Signs explaining Federal Deposit Insurance Corporation (FDIC) and other banking policies on the counter of a bank in Westminster, Colorado November 3, 2009.Â
Rick Wilking | Reuters
The nation’s top bank regulators will face tough questions for the first time Tuesday about how Silicon Valley Bank and Signature Bank collapsed practically overnight earlier this month.
Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, Michael Barr, vice chair for supervision at the Federal Reserve and Nellie Liang, undersecretary for domestic finance at the Treasury Department will all testify before the Senate Banking Committee at a hearing on the recent bank failures starting at 10 a.m.
The regulators will also defend the decisions they made in the hours after the collapse, particularly the unanimous vote to invoke the systemic risk exception to the FDIC’s deposit limit, according to their written testimony released ahead of the hearing.
This allowed the FDIC to guarantee hundreds of billions of dollars in uninsured deposits at the banks, money that might otherwise have been wiped out.
Both Republicans and Democrats on the 29-member panel questioned whether these deposit guarantees amounted to a government bailout for rich account holders.
But according to Barr, regulators were more afraid that if they did not backstop deposits, what started as a contained shock could explode into a full-blown financial crisis.
“The prospect of uninsured depositors not being able to access their funds could prompt depositors to question the overall safety” of all U.S. banks, he said in his prepared remarks.
While the witnesses Tuesday agree that plenty of blame lies with the banks’ executives, they also say the collapse of SVB and Signature exposed gaps in how regulators measure risk.
“One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage,” the FDIC’s Gruenberg said in his written testimony. “Particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.”