The nation’s top bank regulators faced tough questions from Congress for the first time Tuesday about how Silicon Valley Bank and Signature Bank collapsed practically overnight earlier this month.
The regulators defended decisions they made both before and after the collapse of SVB, particularly their unanimous vote to invoke the systemic risk exception to the FDIC’s deposit limit.
Bank stocks turned negative following the hearing before the Senate Banking Committee, potentially spooked by the three top regulators each saying they favored more stringent rules for banks with more than $100 billion in assets. The SPDR S&P Regional Banking ETF fell 1% in afternoon trading.
At times, the hearing was contentious. Committee Chair Sen. Sherrod Brown, D-Ohio, accused regulators of having “dropped the ball” because they didn’t see the the ballooning risk that weakened SVB before its ultimate collapse.
Michael Barr, vice chair for supervision at the Federal Reserve, pushed back on his contention.
“Fundamentally the bank failed because its management failed to appropriately address clear interest rate risks and clear liquidity risks,” he said.
Sen. Elizabeth Warren, D-Mass., pressed all three regulators about their views of stricter banking rules for mid-sized banks. Barr, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, undersecretary for domestic finance at the Treasury Department, all said they supported more banking rules.
“It may be tempting to look at all this and say, we don’t need new rules, that the real problem was these arrogant executives,” said Brown. “But there will always be arrogant executives. That’s exactly why we need strong rules.”
Regulators said more rules are not all that is needed to prevent the next SVB or Signature Bank.
“We must evolve our understanding of banking in light of changing technologies and emerging risks,” said Barr.
“To that end, we are analyzing what recent events have taught us about banking, customer behavior, social media, concentrated and novel business models, rapid growth, deposit runs, interest rate risk, and other factors… And for how we think about financial stability,” he added.
The FDIC’s Gruenberg said regulators need to reassess how they look at uninsured deposits when calculating a bank’s risk profile.
“One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, 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.
Tuesday’s hearing was the first of two congressional committees that will hear testimony from Gruenberg, Liang and Barr this week. The second hearing will be Wednesday at 10 a.m. before the House Financial Services Committee.
This article was originally published by CNBC.