Three things to watch as Congress begins banking hearings

By Mackenzie Hawkins and Austin Weinstein

Bloomberg

March 27, 2023 4:16 PM PT

Congressional committees are poised to start investigating the collapse of Silicon Valley Bank and Signature Bank, offering a stage for what’s likely to be a partisan clash over the role of financial regulations — and the people charged with enforcing them — in the second-largest bank failure in U.S. history.

The Senate Banking Committee will meet Tuesday, followed by the House Financial Services Committee on Wednesday. Each will hear from Martin J. Gruenberg, chair of the Federal Deposit Insurance Corp.; Michael Barr, vice chair for supervision at the Federal Reserve; and Nellie Liang, undersecretary for domestic finance at the Treasury Department.

Notably absent from the list: former SVB Chief Executive Gregory Becker and former Signature Bank CEO Joseph DePaolo, who’ve been asked to testify this week or at a later date.

The witnesses face a grilling over the handling of SVB’s collapse, which sent shock waves through the financial system as regulators seized the lender and took emergency steps to prevent a broader collapse. SVB was sold to Raleigh, N.C.-based First Citizens BancShares late Sunday night, two weeks after the FDIC announced it would backstop all of SVB’s uninsured deposits.

Congress’ response has primarily broken along party lines. Republicans have pointed to a lack of supervision by the Fed, and criticized President Biden for what they call a bailout of a “woke” bank. Democrats have largely blamed a regulatory rollback during Donald Trump’s presidency that loosened oversight requirements for midsize banks such as SVB — though some face criticism for joining Republicans in voting for it.

Don’t expect legislation immediately, though.

“My job is to do oversight — not to rush this, but not to delay it either,” Senate Banking Committee Chairman Sherrod Brown, a Democrat from Ohio, said at an American Bankers Assn. conference last week.

This week’s hearings are expected to be the first of many, in what’s set to be a long, drawn-out debate over legislative fixes. Here are three topics to keep an eye on — and the most important members to watch.

Fed oversight

The role of bank examiners has become a central issue in the debate over why SVB collapsed, particularly after Bloomberg reported that examiners at the Federal Reserve Bank of San Francisco raised flags about the bank months before its downfall.

Barr, the Fed’s vice chair for supervision, is undertaking an internal review of its oversight and regulation of the bank, which will be released by May 1. In prepared remarks for the Senate hearing released Monday, Barr said, “SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk,” before then suffering a “devastating” run by its uninsured depositors.

Fed oversight of SVB needs to be thoroughly reviewed, Barr also said. He added that he was committed to ensure “we fully address what went wrong.”

While Barr’s inquiry is underway, Sens. Rick Scott, a Republican from Florida, and Democrat Elizabeth Warren, a Democrat from Massachusetts, backed a bill to create a Senate-confirmed watchdog for the Fed and the Consumer Financial Protection Bureau. Warren has also supported legislation to make the regional Fed banks subject to freedom-of-information rules.

Both Barr and Fed Chair Jerome H. Powell cleared the panel last year — for confirmation and re-confirmation, respectively — but the Fed may take heat from both sides now. Warren has been unsparing in her criticism, and Republicans including Bill Hagerty of Tennessee and Thom Tillis of North Carolina have shown they are ready and eager to find fault in bank failures during a Democratic administration.

Banking regulation

In 2018, Congress passed S. 2155, a bill that rolled back components of the 2010 Dodd-Frank law for small and midsize banks — including the need to stress-test some of them. The measure passed with bipartisan support, 67-31, and remains the last piece of major legislation to move through the Senate Banking Committee.

Since SVB was exempted from stricter regulatory standards under that 2018 bill, many critics have pointed to it as a potential cause of the blowup. Stress-testing SVB might have helped regulators to spot weaknesses, they argued. Warren introduced legislation this month to roll back some of the deregulation.

But advocates of the 2018 measure have stood by it, including two key moderate Democratic senators, Mark Warner of Virginia and Jon Tester of Montana. How they approach Tuesday’s hearing will offer insight into their willingness to bolster bank regulation.

FDIC coverage

Although the goal of this week’s hearings is primarily fact-finding, members are also likely to put down markers for legislative ideas percolating on Capitol Hill, including potential bipartisan action on FDIC deposit-insurance limits. Proposals include raising the insurance cap, eliminating the cap permanently or temporarily, and creating a different insurance category for businesses.

But Congress is a long way off from agreeing on a legislative response — and some members aren’t yet convinced that one is necessary.

“Too often as legislators we walk around and assume the answer is legislation,” Rep. Patrick T. McHenry — a North Carolina Republican and chair of the House Financial Services Committee — said at last week’s bankers’ conference. “We can’t legislate competence.”

And even if key players can agree on a solution, obstacles abound in a factious Congress. Ultraconservatives from Sen. Josh Hawley (R-Mo.) to the House Freedom Caucus are against raising FDIC limits, while progressives such as Warren have demanded that higher limits be tied to tighter regulations for banks — a tough sell in a GOP-led House and with a narrow Democratic majority in the Senate.