Bank stocks were mixed Tuesday as some of the nation's top regulators testified before the Senate Banking Committee. Top officials from the Federal Reserve, Federal Deposit Insurance Corp. and Treasury Department fielded questions regarding the collapse of Silicon Valley Bank and Signature Bank. Meanwhile, First Republic Bank is no longer pursuing a sale, Fox Business reported late Tuesday.
Fed Vice Chairman for Supervision Michael Barr, FDIC Chairman Martin Gruenberg and Nellie Liang, Treasury undersecretary for domestic finance, all testified. The Senate Banking Committee hearing kicked off Tuesday at 10 a.m. ET. Regulators will testify before the House Financial Services Committee on Wednesday.
SVB Senate Hearing
As institutions experienced stress following the SVB and Signature Bank failures, "serious concerns arose about a broader economic spillover from these failures," Gruenberg said in his opening remarks.
The FDIC, Fed and Treasury Secretary consulted with the president and determined the FDIC should use emergency systemic risk authorities under the Federal Deposit Insurance Act.
The FDIC guaranteed all deposits at the failed banks, and the Treasury created a new lending facility to provide cash for banks suffering rushes of withdrawals, according to Liang. She said the moves helped "stabilize deposits throughout the country and provided depositors with confidence that their funds are safe."
Without these actions, the contagion would have been worse and bank runs would have been much more serious, Gruenberg and Liang concurred during questioning.
"It is worth noting that these two institutions were allowed to fail," Gruenberg said, referencing SVB and Signature Bank. "Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed." And the FDIC launched investigations into executive misconduct.
Barr acknowledged that the Fed did not stress-test Silicon Valley Bank in 2022.
"Our banking system is sound and resilient, with strong capital and liquidity," Barr said in his prepared remarks. "The Federal Reserve, working with the Treasury Department and Federal Deposit Insurance Corporation, took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system."
Silicon Valley Bank Was A 'Textbook Case Of Mismanagement'
"SVB's failure is a textbook case of mismanagement," Barr said in his prepared remarks. He said that Silicon Valley Bank's concentrated business model grew too quickly, with assets tripling in size between 2019 and 2022. Supervisors began sending warnings of deficiencies in governance and controls in late 2021.
"Fundamentally, the bank failed because its management failed to appropriately address clear interest-rate risk and clear liquidity risk," Barr testified. He criticized SVB for lacking a chief risk officer and failing to prepare for rising interest rates, which caused a decline in asset values.
"The bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours," Barr said.
Supervisors rated the bank at a "very low rating" prior to the bank run, Barr said during questioning.
Several Senators on the committee blamed Fed and FDIC oversight for the bank failures, with republicans suggesting regulators were concerned with other policy issues. "Our regulators appear to have been aleep at the wheel," Ranking Member Senator Tim Scott (R-S.C.) said during the hearing.
Additional Bank Oversight
The Federal Reserve plans to review stress-testing requirements for smaller banks, such as Silicon Valley Bank. Meanwhile, the FDIC will release a review of the bank failures and the deposit insurance system by May 1. The report will include policy recommendations for deposit insurance coverage levels, excess deposit insurance and implications for risk-based pricing.
The Fed and FDIC plan to use their available authority to pursue clawbacks and recoup executive compensation.
Sen. Sherrod Brown, D-Ohio, said he will introduce legislation for greater penalties against bank executives to hold them accountable for bank failures and risky investments.
Gruenberg and Barr welcomed independent reviews into the Fed's actions and supervision.
Barr, Gruenberg and Liang all agreed that regulations need to be strengthened to prevent these types of failures. Barr said there may need to be greater capital and liquidity requirements for banks with over $100 billion in assets.
First Republic No Longer For Sale
First Republic Bank, among the most embattled regional banks, is no longer for sale, Fox Business reported late Tuesday. Shares inched lower after hours Tuesday following the news. FRC stock pared losses to close down 2.45% on the day, dropping nearly 5% prior to the announcement. First Republic stock jumped nearly 12% Monday following weekend reports that officials are considering expansions to the Fed's liquidity offerings, with an eye to helping First Republic.
Bank Stocks
First Citizens rose 2.3% Tuesday. Shares rocketed 53% Tuesday after First Citizens purchased all the deposits and loans for Silicon Valley Bank.
Silvergate Capital jumped 6.6% Tuesday. Shares bolted 14% Monday after accepting a $161 million loan repayment from MicroStrategy.
The Financial Select SPDR ETF and SPDR S&P Regional Banking ETF were both flat Tuesday following the hearings.
Large banks JPMorgan, Morgan Stanley crept higher while Goldman Sachs traded sideways. Bank of America declined 1.3%.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
