared calm according to the bank's report to supervisors. But later Thursday afternoon deposit outflows started and by Thursday evening we learned that more than 42 billion dollars, as you had indicated, had rushed out of the bank. Um, that's an extraordinary pace and scale.

Federal Reserve Bank Staff worked with the bank through the afternoon, evening, and and overnight to try and find enough collateral Uh, that the Federal Reserve could continue discount window lending against Uh. On on Friday morning, it appeared that it might be possible to meet the outflow that was expected the day before, but that morning, the bank let us know that they expected the outflow to be vastly larger. Based on client requests and what was in the queue, a total of a hundred billion dollars was scheduled to go out the door that day. The bank did not have enough collateral to meet that, and therefore they were not able to actually meet their obligations to pay their depositors over the course that day.

And and they were shut down. Senator Krapo is recognized from Ida Thank you very much Mr Chairman Uh, in your testimony, Mr Barr you indicated that you were going to be in one of the aspects of what you're working on. You're going to be looking at whether more stringent standards are needed I Don't want to follow up on Senator Warner's questions relating to this argument that has been put out there. I Think as a part of the blame shifting game and there's a lot of that going on right now that it was a statutory failure.

That brings us to the 2018 reforms: 21 Senate Bill 2155 and I Just want to read to you a couple of sentences out of Senate Bill 2155 with regard to the question of whether that legislation prohibited our Federal regulators and particularly the Fed from doing anything they needed to do with regard to applying the appropriate, strict standards. And to start out with: I will read what what Senate Bill 2155 did was to stop a one-size-fits-all system and mandate by using the changing the word made To shall mandate that the Federal Reserve tailor its regulations to the risk and so forth. I Want to read the language It mandates that the Federal Reserve differentiate as it tailors differentiate among companies on an individual basis or by category taking into consideration their capital structure, riskiness, complexity Financial activities including Financial activities of their subsidiaries size and any other risk related factors that the Board of Governors deems appropriate. And then at the conclusion of the statute of that section of the statute, it makes it crystal clear and this is the statutory language.

Nothing in subsection A shall be construed to limit the authority of the Board of Governors of the Federal Reserve System in prescribing Prudential standards under this section or any other law to tailor or differentiate among companies on an individual basis or by category taking into consideration their capital structure riskiness complexity Financial activities including Financial activities of their subsidiaries size and any other risk-related factors that the Board of Governors deems appropriate and I could go on with multiple times that language was repeated. My question to you is was there any statutory restriction faced by the Federal Board of Reserves as it issued its regulations on tailoring that would have prohibited them from applying the strictest standards they could to address the Prudential needs of our banking system? Uh, thank you Senator Uh, crapo. I Agree with you: there was a substantial discretion um under that act for the Federal Reserve to put in place tailoring rules that were different from the tailoring rules that had put in place uh in in 2019. I Think there is still to this day a substantial discretion uh in changing those by notice and comment rulemaking.

That's one of the areas that we'll be looking at in our review whether there should be appropriate changes. there are some areas for, particularly for smaller firms firms between 50 and 100 billion where the ACT is more prescriptive, but for the firms of the category that we're addressing today, there's substantial discretion for the Federal Reserve to change those rules in a way that is supportive of safety and soundness and financial stability. Thank you and I appreciate your answer. You said recently that the bank failed referring to Sdb as the public began to focus on changes in values of Securities in the banks held to maturity account? That's correct, right? My question to you, there is Uh did.

Did the standards on that risk that are used for supervision? were those changed at all in Senate Bill, 2155 and 2018. The the standards for Capital rules are determined by the bank agencies. The bank agencies made a decision to Um for smaller categories of these large Banks to not require the pass-through of Aoci into the capital structure, but that was a decision that is available to be altered by the discretion of the bank agency and was not mandated by 2155. Uh, no, it was not mandated by 2155..

Last question is under the current standards that are applied with regard to Capital Was Svb adequately capitalized? Uh, prior to Uh? Yes, Prior to its failure, it was categorized under current capital rules as well. Capitalized? All right. Thank you very much. Hey Senator Great post Senator Cortez Masco from Nevada is recognized.

Thank you Mr Chair Thank you all three of you for being here! Vice Karen Barr Let me let me start with you: You've talked about how the Federal Reserve is undergoing an investigation. Um, to determine whether the Federal Reserve actually failed in this instance, Is the Federal Reserve the appropriate body to conduct this investigation? or should we have an independent investigation? Uh, thank you. Senator It's a terrific question. We described what we're doing as a review.

We're reviewing our own practices. I Think it's an important part of risk management to do self-assessment I Think it would be irresponsible and imprudent of us not to do self-assessment We're going to take that very seriously. We're going to be thorough, we're going to be transparent, and we're going to be far-reaching in that self-assessment I Also, think it's appropriate for Outsiders to have independent reviews, and we expect and welcome independent reviews of our actions. And if the, if you uncover in your investigation that the Federal Reserve failed here in some of the supervisory roles, will you make that public? Yes, we intend to make our report of fully public on May 1st and that report will include.

Normally, it's not our practice to include, but that report will include confidential supervisory information such as the exam reports. And in the scope of your review, you identify the scope of that review in your written testimony. Is there anything in addition that's not in your written testimony that you will be reviewing here. and then let's go Uh, thank you.

Senator I've asked the staff to be um, uh, far-reaching so if they determine that an issue should be in scope, they have full discretion to put that issue in scope and to address it in the review. So there are no limitations on their ability to review how the Federal Reserve conducted its supervision and the regulatory oversight of the firm. Thank you! And then one final thing, because there's been a lot of discussion about Um, the previous Uh rollback of some of the regulation in in votes in this body uh, just recently. If you find that that change in the law impacted the Federal Reserve's ability to conduct the appropriate tests based on the tiering of the bank's assets, would you be forthcoming with that and and say so yes, we intend to describe where we think supervisory and Regulatory failings occurred.

If changing those to make them what we we think is the right standard would require an act of Congress We will say so in that review and then Chairman Gruenberg Same to you: you're conducting the scope of the FDIC Are you comfortable that you can conduct that and be transparent and accountable? Or should there be an independent body looking at this I Think there's room for both As Michael indicated. I Think it's important for each of our agencies to look internally at our supervision of these institutions and draw lessons from it. In our case, we've asked our chief risk officer who's not directly involved in the supervision process and has his role is to evaluate risk at the FDIC to undertake this internal review of our supervision of a signature bank. Thank you! And then there's been a lot of talk in the media about the executive salaries, about the executive bonuses, about the the sale of stock.

Let me ask, um, the three of you. My first question is what Authority Do you have to claw back any of those bonuses or the executive pay? or even deal with the the sell of the stock? And maybe Mr Greenberg Let's start with you and then thank you Senator You know, as I indicated in my opening statement, the FDIC for every failed institution is required to undertake an investigation of conduct of the members of the board, the management of the institution, as well as professional service providers and other institution-affiliated parties. We've already begun that investigation and we have significant Authority under the law depending on the findings of the investigation to impose civil money penalties, restitution, and as well our individuals from the business of banking. So the authorities are substantial and we're going to pursue this as expeditiously as we can.

I know there's interest we don't we do not have under the Federal Deposit Insurance act explicit Authority for clawback of compensation, we can get to some of that with our other authorities. We have that specific Authority Under Title II of the Dodd-Frank Act If you are looking for an additional Authority specific Authority Under the FDI act for Club X probably would have some value here. Thank you Mr Barr Uh, thank you. The board does have authority to pursue actions against individuals who engage in violations the law, who engage in unsafe or unsound practices, who have engaged in breaches of fiduciary duty.

We retain this Authority Even after a bank fails, and we stand ready to use this authority to the fullest extent. Based on the facts and circumstances. And as with Chair Grunberg, potential consequences include a Prohibition from banking, civil money penalties, or the payment of restitution, we intend to use these authorities to the fullest extent we are able. Thank you Missing and I know Chairman's Indulgence briefly.

Yes I Defer to the FDIC and Federal Reserve on this. Thank you thank you Mr Chairman That was brief. Thank you Madam Under Secretary Senator rounds of South Dakota is recognized. Thank you Mr Chairman First of all, thank you to all of you for occurring me for our committee today.

Vice Chair Bar In your testimony, you said that in November the FED supervisors delivered a supervisory finding on Interest Rate Risk Management to Silicon Valley Bank As you know, the communication of supervisory findings must be focused on significant matters that require attention. Matters requiring immediate attention or MRIs are matters of significant importance that the FED believes need to be resolved right away, including matters that have the potential to pose significant risk to the safety and soundness of the banking organization. My question: Vice Chair: Barr was managing interest rate risk listed in the MRI section of the supervisory finding issued to Svb. and if it was not, why not? Um Senator We're We're still reconstructing the supervisory record.

We've just started the review, but my understanding is that they were issued a matter requiring immediate attention based on the inaccuracy of their interest rate risk modeling. Um. Essentially, the the risk model was not at all aligned with reality. Pretty interesting statement if it was not aligned with reality.

Um I Recognize that you're going to have a complete report and and I'm not going to try to push you too far into this. but I I'm really curious. What's the time frame that's expected for a response For an MRI one that requires immediate attention A senator, there's There's not a fixed amount of time. Uh, it depends on the issue, the scope of the issue, the complexity of resolving the issue.

So I don't I don't have a way of giving you a firm Baseline uh on the action, but they're They're expected to be a top priority for management to address, and particularly in the interest rate environment that we're in. And and knowing that the firm had been cited previously for other problems with liquidity risk management, and interest rate risk management supervisors would expect that that would take a high priority attention by top management, The supervisors met with the CFO of the firm in the fall in October of 2021 to convey the seriousness of the findings directly during this time period. Uh, perhaps for as much as six months during that previous year, Bank was without a risk management officer. Is that correct? That's my understanding.

I I Think it's a terrible risk management Obviously not to have a a Cro at the firm you need an effective cro is part of risk management firm And as I indicated previously, the supervisors had told the firm uh in the summer that they had deficiencies in governance and controls at the management level and the board level and that was related to their failure to appropriately manage risks. My understanding is that there was a period of time there in which they were without a CFO as well. Is that correct? I Don't have the details of that, but I'm happy to get back to you. Okay, um, when and I recognize that there is a difference between a matter requiring immediate attention and a matter requiring attention.

Can you kind of share with us the difference? I mean that there clearly is a defined difference between a matter of such importance that requires immediate attention versus one where it requires attention. Can you talk a little bit about what the expectations are between the two, they're both really signal that bank management should pay attention to what's in front of them. They're not. They're not issued lightly.

A matter require immediate attention is, as its name suggested. uh, telling managers that they should place a priority on fixing this issue over other issues. but the the exercise of the line between the two is a matter of supervisory judgment. Follow up a little bit and recognizing once again that we'll get a full report in the next couple of weeks.

But it seems to me that when it turns into an MRI there is an expectation that the board or the executive officers would respond fairly quickly to your knowledge. At this point was that expectation that? well? I I Think the fundamental fact is you know the firm failed because of its interest rate risk and its liquidity risk. and that is I Think evidence of the fact that they didn't respond strongly enough and promptly enough. In other words, with the information that you had and that The Regulators had, they were able to determine that there was a problem at the bank and they directed that there be a response immediately, an immediate response.

Uh, based upon the data that they were able to gather at that time. That's a reasonable assumption, is it not I I Don't know what the time frame sets out set out in each of the individual orders were, so I'm not able to answer your question with precision and I want to be very careful to be able to do that that's fair and not not go beyond them. but we will receive that information when the full report comes out. Yes on May 1st we'll release the full report and it will include the reports of examination and so people will be able to see what's in the record.

They're very good. Thank you, thank you! Senator Menendez of New Jersey is recognized. Thank you Mr Chairman In 2018, Congress passed a bill which was signed into law by President Trump that relaxed regulation for institutions like Silicon Valley Bank that law which I opposed uh Exempted those Banks from enhanced Prudential standards stress tests raised the Threshold at which a bank would be considered systemically important. But even as that law kept Silicon Valley Bank off the list of systemically important institutions, the Fed and the FDIC a rightly cited systemic risk to justify their actions to prevent runs on other.

Banks So Mr Barr Mr Gruenberg each of you voted to invoke what is known as the quote Systemic Risk Exception. So with a simple yes or no, can you tell me that the situation at Silicon Valley Bank pose systemic risks? I Thank you Uh Senator I think it's an absolutely crucial question Uh, the invocation the Systemic Risk exception required Uh judgment as well as incoming data and our best assessment. the assessment of a unanimous Federal Reserve Board Any unanimous Board of the FDIC and the Treasury Secretary was that we were seeing signs of contagion in the banking system that threatened to put at risk depositors and Banks across the country and to make sure that Banks could continue to land in their communities, to make sure that depositors were safe, to make sure that businesses could pay payroll. But we thought it was important to Uh to invoke that systemic risk determination and close event that you felt that Silicon Valley Bank was a systemic risk at that point in time.

The Judgment was really broadly about the risk that the failures of these institutions and other stresses in the system were posing as a whole as opposed to a particular decision. Seems to me that that sounds like a distinction without a difference. Uh, if any single bank's failure can cause contagion, uh, that threatens the system, then it seems that the the bank should be considered systemically important. Uh, and so we need you.

You all need to have an obligation to be clear with us, Um, and with the American people, Uh, when you took extraordinary steps to protect uninsured depositors that could very well lead to increased fees charged to Banks and ultimately to Consumers. So I think we need to be clear about what is a systemic risk. Uh, and so I'm looking forward. a more crystallized version of that I was here in 2008 I Don't want to live through it again? Uh, do you agree with President Biden's statement two weeks ago that Congress should strengthened rules for banks to make it less likely that we will see another failure similar to that of Silicon Valley Bank Uh, thank you.

Senator I Think it's important for us to to strengthen capital and liquidity rules. We're working on strengthening them as as part of our Basel III reforms and our holistic review of capital and I think we need to to move forward with that. and as both chair Greenberg and I suggested with a long-term debt requirement that would provide an additional cushion in addition to Capital Uh, For large institutions that that work will need to go through notice and common rulemaking, there will be transition periods for it. But I think that is really important work for us to do and I'm committed to doing it well.

Let me ask you. uh Mr Barr This morning, I along with Senator Rounds and other members of this committee sent a letter to Chairman Powell asking him to explain whether the Feds had applied enhanced supervision or Prudential standards to Silicon Valley Bank or any similar size Bank using the Fed's existing Authority We've also learned from public reporting that Fed supervisors began flagging problems as SBB as far back as 2021. now I understand we have a lot more to learn about the facts of what transpired both at the bank with any management failures, but I expect that we're going to see that all factored in as part of a review. So as you begin that review, let me ask you: do you agree with Chairman Powell's statement last week that from what we know it is quote Clear that we do need to strengthen supervision and regulation.

Yes, I absolutely agree with that. Thank you for that now. Lastly, uh, what? I I would love to know Mr Greenberg about as we think about uh, should we raise uh the Federal Deposit Insurance What percentage of account holders is that account for? How much is private versus business and what are the costs that are associated with it? So I'll just put that out there for you to submit an answer to the record because it will take more time than what I have. But the last point I want to make is we have seen a flight from Regional and Community Banks to quote unquote too Big to fail Banks and a concentration of deposits at a select few institutions also brings about its own risks to the financial system.

At the end of the day, it seems that we are incentivizing uh entities to go to go to Too Big to Fail Banks It only makes it even more consequential in terms of too Big to fail. Is that what we want to ultimately achieve in this process? A Senator I Think that the the goal of the actions that we took are to make sure that we have a thriving and uh, diverse system of banking in the United States including Community Banks and Regional banks that are the lifeblood of many communities all across the country. I Think it's around the Senator County Louisiana is recognized. Thank you Mr Chairman Thank you all for being here today Chairman: Barr We uh the Federal Reserve rather stress tested 34 banks in 2022.

Is that correct? Uh Senator I don't have the exact number in front of me but that's why I have here record. it says 34. and the cutoff was 100 billion dollars. Is that right? Yes, Okay, um, you didn't Stress Test: Silicon Valley Bank did you no? Under The Reserve Federal Reserve Boards rules that were put in place.

Um for the transition into the stress testing, it takes a while for a firm uh to be considered above the threshold. They need to have a rolling four-quarter average stress test Silicon Valley Bank in 2022. Yeah, okay, Uh Silicon Valley Bank had uh, 100 billion dollars more than 100 billion dollars in assets at the end of of 2021, Did it not? Senators I was explaining that the transition rules in place at the time require a rolling four quarter average to be above that amount. Okay, and then if the firm is happens to be in a year that isn't the year that since it's in every other year test that a test is running right then it waits till the next year.

So for Silicon Valley Bank that would have meant 2024 would be its first stress test. But the point is, you didn't you didn't test Silicon Valley Bank We we did not apply a stress test to Silicon Valley Bank. It was of course using its own stress test. Did you have the authority to do it? Um, under our existing regulations? No, We would have to change our regulations to have that Authority Under under the Uh, the the Congress's amendment to Dodd-Frank Senator Kreypo talked about it 2155.

Section 252.3 Isn't it a fact that we gave the Uh the the Federal Reserve the authority to to stress tests Silicon Valley Bank Uh. Under under that legislation, the Federal Reserve could have put in place a rule defining the word periodic, but you did a different way than than was done right. But you did. Did the Federal Reserve did not do that? Okay, um, if you had stress tests, so you well I'm going to do this way.

If you had stress tested Silicon Valley Bank in 2022. it wouldn't have made any difference would it I don't know the answer to that question? Well, you didn't test for Silicon Valley Bank's problem I've read your report, your your stress test. You stress tested these 34 Banks for uh, following GDP spiking unemployment into false and Commercial Real Estate Isn't that correct? Yes! In a typical adverse scenario for banks, we're testing falling interest rate. That wasn't our problem in 2020.

I Completely agree. This is not our problem today. The problem is inflation High interest rate and loss of value in government bonds, isn't it? I Completely agree with you. So you you stress tested in 2022 for the wrong thing.

The stress test is not the primary way that the Federal Reserve or other Regulators test for interest rate risk, but you you stress tested for the wrong thing as I said Senator I agree with you that it would be useful to test for higher Rising interest rates. That's why in our alternative scenario multiple scenario that we put in place for this year's stress pass, we do that. these decisions were made before I arrived. but I agree with you.

but it's like somebody going in for a a a test for uh for covet and getting a test for Cholera isn't it? I I Don't know enough about either of those tests to know. Yeah, well, they're different. Um, so all this business about well God The amendment to Dodd-Frank kept them from stress testing the way I see it, you chose not to stress test and if you had stress tests Silicon Valley Bank you wouldn't have caught the problem. As as I said Senator I agree with you that the the statute requires periodic stress testing.

the Federal Reserve made a decision about how to implement that right in 20 in 2019 right That resulted in Svb not being tested until planned to be tested until 2024. But as I said, the stress test you knew from the I'm sorry to cut you off but the Chairman's going to cut me off in a second. but you knew the Federal Reserve knew well in advance is Silicon Valley Bank had a problem withholding too much of its money in interest rate sensitive along government bonds. didn't you? I Think the investing public and the Federal Reserve which cited it for interest rate risk problems knew that it had interest rate risk I Think the Federal nobody anticipated anything about it.

did it I'm sorry I couldn't hear you the Federal Reserve didn't do anything about it, did it I I disagree with that Senator Respectfully the the Federal Reserve did uh cite these problems to the bank and require them to take action Bank management failed to act on those you didn't follow up, did you food? Sometimes time has expired I think that I sit here and watch. um Mr Barr Uh. reluctant to criticize some of the moves of his predecessors at the Federal Reserve I'll leave it at that. Senator Smith from Minnesota is recognized.

Uh, thank you Mr chair and uh, thanks to our um our folks for being here today. Really very much appreciate it. Um so I want to just start by reiterating what I know some of my colleagues have said which was that as these two Banks collapsed I've heard you say very clearly: Vice uh chair Barr Um, the Silicon Valley Bank in particular collapsed because of you know what looks like gross mismanagement and failure to manage even the most basic of risk, some liquidity and interest rate risks. The Biden Administration and Regulators took strong and decisive action to protect people and to keep our banking system safe and secure.

And the reality is that that action that you took was necessary. but it was also extraordinary. Extraordinary actions were called for I'm in the moment and you of course don't want to have to use extraordinary actions. you want to be able to rely on banks to do to make good decisions and to protect their shareholders and to correct their depositors.

Um, but let me just clarify one thing before. I Want to follow up a little bit on senator Kennedy's questions Um, the Federer The FED under the previous Vice chair of supervision put into place rules that I think there's a question about whether those rules I mean I think even in the moment you were, you were critical of those rules. Is that right? Yes, that's correct. And so um, your review will will take a look at what would have happened if those rules hadn't been in place and then you can make decisions about what new rules need to be in place to protect from this kind of extraordinary situation that we saw with these new these two.

Banks Is that correct? Yes, that's correct. So I think that's just important for us all to understand here as we understand as we think about what has happened. Um, the Silicon Valley Bank's failure was the result. It appears of management failures at many levels, all coming together at the worst possible time.

and I'm particularly struck by the bank's failure to manage interest rate risk. You and I talked about this um last week which is basic Bank Management It's not rocket science to manage interest rate risks. Um, and you know interest rate risks. interest rates excuse me were near zero for more than a decade and a lot of business models it appears, including Silicon Valley Bank's business model was predicated on basically free money and um, that obviously presents risks when that changes.

So I'm concerned. Um, uh, Vice chair Barr about other institutions Banks and non-banks alike, how they are managing what must be similar interest rate risks. Could you just address that? Um, and talk about how the FED right now and others are monitoring that interest rate risk and what that tells you about what we need to do differently. Uh, thank you.

Senator Let me just start with a basic point which is the the banking system is is sound and resilient. Most banks are highly effective in managing interest rate risk and liquidity risk. It is the bread and butter kind of work of Bank management. So we are monitoring the financial system, monitoring the banking system.

Uh, we're looking at interest rate risk and liquidity risk across the banking system to assess that where Banks need to do better at interest rate risk and liquidity risk management. Uh, we're pointing that out. but I think the fundamental point is the banking system is sound and resilient. I Might have mentioned to you when we spoke that I had a chance to meet with a group of Minnesota Bankers I'm including Minnesota has more Community Bankers I think per capita than any state in the country and they were eager to point out to me that their business models are very different from the business models of Highly risky Enterprises like Silicon Valley Bank and so I appreciate you.

Um, you're raising that. In fact, I've been getting texts from some of my Bankers today watching this hearing and wanting to point out wanting to point out that difference. um Mr Barr can you talk about uh the risks of interest rates? sort of this interest rate risk as it might affect non-banking institutions as for example mortgage loan companies. Thank you! First let me just uh you know say as you indicated I hear from Community Bankers as well and I know many other Senators have in in your home States the the vibrancy and the health of that Community banking sector and and we see that too.

Um, we are obviously looking at interest rate risk um as it affects not only banks, but but also the non-bank sector. Uh, we we look at uh, of course at non-bank mortgage servicers that we're looking at hedge funds. We're looking broadly across uh, the financial landscape to see where those risks might arise and and how those might propagate in in other ways into the banking system. So we're highly attuned to that.

But again, I Think the basic point is that the banking system is sound and resilient. Depositors are safe. Um, and and we've uh, through our actions, demonstrated that. Thank you very much.

Thank you Mr Chair Smith Senator Lamas of Wyoming is recognized. Thank you Mr Chairman and thank you Panel I Want to follow up a little bit on Senator Kennedy's line of questioning as I read um. Statute 5365 Section C Risks to financial Stability, Safety and soundness. The Board of Governors May order or rule excuse me.

The Board of Governors may buy, order or rule promulgated pursuant to Section 553 apply any Prudential standard established under this section to any Bank holding company with Consolidated assets equal to or greater than a hundred billion dollars. so that was Silicon Valley bank. Then you've got section Uh, Statute 2155. that when it was changed from May to Shell made mandatory a new Duty on the Federal Reserve to take into account higher risk profiles presented by certain Banks and to strengthen supervision of those.

Banks. So you look at Silicon Valley Bank They had a number of activities with above average risk profiles. Uh, their concentration of deposits, Uh, the quantity of uninsured deposits 94 uninsured deposits. Then you look at Federal Reserve Authority Under Regulation double.

Why? To impose additional risk-based or leverage capital or liquidity requirements or other requirements the board deems necessary to carry out the purposes of Dodd-Frank I Look at all this and I Think that among all these statutes and regulations, the FED had plenty of authority to prevent silicon. National Silicon Valley Bank and and the problems it encountered and and what was aware pretty early on that there were unique problems there and that it was a very, very unique financial institution because of its risk profile, but didn't do it I'm as I look at what Authority you've been given. I Can't think of another additional rule or regulation or law that you need it. Tell me whether you agree with that or not.

Senator I I Agree that the Federal Reserve has substantial discretion to alter through notice and common rulemaking. the rules that were put in place in 2019. With respect to firms over 100 billion. There, there are some areas that the statute would provide some limitation to, but there's substantial discretion for the Federal Reserve to change its rules.

For firms in the 100 to 250 billion dollar range, change its rules. What would it have to do? Uh, we would have to go through a notice and comment rulemaking process I Don't mean the procedure for changing a rule I mean what changes would you make to the rule Senator We haven't made a definitive conclusion on that. We're undertaking this review of Sbd's failure in order to better assess whether it be appropriate to change Capital rules and liquidity rules for this size firm. for firms More generally we're looking at that uh, right now is fractional Reserve banking overly risky in this age of online banking as Senator Let me let me just say repeat what I said before which is that the overall the the safety and sadness the banking system is strong.

Banks are safe and sound. Depositor should feel assured that their deposits are safe. Well here's the problem though as I see it the way that these banks have been managed. Wyoming's Community Banks may end up paying for this through higher assessments from the FDIC am I Correct Mr Gruenberg well as I indicated Uh senator in regard to these two institutions, um, any cost to the deposit Insurance Fund from covering uninsured deposits is required by law to be recovered through an assessment on the banking industry.

Exactly if I make just one additional point, the the law does give the FDIC Authority in implementing that assessment to consider the types of entities that benefit from any action taken or assistance provided. So are you saying that you're able to exempt to Wyoming's Community Banks from paying for this? I'm suggesting we have some discretion there and we're going to consider that if you carefully will you exempt Community Banks from having to pay for this. That's a judgment our board is going to have to make. and as I indicated, we anticipate going out for notice and comment.

uh, public rulemaking in May to implement the assessment and as I indicated, we have Discretions you have to go through APA rule making to assess. that's the law that was a legal requirement. Thank you Mr Chairman, Uh, thank you Senator Senator Warren of Massachusetts is recognized. Thank you Mr Chairman So we just experienced the second and third largest bank failures in American history.

Executives at Svb and Signature took wild risks and must be held accountable for exploding their Banks and I'll soon introduce a bipartisan Bill to do exactly that. But let's be clear, these collapses also represent a massive failure in supervision over our nation's Banks So coming out of the 2008 crisis Congress put tough banking rules in place. Now Big Banks hated them and their CEOs lobbied hard to weaken those rules. Ultimately, Congress signed off and then it got bad.

Really bad. Regulators burned down dozens of safeguards that were meant to stop Banks from making risky bets. Now the three of you here today represent U.S Treasury and two of our top banking. Regulators I'd like to know if you believe that we need to strengthen our banking rules going forward to ensure the safety of our financial system.

Vice Chair Bar Let me start with you: Do you believe we should strengthen our financial rules going forward? Yes I do. Center Thank you Vice President Biden Agrees with you as well. Two weeks ago, he stated that we must quote strengthen the rules for banks to make it less likely that this kind of bank failure would happen again. Chairman: Gruenberg What about you Do you agree with President Biden that we need to strengthen our banking rules I Do agree Senator Good And now Under Secretary: Liang Do you agree with the President on this? Senator I Agree that we do need to prevent these types of bank failures? Well, I'm asking you.

of course we need to prevent them, but that's not by simply wishing it. it's by stronger regulation. Is that right? I Agree Senator Okay, good. now we need better laws here in Congress But let's also talk about how we can strengthen the rules today even before Congress acts Under current law, the Federal Reserve has the discretion to apply stronger Prudential standards on banks with assets between a hundred billion and 250 billion exactly the size of Silicon Valley Bank That Authority is not being used right now Vice Chair Bar Will you use your authority to strengthen rules for the largest banks in this country? As you use your authority to strengthen the rules for the largest banks in this country, Will you be reaching banks with assets of at least 100 million dollars? A hundred billion dollars? Uh Senator We of course would need to go through a notice in common Rule Mate: I Understand Um in this process, but I anticipate the need to strengthen capital and liquidity standards for firms over 100 billion dollars.

Okay, so this is the area we're looking at. We're going to push down further in terms of the greater scrutiny. Chairman: Gruenberg Let me turn to you Once the FED began torching rule after rule in 2018 for Big Banks, the FDIC under your predecessor joined in on the fund and also started weakening FDIC rules across the board: capital and liquidity, uh, requirements, stress tests, you name it. In fact, your predecessor explicitly told these banks that if FDIC Bank examiners were asking too many questions that they should quote, let us know end quote.

Now there's a banking regulator who makes it clear that she is there to serve the Big Banks instead of the American Public Chairman Grunberg Will you commit to using your authority to undo the rollbacks that your predecessor initiated and to strengthen the rules and supervision for banks with great greater than 100 billion dollars in assets. Senators I Think you knew I was a member of the board at that time and voted against those measures And I certainly think it's appropriate for us to go back and review those actions. In light of the recent episode and and consider what changes. Well, I Have to say a review sounds a little wishing here you didn't think they were good rules to begin with.

My Views haven't changed Senator All right, so you still think they were a bad idea. Got it? You know each of each Authority that you could exercise right now to strengthen rules for big Banks and to ensure that our banking system and our economy are safer. I Urge you to use that Authority and I urge my colleagues here in Congress to do our part to protect American families and small businesses from yet another banking crisis. Thank you thank you Mr Chairman Senator Senator Hagerty from Tennessee's recognized.

Thank you Mr Chairman If you'd allow me just a moment to speak to the tragedy that occurred at the Covenant School of Nashville Tennessee yesterday. Um, a depraved person. A sick person executed a tragic act and yielded to terrible result. and my entire Community is mourning.

We're mourning for the families, for the victims. for everybody concerned. I Also want to acknowledge The Bravery of the National Police Department They stepped into Harm's Way Within 14 minutes brought the situation under control. Tremendous bravery at a time when it's called for and what acknowledge their sacrifices.

Um, now let's turn to the matter at hand. and I know that politics in Washington always seizes upon any crisis as an opportunity to achieve whatever regulatory or legislative opportunity or goal that may be uh in front of them. But I'd like to talk about managerial execution here specifically. I'd like to start with you chairman Greenberg I'd like to talk through a series of events that followed Sbb's failure two weeks ago.

As you know, Silicon Valley Bank was taken into receivership on a Friday morning that gave the FDIC three days to find a buyer before markets opened on Sunday night. you had tremendous resources at your disposal 18 years of experience on the FDIC board yourself, detailed resolution plans, over five thousand employees and interest from a number of banks to bid including at least one formal offer as I understand it instead of successfully executing this process. However, the FDIC used the systemic Risk exemption to guarantee all deposits at Svb, creating tremendous uncertainty across our economy. And now, two weeks later, the FDIC has announced the sale of less than half the Banks Bail bank's assets at a loss of 16 and a half billion dollars.

So my first question in the Joint Statement released on March 12th you said quote no loss is associated with the resolution of Silicon Valley Bank will be worn by the taxpayer. Is that still your physician? Um, Senator Yes. As you know well, the poor maintenance with two partial sales completed and over 22 billion in losses already accrued, that position just doesn't square with reality. These losses are borne by the deposit.

Insurance Fund That fund is going to be replenished by Banks Across the Nation that had nothing to do with the mismanagement of Silicon Valley Bank or the failure of supervision here. In fact, that's going to be addressed by a special assessment to those. Banks And as we all know, these banks will have to pass these costs along last time. I Checked those costs to get passed along to the consumer.

Those consumers are American taxpayers chairman. Greenberg Invoking the systemic risk exemption is a last resort emergency option to the typical methods of resolution, and it begs the question of why you had to invoke that extraordinary exception. Just this past, Sunday's announcement of a new purchaser part of Svb. Not only were serious losses incurred, but the FDIC entered into a loss sharing agreement with the acquiring bank and a 70 billion dollar line of credit was extended to the purchaser.

That's a pretty sweet deal. This makes me wonder what prevented the FDIC from coming to a deal like this two weeks prior. He told ranking member Scott that you received bids for Svb over the weekend following its collapse, but that they were insufficient. What was your counteroffer and do Did you engage with the board of the bank that didn't approve this? To get them to step up and approve it, we received one offer that was frankly, more expensive than the cost of liquidation.

It didn't appear to be a viable offer at that moment. Was there a counteroffer to that We I would have to check with our staff in terms of how much of a back and forth. Let's talk about the bidding process itself. Were certain banks dissuaded by you or anyone else associated with this from bidding on Svb either before or after the bank was taken into receivership? No senator throughout the course of that weekend I was inundated with phone calls telling me that legitimate voters were being waived off of the process.

It's one thing to reject a bit if it's bad, but if in Geology had anything to do with this, this entire committee is going to be deeply concerned about that. I Look forward to the Gaos report on this because the result of this failure places the banking sector in a state of disarray that we've never seen before. In spite of all the preparation and tools at your disposal, the FDIC failed to do its job. There was obviously enough demand to orchestrate a sale.

What it looks like to the American people is that you simply didn't feel the incentive to execute and leaned on the systemic risk exemption to buy time and in doing so, it placed the entire U.S banking sector into Uncharted wires. I Don't see any apparent Improvement in outcome and this is a disgrace I Look forward to the Geo review and I hope that we get to the bottom of this uh Vice chair bar very quickly. I'd like to come to you In response to 2008 Financial Crisis, the size and scope of the regulatory regime was dramatically expanded by Congress Regulators like yourselves are giving Powers not to mention hundreds of academics at your disposal with the sole job of monitoring and addressing risk to the financial system. All of this was in hopes of identifying and preventing bank failures that pose systemic risk.

And in spite of all these tools, we find ourselves in a situation today that is is unprecedented. It's pretty clear that Silicon Valley Bank was woefully mismanaged Their management team which didn't have a chief risk officer for eight months last year, yet created and maintained a chief diversity Equity inclusion officer allowed their Bank to accumulate truly shocking levels of risk. and while this was occurring, the San Francisco Fed was spoken focused on researching left-wing policies that they had absolutely no expertise in ignoring one of the most basic risks in banking interest rate risks. perhaps most damning of all, until the day of their failure SBB CEO Sat on the board of the San Francisco Fed.

So Mr Barr in your review of what went wrong on your in your supervision, will you consider the level of managerial distraction that was evident at the San Francisco Fed? Uh Senator The staff have free reign to examine any issue that that might have addressed supervision. I Think the core issues are the ones I suggested at the outside and they're really basic interest rate risk mismanagement by the bank liquidity Risk mismanagement by the bank The the San Francisco examiners the examiners at the San Francisco Federal Reserve Bank called those issues out to the board, called them out to the bank and and those actions were not acted upon in a timely way. And so I think in a way, the sense of urgency that was brought to bear on this and the sense of pressure and if every tool at their disposal was used because they certainly were doing other things well beyond their remed. Thank you, thank you Mr Chairman Absolutely thank you for your questions.

Uh I'm going to ask the questions now if I might uh In 2008 I voted against the bailouts of the big Banks Because they don't support taxpayer bailouts, we do need to protect American Consumers and small business folks. We need to hold Bank Executives accountable when they screw up. and if The Regulators were asleep at the wheel, we need to hold them accountable. Look at correlation I would say is when I run my farm if I look at the price of diesel fuel and seed and that's all I look at I don't get the whole picture and quite frankly I won't be in business long if Regulators are only looking at Capital that isn't everything that's going on at Silicone Bank.

They had a concentration in a highly volatile industry. They had grown rapidly, had mostly uninsured deposits. Their Investments were poorly timed with interest rate increases that were clearly forecasted. all setting the conditions for a classic Bank Run one that happened quickly due to new technologies that are out there.

So Vice Share bar from 2020 to 2022, The Silicon Valley Bank Grew From 20 or Grew From 71 billion to more than 200 billion. This was a very rapid growth. It was heavily concentrated with tax and startups industries that have always been volatile. Then the bank took those mostly uninsured deposits to invest them in long-term U.S treasuries.

When the FED had been clearly forecasting that rates were going to go up. which the bank executive should have known because their CEO is a director at the San Francisco Fed and for two years it seems that Federal Regulators were flagging concerns about this situation. Is that a fair statement that for two years that the Fed was flagging concerns about this bank's Financial viability. Uh, the Senator that the examiners were focused on interest rate risk and liquidity risk at the big beginning in November 2021.

There at least as far as I know from the supervisory record thus far, I Have not seen something that said that the supervisors were focused on whether the firm was viable, but our review is underway. But doesn't that impact the viability? Yes, Senator Is it a core safety and soundness risk? A liquidity risk and interest rate risk are core risks that the bank mismanaged So were The Regulators physically in the bank So I've talked to a lot of intermediate-sized banks. They tell me that the Regulators are right there. five days a week.

Seven days a week. If they're open seven days a week, were The Regulators in that bank uh, physically speaking. I I Actually don't know that the part of the supervisory period is during the pandemic when activities were happening in part remote. so I don't have yet, but we have I Just want to point out the fact that um, Pandemic's been over for a bit for quite a bit and the opportunity for those Regulators to be in there would have been long before a month ago.

Yes Senator I Just I don't have the full supervisory record. We've just begun a review and I want to be very careful to answer only questions I Know Do you know if you know if the FED supervisors met with the board of directors of Silicon Valley Bank I I don't know that yet I know they met with Senior Management but I'm still reviewing no If Silicon Valley Bank had a risk committee and if in fact the FED uh supervisors met with the risk committee I will know that by the May 1st report. So were they warned about potential fines? I'm sorry, could you say that again? So I mean look, they had some problems. Were they warned to either fix them or they were going to get fined? The matters requiring attention and matters requiring immediate attention to my understanding require the fixing of the problem.

but I don't I Don't know whether they've highlighted any additional steps that might be taken. Certainly, that firm was unnoticed that they needed to fix those problems quite clearly since November of 2021. but yet they didn't They did not. So what point in time does the FED Regulators drop the hammer on this outfit I mean I don't even need to get going on the the bank? Uh CEO taking uh, a ton of money right before this thing went Belly Up as it was going Bella At what point in time we can have all the regulations on the book? I've talked to a lot of Bankers who said if this didn't happen before Dodd-Frank the regulations were to stop this to happen and and we have Dodd-Frank and we did make 2155 to tailor the regulations to fit the risk.

That was a big part of it on the intermediate Banks and in fact on the small Banks too. But yet for over a year and correct me if I'm wrong Mr Barr For over a year Regulators were saying to this Bank straighten up and fly right and they never did a damn thing about it and The Regulators didn't make it so damn miserable which my understanding is Regulators are pretty good at that. When they want to be making so damn miserable, these folks would adjust their business plan to take care of the risks that was in their back. Said it right.

I agree that that the risks were there that The Regulators were pointing them out and the bank didn't take action. It's ultimately uh, in the first instance, the bank management responsibility to fix these problems and they and they failed to do it where where we didn't take enough action. If the Federal Reserve supervisors didn't take enough action, we're going to be talking about that in our review and we expect to be held accountable for it. So I got to tell you.

uh Michael Michael Barr I am not a banker I ain't even close to being a banker I'm a dirt farmer and I'm going to tell you when they laid out what this bank had happened over the last two years, you did not have to be an accountant to figure out what the hell was going on here I agree and all I've got to say is as you do your uh, look back into what transpired, It better be fixed. If it's a regulator's fault, it better be fixed. If it's the regulation fault, it better be fixed if it's something else. I Hope there's a report to this committee saying you know what guys, this can happen again unless this happens.

but it looks to me like I'll just say this and I'm looking out from the outside in it looks to me like The Regulators knew the problem but nobody dropped the hammer. I Thank you Senator Tester As I said, our our review is going to be thorough, it's going to be open, and if we find problems like the ones that you just described, we're going to say it clearly and and describe what we think should be done. When do you think that report will be done and I'm way over time sorry, what do you think? May 1st, May 1st. So we got a month.

we should have them back after the report is done. We look forward to that. Thank you good at events. Uh, thank you Mr chair um and and thanks to the three of you for being here I Want to talk just a little bit about the inherent unfairness and what I think transpired with Silicon Valley Bank And you know I come from the Venture Capital industry and this is a statement against interest and certainly a statement against the interests of of some of my friends.

But uh, the the business model of Silicon Valley Bank was to provide banking services to venture capital firms and to venture-backed companies. And if you think about the fundamental trade that was implied I would even say explicit in their business model. what they did is they offered highly beneficial Financial products to venture-backed companies and Venture capitalists in exchange for having a large number of deposits in your Silicon Valley bank account. sometimes often exclusively.

So a common practice, for example, uh, was to say that you would provide a line of credit to a venture capital firm, but only if that firm put all of its money 100 of its deposits in Silicon Valley Bank or they would offer private jet financing and other goodies that are basically beneficial only to the very wealthy in exchange for having all of your deposits at Silicon Valley Bank. Now, given that that was implied in the business model of the bank, I Think it's important that we use the term bailout and I know that some of you don't like that term, but I think it's the only term that applies fairly here because we using excess fees on Community Banks all across the country effectively chose to bail out the uninsured depositors of Silicon Valley Bank. Now there are some outrageous examples there: I Think you know one firm had had deposits over three billion dollars, another I think Roku had deposits of 500 million, but there were a lot of people. A lot of firms at Silicon Valley Bank that had deposits well over a million.

Well over five million dollars. and what we did in practice do was was bail them out I I Guess my first question I Put this to all three of you and because time is limited I I I'd like to I'd like you to answer quickly is what is the threshold whether? What? Whether you. guys meant to or not I Think The The implication of what happened with Silicon Valley Bank is that there are a lot of people who expect that their uninsured deposits are effectively insured at an unlimited level. Or if you're a banker.

uh, there's an assumption from a lot of people that at a certain level, if you're systemically important enough, your uninsured depositors are going to get bailed out. Uh, maybe just go from left to right starting with Mr Greenberg But at what level do you think uninsured deposits in theory are effectively Unlimited Unsured in our banking system today? If I miss a senator, you're asking important questions I Think we have a lot of lessons to learn from this episode. Uh, the decision to cover uninsured depositors that these two institutions was a highly consequential one. Yes, it has implications for the system.

I I Think we need and I indicated in my statement earlier. We need to do a comprehensive review of our Deposit Insurance system and consider the questions that you raise. The FDIC is going to undertake that, and by May 1 we'll deliver a report, including policy considerations to take into account, so we want to try to be responsive on that. Thank you! Mr Mark Uh, I Also think you, uh, you, you raised important questions.

Uh, when we were looking at the systemic risk determination, uh with respect to these institutions, Uh, we were thinking about the risks to the broader Financial system, not the particular depositors. Uh, at one or two institutions you're thinking about and concerned about the extent to which that could impact Regional Banks across the country Community Banks Across the country, we were hearing concerns from Bankers and from depositors from businesses around the country. It's a difficult judgment, but one that at the end of the day unanimous FDIC board and a unanimous Federal Reserve board and the Treasury Secretary agreed that that that risk to the system was not a risk that was worth taking. And so you know today I Think we can you know say that that the banking system is sound and resilient and the steps we took Dem demonstrated that resilience and the safety of deposits around the country.

So so I I was concerned. Um, was concerned with the decision itself though obviously I have a lot of questions there. I Think there's an open question about whether we could have provided the confidence to the banking system the liquidity that was needed in case of a bank run without bailing out the uninsured. Silicon Valley Bank Depositors I Think that's maybe a topic for for a follow-on hearing, but what I worry about is is the the fundamental unfairness here that we've drawn a line.

and I don't know whether the line stops at Silicon Valley Bank Maybe it goes much further. Maybe it stops there where if you're systemically important which is a term that impossible for anybody here to Define with confidence. if you're systemically important, your uninsured deposits are effectively Unlimited in their insurance, whereas if you're not specifically important, if you're a Regional Bank in Ohio, there's a very good chance that your uninsured depositors will not receive that bailout. And I think that uncertainty is a really, really big problem with what you guys have done.

I'm not saying that an accusatory way. I Understand that there were reasons to do what you did, even though I don't think it was the right decision I'm just saying I think it has some real moral hazard here I I Know I'm over time here. So so the one thing I'd ask here is just unanimous consent to introduce a letter to the record from American Share Insurance this accompany provides private Deposit Insurance to most State chartered Credit Union including the 43 in Ohio And just on this point of moral hazard and on this point of unfairness, what I What I'd like to I'd like you guys to consider doing, is extending the same implied offer that you gave to the Silicon Valley Bank uninsured depositors to do it a little bit further down the banking ladder so that everybody benefits from the rule that you guys have created for. Silicon Valley Bank Like without objection Senator Thank you Uh, thank you Mr Chairman Thank all of you uh for your service and and testimony today.

Uh Mr Gruenberger. Um, you're aware are you not uh of the fact that the CEO of Svb sold 3.6 million dollars in Company stock just 10 days before the bank collapsed and the FDIC took over its deposit. So you're aware of that right? I Am Senator And are you aware of the fact that other Executives of the bank and employees of the bank receive bonuses literally hours before Svb collapsed? Yes, Senator Now, I Believe we need to have an independent Uh investigation into any criminal culpability uh, possibility of insider trading uh in this case, but regardless of any criminal culpability, uh, that may be there I think it's simply wrong and I think almost every American would agree simply wrong for the CEO and top Executives to profit from their own mismanagement and then leave Ffdic to be holding the bag. Would you agree with that proposition that that would be wrong? Yes, Senator Now, Dodd-Frank provides clawback Authority that applies to the biggest banks under the Orderly liquidation Authority Under Ola.

But as I understand it that A