When we started this legislative year, we anticipated that much of our time would be focused on public policy debates surrounding environmental, social and governance issues, such as climate-related financial risk disclosures and the financing of fossil fuel companies or gun manufacturers, a debate that is diametrically different depending on whether you find yourselves in a red or blue state. And then Silicon Valley Bank (SVB) failed.
What has been widely reported is that the bank had significant uninsured deposits and a high concentration of tech and venture capital firms as depositors. The tech industries recent economic challenges resulting in higher than usual withdrawals to fund operations caused the bank to sell high-quality liquid securities from their investment portfolio at a loss. The combination of certain bank customers urging their clients to withdraw funds, the ability to move money rapidly electronically, and panic fueled by social media resulted in a historic $42 billion in withdrawals from the bank in one single day.
While failures are never ideal, regulators have tools in place to resolve a failed bank. The Friday morning seizure of SVB and the FDIC’s opening of a bridge bank with all the functionality of a traditional bank first thing Monday morning is evidence of the systems in place and the expertise and experience of banking regulators.
Formal analyses on what happened are underway with a report by the Federal Reserve Board due on May 1 and a Congressionally requested report by the Government Accountability Office due in interim format on April 28. In the meantime, many within and outside the banking industry are scratching their heads and are similarly eager to see the reports. Interest rate risk, concentration risk, and liquidity risk are hardly new concepts and are in fact fundamental. The practice of shocking the balance sheet, understanding the timing of when assets and liabilities are re-pricing, and having a grasp on asset or liability sensitivity is common.
Since the Friday morning when SVB failed, the association has been actively engaged. We opened lines of communication immediately and checked in frequently with state and federal lawmakers and regulators. Coincidentally, we had a visit to Washington, D.C. a week later with our peers from the other state banking associations. This was a previously planned conference convened by the American Bankers Association. The conference provided an opportunity to hear from key decision-makers, including Treasury Secretary Yellen and the chairs and ranking members of the Congressional banking committees. CBA staff and bankers in attendance, led by association chair, George Leis, also had the opportunity to meet with members of the California Congressional delegation, including those that serve on the House Financial Services Committee.
When meeting with elected officials, we took the opportunity to address the situation head on and underscored the strength and resiliency of the banking industry. It was important that we be present, that we share factual information and refrain from speculation. We urged that policymakers gather and analyze the facts before proposing solutions, a message that seemed to resonate.
Congressional hearings on SVB commenced the last week of March with back-to-back hearings in the Senate Banking Committee and the House Financial Services Committee. These first two hearings included testimony from Michael Barr at the Federal Reserve, Martin Gruenberg at the FDIC and Nellie Liang at Treasury. This was the first in what will be a series of hearings. Stateside, the California Legislature will likely convene hearings as well, with the Assembly Banking and Finance Committee planning to hold a hearing on Monday, April 10.
No matter how robust the supervisory infrastructure is, or the adequacy of current state and federal laws, it is expected that we will see calls for new regulation and legislation. The association is prepared to engage with stakeholders for what we hope will be a thoughtful conversation. It’s our hope that the reaction will be tailored and focused on potential gaps and that an overreaction be avoided. Some policymakers have a particular agenda that pre-dated the failure of SVB. Unfortunately, the bank’s failure will feed their narrative even if the facts don’t.
As we have always done, we will look forward to sitting at the table with policymakers to discuss solutions that avoid taking a sledge hammer to the industry where a surgical approach is more sophisticated and appropriate. The banking industry remains strong and resilient. And, despite what happened with SVB, the banking industry will continue to play a vital role in supporting communities and the overall economy.