Senators question Powell about Fed supervision of SVB

Bipartisan senators have sent a letter to Federal Reserve Chairman Jerome Powell raising doubts about the ability of the central bank to exercise its full legal authority in overseeing Silicon Valley Bank and other mid-sized financial institutions.

‍

Five of the lawmakers are members of the Senate Banking Committee, including Bob Menendez, a New Jersey Democrat, and Mike Rounds, a South Dakota Republican who are both members of the Senate Banking Committee. 

‍

This letter, which a copy of has been obtained by Bloomberg, asks whether the Fed used its powers under federal law to apply "enhanced supervision and prudential standards" to Silicon Valley Bank or any other bank that has between $100 billion and $250 billion in assets in order to apply enhanced supervision and prudential standards.

‍

As it is defined in the law, the Fed may do so in order “to prevent or mitigate risks to the financial stability” of the US, as well as “to promote the safety and soundness of the bank.”

‍

A letter sent by the senators on Monday requested that answers be provided by the 10th of April. 

‍

This kind of evaluation would have required SVB to adhere to stricter regulations than the biggest banks, including higher capital and liquidity requirements as well as yearly stress tests. SVB revealed in its financial records that the company had acquired assets totaling $211.79 billion before its failure earlier this month, comfortably within the statutory limit.

‍

It is the question that points to an important issue in the reform legislation passed in 2018 that directed regulators to tailor their supervision of banks according to their size in accordance with the law. 

‍

The law raised the asset threshold from $50 billion to $250 billion at which heightened prudential criteria apply. However, it gave regulators discretion over when a bank reached the $100 billion level. In practice, the bill granted authorities the power to increase supervision of less secure banks.

‍

Tuesday is the first hearing the Banking Committee has had since SVB and Signature Bank failed. Together with Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, and Nellie Liang, undersecretary of the Treasury for domestic finance, the Fed vice chairman for supervision, is slated to testify.

‍

In their letter, the lawmakers asked the central bank whether it had ever used its authority to apply stricter oversight standards to SVB or to any other midsize bank within the country. What happened with SVB is a puzzle in itself, and the answer will help us figure out what went wrong and why. Several Democrats have claimed that the current turmoil in the banking system is primarily due to a change in legislation that took place in 2018, but others have suggested that it is mainly due to an apparent failure by the regulators of banks.

‍

Additionally, three other senators signed the letter, including Democrat Catherine Cortez Masto of Nevada, Republican Thom Tillis of North Carolina, and Democrat Cynthia Lummis of Wyoming, all of whom are Democrats.