Bank failure fallout is far from over, lawmakers say

Stocks were up Monday morning as the latest failures in the financial sector receded further in the market’s rearview mirror.

But lawmakers in both parties are saying additional congressional action on the collapse of Silicon Valley Bank — including a subpoena of former CEO Greg Becker — is necessary.

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“I certainly think the CEO and the leadership of SVB should be subpoenaed. If you look at their stock transactions, these guys offloaded a lot of worthless equity,” Sen. J.D. Vance (R-Ohio) told The Hill on Thursday before lawmakers headed out for two weeks of district work.

“They had to know it was worthless. They made off like bandits, but of course the American taxpayer got stuck with the bill,” he said.

“If we subpoena them, and I hope that we will subpoena them, I expect they’ll show up,” Vance said. “I suspect the SVB bailout and crisis is going to be a main focus in April and May.”

Why senators want to grill the former SVB chief

Senate Banking, Housing, and Urban Affairs Committee Chairman Sherrod Brown (D-Ohio) speaks with Sen. Tim Scott (R-S.C.).

Becker sold more than $3.5 million in SVB stock 11 days before his bank was shuttered by U.S. banking authorities, according to a Securities and Exchange Commission filing.

Two days later, Treasury officials announced that depositors at the bank would be bailed out by the Federal Deposit Insurance Corporation (FDIC) at levels well above the $250,000 insurance cap, in some cases into the billions of dollars.

U.S. authorities said they did this because they said the failure of SVB, along with the cryptocurrency-focused Signature Bank, presented a “systemic risk” to other U.S. banks that could lead to additional bank failures.

But Becker himself argued against the characterization of his bank as systemically important in 2015 in order to push back against Dodd-Frank regulations that were eventually rolled back in 2018.

Some Democrats and supporters of stricter bank rules believe the loosened regulations could have helped stave off SVB’s failure.

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Becker also argued it wasn’t SVB’s size that should exempt it from a systemic risk classification, but rather its business model and inherent risk profile.

He added that SVB had invested in “risk systems,” hired additional “highly skilled risk professionals” and set up an independent “risk committee” on its board of directors — none of which proved to be helpful in averting the bank’s eventual collapse.

“I think that Silicon Valley Bank is unique in the banking system,” Banking Committee member Sen. Thom Tillis (R-N.C.) told The Hill Thursday. “Their sheer size put out ripple effects, but I think we saw a lot of that stress play out the week after.”

‘Asleep at the switch’

Federal Reserve Vice Chairman For Supervision Michael Barr gives an opening statement during a Senate Banking, Housing, and Urban Affairs Committee hearing on March 28 to discuss the recent bank failures of Silicon Valley Bank and Signature Bank along with the federal response.

“I’m looking forward to the administration admitting they were completely asleep at the switch on supervisory and regulatory,” Tillis said.

Senators said they were looking forward to the results of an investigation into the failure of SVB and why regulators failed to prevent it, a probe that is being led by Federal Reserve Vice Chair for Supervision Michael Barr.

Heat on the Hill: House lawmakers roast regulators over failed banks

Sen. Tim Kaine (D-Va.) told The Hill he thought new legislation could be warranted.

“If we did one banking bill this year, we’ll only do one. We may not do one, but if we do one, we’ll only do one,” he said. “Let’s get the report and that report will point the way either toward administrative fixes or legislative fixes.”

Kaine added that Senate Banking Committee Chairman Sherrod Brown (D-Ohio) and ranking Republican Sen. Tim Scott (R-S.C.) “have a good working relationship. So let’s just get the report and then we’ll decide what to do.”

President Biden has said the FDIC needs to be able to punish the bosses of failed banks more severely under the law, calling for Congress to limit their pay, fine them and ban them from further work in the banking business.

The toll: FDIC spent $20 billion to handle Silicon Valley Bank collapse

“Joe Biden has asked for a bill to do clawbacks, and that’s exactly what Senator Hawley, Senator Braun, Senator Cortez-Masto and I have just been given,” Sen. Elizabeth Warren (D-Mass.) told reporters last week.

Warren also has a proposal with Tillis to increase the legislature’s power over the Federal Reserve, which as a central bank is supposed to be an independent monetary authority.

Her plan would allow the Banking Committee access to some of the Fed’s supervisory information.

“These reforms would strengthen congressional oversight of the Fed and other financial regulatory agencies, while still explicitly maintaining the Federal Reserve’s independence on monetary policy issues,” a write-up of her proposal reads.

Roadblocks in the House

Any such legislation could face a difficult road in the Republican-led House, where Financial Services Committee Chair Rep. Patrick McHenry (R-N.C.) has sounded a reluctant tone on new legislation following the collapses of SVB and Signature.

McHenry has received more than $275,000 from Signature Bank and has been leading a House inquiry into its failure.

McHenry reportedly attended a fundraiser thrown for him by Signature just weeks before the bank failed.

“Before we draw conclusions on regulations or changes to law, we need to establish the related facts,” McHenry said during a March 29 hearing of the Financial Services Committee on the bank failures.

Lawmakers doubt that the latest bank failures will force the banking industry toward more risk-averse behaviors, due to the incentive structures and the assumption established after the 2008 financial crisis that Congress will come to the rescue of failed financial businesses.

“If you become heavily levered, your return on equity does not change, but the volatility goes up,” Rep. Bill Foster (D-Ill.), who sits on the Financial Services Committee, told The Hill in an interview in December.

“And if you are a CEO who is compensated with asymmetric risk then that if you have a really profitable quarter you get a huge bonus, and if it all goes south and your firm disappears, you just retire to the Hamptons.”

“You have a rational incentive to lever up and get in as risky a position as possible,” he said.