Banks face regulation crackdown after crisis

Markets fell Tuesday as investors digested the first of several expected Congressional hearings on the banking tumult.

The Senate Banking Committee on Tuesday probed key federal regulators on the events that led to the collapse of Silicon Valley Bank and Signature Bank. Regulators revealed that customers of SVB tried to withdraw $100 billion from the bank the day it failed, and that Federal Reserve supervisors gave the bank low ratings on its strength and stability before its collapse.

Regional bank stocks slipped, cutting short their Monday rally. The SPDR S&P Regional Banking ETF, which tracks a number of small and midsize bank stocks, fell about 0.4%.

But shares of First Citizens Bank, which bought SVB's remaining assets, deposits and loans, rose 2.3%. Shares of New York Community Bank, whose subsidiary Flagstar Bank bought Signature Bank, climbed 1.8%.

Shares of AMC Entertainment, the world's largest movie theater chain — and a meme stock — surged 13.2% and saw a brief trading halt on reports that Amazon is looking to purchase the ailing company.

Investors also parsed through fresh data on the state of the economy. Confidence in the US economy grew in March despite the turmoil in the financial sector, according to the Conference Board. A survey from the Federal Reserve Bank of New York revealed that Americans expect home prices to continue swelling over the next year.

The Dow fell 37 points, or 0.1%.

The S&P 500 shed about 0.2%.

The Nasdaq Composite lost about 0.5%.

Republican Senators repeatedly insinuated on Tuesday that the recent US banking turmoil came as a result of the Federal Reserve's focus on climate change.

The Federal Reserve announced in September that the six largest banks in the United States would participate in a voluntary pilot program to test what effects disastrous climate change scenarios could have on their bottom lines.

During Tuesday's hearing, some Republican lawmakers appeared to blame the Fed's focus on that program and on addressing climate change in general for a lack of regulatory banking oversight.

In his opening statement, Republican Senator Tim Scott, the ranking member of the banking committee, called the Fed's focus on climate change a waste of time.

"The Fed should focus on its mission and not the climate arena. This is a waste of time, attention and manpower," he said. "All things that could have gone into bank supervision."

Republican Senator Steve Daines of Montana said President Joe Biden's stimulus plan contributed to the downfall of Silicon Valley Bank by failing "to prioritize clear and present risks of the inflationary environment, rising interest rates and what they would do to bond values," and "instead opting to focus on climate change."

Daines also accused the Federal Reserve Bank of San Francisco of prioritizing addressing climate change over the risks presented by higher interest rates.

"Senator, I've been focused on risk throughout the system, both short-term and long-term risks," replied Michael Barr, the Fed's vice chair for supervision. "Interest rate risk is a bread and butter issue in banking. It's what our supervisors do all the time."

In an interview with Montana Public Radio in 2014, Daines said that "the jury’s still out" on whether climate change is real. His campaigns have received more than $600,000 in donations from the oil and gas industry.

Fed Chair Jerome Powell has said repeatedly that the central bank would not become a “climate policymaker.”

“Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates,” Powell said in January. “In my view, the Fed does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision. The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.”

Democratic Sen. Jon Tester of Montana demanded the Federal Reserve get to the bottom of what went wrong leading up to the implosion of Silicon Valley Bank.

“It better be fixed,” Tester told Michael Barr, the vice chair for supervision at the Federal Reserve. 

Barr, who was nominated by President Joe Biden to the top bank oversight role at the Fed, has promised to publicly release a review on the Silicon Valley Bank failure by May 1. 

“If it’s the regulator’s fault, it better be fixed. If it’s the regulation’s fault, it better be fixed,” Tester said. “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.’”

Tester argued the problems at the bank are obvious. 

“I am not a banker. I ain’t even close to being a banker. I’m a dirt farmer,” Tester said, adding that you don’t need to be an accountant to “figure out what the hell was going on here.”

Tester took issue with how bank examiners were aware of brewing problems and management deficiencies at Silicon Valley Bank long before the failure earlier this month. 

“For over a year, regulators were saying to this bank, ‘Straighten up and fly right.’ And they never did a damn thing about it,” Tester said. “And the regulators didn’t make it so damn miserable, which to my understanding regulators are pretty good at that when they want to be, that these folks would adjust their business plan to take care of the risks that were in their bank.”

Barr responded that ultimately its bank management’s responsibility to fix problems that regulators flagged – but they failed to do that.

Still, Barr said officials will discuss whether Fed supervisors also failed to take enough action here. 

“We’re going to be talking about that in our review and we expect to be held accountable for it,” Barr said. 

Democratic Senator Elizabeth Warren of Massachusetts grilled federal regulators on their commitment to tightening banking rules before the Senate Banking Committee on Tuesday. 

"Executives at SVB and Signature [Bank] took wild risks and must be held accountable for exploding their banks," Warren said. "But let's be clear, these collapses also represent a massive failure in supervision over our nation's banks."

All three federal regulators called to testify agreed with Warren that the government needs to strengthen the rules for banks to help prevent future bank collapses.

"I anticipate the need to strengthen capital and liquidity standards for firms over $100 billion," said Michael Barr, the Federal Reserve's vice chair for supervision.

Silicon Valley Bank and Signature Bank executives made out pretty well last year.

Now, critics want to claw some of that money back.

At Tuesday's Senate hearing on the banking crisis, both Michael Barr, the Federal Reserve's vice chair for supervision, and Federal Deposit Insurance Corporation Chair Martin Gruenberg confirmed that they were considering serious action against the people who ran the banks.

What's happening: Employees of SVB received bonuses for work done in 2022 just hours before the bank collapsed.

Recent Securities and Exchange Commission filings also show that former SVB CEO Greg Becker sold more than $2 million in bank stocks in late February and $1.1 million in stocks in January, ahead of the bank's failure.

Becker took home about $10 million in compensation last year. Joseph DePaolo, the former CEO of Signature Bank received about $8.6 million.

Both the FDIC and Federal Reserve have the authority to claw some of that money back and further penalize bank executives.

"The board does have authority to pursue actions against individuals who engage in violations of the law, who engage in unsafe or unsound practices who have engaged in breaches of fiduciary duty," said Barr.

"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," he said. Potential consequences include a prohibition from banking, civil money penalties, or the payment of restitution.

FDIC chair Gruenberg said that his agency is already conducting investigations into the conduct of board members, executives and other affiliated parties of the failed banks.

The Federal Reserve received bids for Silicon Valley Bank the Sunday after its collapse, Martin Gruenberg, chairman of the board of directors of the FDIC, testified before Congressional members Tuesday.

"One wasn't valid because it had not been approved by the board of the bank. And the other, after we evaluated it, indicated that it was more expensive than a liquidation of the institution would've been to the FDIC," Gruenberg said. 

The FDIC said March 19 that it sold Signature Bank to Flagstar Bank, a subsidiary of New York Community Bank. A week later, the FDIC announced that First Citizens Bank bought what's left of Silicon Valley Bank.

SVB collapsed March 10 after the bank announced about 48 hours before that it sold securities at a loss and would sell $2.25 billion in new shares to raise capital. That triggered a bank run as prominent key venture firm and figures told depositors to withdraw their money.

"A total of $100 billion [of deposits] was scheduled to go out the door that day. The bank did not have enough collateral to meet that," said Michael Barr, vice chair for supervision at the Federal Reserve.

Panicked customers attempted to withdraw a staggering $100 billion from Silicon Valley Bank on the day the tech lender was shut down by regulators, a top US regulator said Tuesday.

The disclosure underscores the enormity of the bank run at Silicon Valley Bank as it became the second-largest bank failure in American history.

Officials have previously detailed that customers successfully pulled $42 billion from Silicon Valley Bank on March 9, the day before it was shut.

Michael Barr, vice chair for supervision at the Federal Reserve, told lawmakers on Tuesday that Fed staff worked with Silicon Valley Bank that afternoon and evening and “through the night” to try to find enough collateral to allow it to borrow from the central bank through the discount window.

“On Friday morning it appeared it might be possible to meet deposit outflows that was expected,” Barr said at the Senate Banking Committee hearing.

But then SVB executives told the Fed the expected deposit outflows would “vastly” surpass what was anticipated, Barr said.

“A total of $100 billion was scheduled to go out the door that day,” Barr said. “The bank did not have enough collateral to meet that. And therefore they were not able to actually meet their obligations to pay depositors over the course of that day and they were shut down.”

Americans expect home prices to continue to rise over the next year, according to a consumer expectation survey on housing from the Federal Reserve Bank of New York. But, they expect prices to rise by the smallest amount since the survey began in 2014.

On average, respondents to the survey said they expect home prices would rise 2.6% over the next year. That's lower than last year's expected growth of 7% in 2022.

This anticipated decline tracks with data from the core Survey of Consumer Expectations, which shows that home price growth expectations declined sharply between May 2022 and November 2022, when mortgage rates surged.

Households expect mortgage rates to go even higher this year, according to the survey. According to respondents, households now expect mortgage rates to rise to 8.4% a year from now and 8.8% in three years' time.

Consumers expect rent to fall slightly, but the survey reveals people anticipate rent will remain high by historical standards and in comparison to home price growth expectations.

On average, households expect the cost of rent to increase 8.2% over the next year. That is down from the expected 11.5% increase reflected in last year's survey. 

Renters reported a small increase in their likelihood of owning a home in the future. The figure rose from 43.3% in 2022 to 44.4% this year. Still, this remains well below the historical norm between 2015 and 2021, when it was generally over 50%.

Michael Barr, the Federal Reserve's vice chair for supervision, said Tuesday during the Senate hearing on the bank crisis that Federal Reserve supervisors gave Silicon Valley Bank a low rating before its collapse earlier this month.

Regulators use a scale known as CAMELS to determine a bank's strength and the likelihood it could struggle in a difficult environment.

"The firm was rated a 3 in the CAMELS scale, which is not well managed. And at the holding company level, it was rated 'deficient,' which is also clearly not well managed," Barr said.

The components of the CAMELS rating system include capital adequacy, asset quality, management, earnings components, risk of running low on cash and sensitivity to market risk. The ratings range from one to five, running from the best to worst rating.

"Fundamentally, the bank failed because its management failed to appropriately address clear interest rate risk and clear liquidity risk. That interest rate risk and liquidity risk was cited, was highlighted by the supervisors of the firm beginning in November of 2021," Barr said. "The Federal Reserve Bank brought forward these problems to the bank, and they failed to address them in a timely way."