WASHINGTON -- The failure of Silicon Valley Bank demonstrates a "textbook case of mismanagement," the Federal Reserve's top banking regulator is expected to tell Senate lawmakers on Tuesday, while acknowledging there may have been shortcomings in the central bank's oversight.
"SVB failed because the bank's management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors," said Michael Barr, the Fed's vice chairman for supervision, in written testimony released by the central bank.
Mr. Barr is set to appear on Capitol Hill as officials across Washington probe the collapses of SVB, the second-biggest bank failure in U.S. history, and Signature Bank in New York. Fearing their failures could spread contagion to the rest of the financial system, federal regulators this month used emergency powers to guarantee all depositors at those two banks would get their money back.
Mr. Barr is leading a review of the Fed's supervision of SVB, which is due by May. He said in the prepared remarks that the central bank is committed to ensuring it "fully accounts for any supervisory or regulatory failings, and that we fully address what went wrong."
Federal Deposit Insurance Corp. Chairman Martin Gruenberg, who will also appear before the Senate Banking Committee Tuesday, plans to say that his agency will produce by May 1 a report on its supervision of Signature and a separate review of the deposit insurance system.
The regulators' decision to guarantee all deposits at the two failed banks has prompted some banks and lawmakers to explore whether deposit insurance should be expanded beyond the $250,000 per depositor that is currently protected.
Mr. Gruenberg said the FDIC will consider policy options for changing deposit insurance levels, among other elements of the system.
Both regulators said in prepared remarks that the broader banking system is sound after the events of the past few weeks. They will be joined at the hearing and at one in the House Wednesday by Nellie Liang, a top Treasury official.
The FDIC announced early Monday that First Citizens BancShares Inc., one of the nation's largest regional banks, is acquiring large pieces of SVB more than two weeks after the lender's collapse sent tremors through the banking system. Regulators took control of Santa Clara, Calif.-based SVB on March 10.
Worries about American banks have centered on other regional lenders that are perceived to be at risk of deposit flight. Both SVB and Signature had large amounts of uninsured deposits. According to Mr. Gruenberg's prepared testimony, the 10 largest deposit accounts at SVB held $13.3 billion.
Mr. Gruenberg said that banks with large amounts of uninsured deposits face challenges, "particularly in today's environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels." He said outflows at banks that had faced deposit flight had slowed after the federal intervention for SVB's and Signature's depositors.
Losses to the government's deposit insurance fund from protecting deposits at SVB are expected to be roughly $20 billion, while losses tied to Signature will cost the fund about $2.5 billion, according to Mr. Gruenberg. The government will charge banks a fee to cover those losses.
Mr. Barr said in his prepared remarks that the Fed is considering whether its bank supervisors have the tools to mitigate threats they see to a firm's safety and soundness. He said it is also looking at whether "the culture, policies, and practices of the board and Reserve Banks support supervisors in effectively using these tools."
He also said the Fed is weighing whether a Trump-era rollback of financial rules allowed SVB to escape more stringent stress tests and other standards.
"We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure," he said.
The Fed is also assessing whether, if it had imposed stricter regulatory requirements, SVB would have had higher levels of capital and liquidity that would have prevented its failure or made it more resilient, Mr. Barr said. He said his review would be thorough and that his report would include supervisory assessments and exam material.
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