The US Senate Banking Committee held a hearing on March 28 on the regulatory response to recent bank failures. Officials from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury testified. FDIC Chairman Martin Gruenberg discussed the causes of the Silicon Valley Bank (SVB) and Signature Bank bankruptcies, including the role of digital assets and the agency's responses to the crisis.
High levels of uninsured deposits and rapid growth were common factors in bank collapses in March, Gruenberg said. Gruenberg's narrative began with the Silvergate Bank shutdown focused on digital assetsannounced on March 8, although that story began with the bankruptcy of FTX.
FTX accounted for less than 10% of Silvergate Bank's total deposits, but the bank lost 68% of its deposits following the FTX bankruptcy, setting off a fatal chain of events for the bank. Gruenberg said:
โThe problems experienced by Silvergate Bank demonstrated how traditional banking risks, [โฆ] When not handled properly, it could combine to lead to a bad result."
The FDIC was informed of the run on SVB on the afternoon of Thursday, March 9. SVB closed on March 10 and the FDIC worked with the bank throughout the weekend, managing to reopen the bridge bank the following Monday. Gruenberg pointed out that, like Silvergate Bank, SVB had concentrated its activities in a single sector: venture capital firms.
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Signature Bank was more diversified than Silvergate Bank or SVB. That was partly due to the bank's decision to reduce its exposure to digital assets after the FTX bankruptcy and media scrutiny over the bank's ties to the cryptocurrency exchange. The bank received more negative FTX-related attention in February, when was sued for allegedly facilitating Mix of FTX accounts.
Signature Bank's deposit outflows began on March 9 and peaked the following day, Friday, with approximately 20% of deposits withdrawn within hours. Management failed to provide accurate financial data and the situation deteriorated:
โResolving the negative balance required a prolonged joint effort between Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funds from the Federal Reserve Discount Window to cover negative outflows.โ
"This was accomplished with minutes to spare before the Federal Reserve wire room closed," Gruenberg added.
Gruenberg noted that Silvergate Bank and Signature Bank used digital platforms that allowed for 24-hour transactions. They were โthe only two known platforms of this type within US insured institutions.โ
Senator Warren and FDIC Chairman Martin Gruenberg exchange a few words before beginning today's regulatory oversight hearing, which begins now. Follow along!! pic.twitter.com/Tzw14NH3Os
โBrendan Pedersen (@BrendanPedersen) March 28, 2023
Gruenberg gave a preliminary estimate of $22.5 billion for the cost of the Deposit Insurance Fund to resolve the losses at SVB and Signature Bank. He added, echoing several government officials in recent days, that:
"The state of the US financial system remains strong despite recent events."
FDIC to publish a full report on the deposit insurance system; The FDIC's chief risk officer will publish a report on the corporation's supervision of Signature Bank by May 1. In addition, the FDIC will issue a proposal on the new special assessment rulemaking that month.
The other speakers in the audience gave briefer testimony. Under Secretary of the Treasury for Domestic Finance Nellie Liang described how the Treasury engaged with the FDIC and the Federal Reserve during bank failures. Fed Vice Chairman of Supervision Michael S. Barr discussed in rather technical terms, the failure of SVB and the subsequent measures taken by the government.
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