Sen. Elizabeth Warren, D-MA, is seeking answers from Federal Reserve Chair Jerome Powell, asserting the central bank failed to hold Silicon Valley Bank’s executives accountable for its 2023 collapse and failing to complete any rulemaking to prevent a future collapse.
In a letter sent to Powell on Monday – the second anniversary of SVB’s failure – Warren requested information on the Fed’s efforts to investigate SVB’s executives.
“These executives drove the bank into the ground, requiring extraordinary government intervention and costly support to stave off another catastrophic banking crisis that would have harmed working families,” wrote Warren, the ranking member of the Senate Banking Committee. “But the Federal Reserve Board has not exercised its clear enforcement authorities against the individuals that egregiously violated banking laws and regulations.”
The Federal Deposit Insurance Corp. sued 17 former executives and board directors of SVB in January, alleging “gross negligence” and breach of fiduciary duty before the agency stepped in as the bank’s receiver.
SVB tripled in size from 2018 to the end of 2021, though the banking sector grew 29%, Warren noted. SVB’s assets grew from less than $60 billion at the end of 2019 to $209 billion at the end of 2022 with around 94% of the bank’s deposits uninsured and highly concentrated in venture capital-backed technology and life science companies – “a toxic mix,” the senator wrote.
The management team allegedly failed to manage interest rate and liquidity risks during the two years before the bank’s collapse in pursuit of short-term profits.
Warren slammed Powell for failing to finish a rulemaking regarding compensation as required by the Dodd-Frank Act. Last May, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the FDIC proposed a joint rule to curb incentive-based compensation arrangements. The FDIC, however, backtracked last week, withdrawing authority for staff to publish the proposed rule in the Federal Register.
For the rule to become effective, it must be proposed and adopted by the Fed, the OCC, the FDIC, the FHFA, the Securities and Exchange Commission and the National Credit Union Administration.
The Fed’s former vice chair for supervision, Michael Barr, has said the Fed is “committed to following the law,” but the board believes “we need to conduct some further analysis before deciding what steps to take.”
“This is an abdication of your responsibility to maintain the safety and soundness of the nation’s banking system and an invite for future mismanagement by the next generation of wealthy bank executives,” Warren said.
Warren said the Fed has the power to hold executives financially accountable through civil money penalties for unsafe practices and legal violations and ban executives from the banking industry if their actions cause financial loss and involve personal dishonesty or show willful disregard for a bank's safety.
Despite evidence from the Fed’s preliminary review and the FDIC lawsuit, the central bank has not yet exercised these authorities against the executives of the failed bank, Warren said.
“It is not too late for you to act to hold these irresponsible executives accountable, and I ask that you do so without delay,” she said.
Warren grilled Powell on whether the Fed has concluded its probe and, if so, why the central bank hasn’t imposed civil money penalties on SVB executives or banned them from the banking industry. If the investigation is ongoing, she asked Powell when the expected completion date is.
She asked if it is an unsafe and unsound practice for bank executives to manipulate risk model assumptions, remove hedges on securities portfolios to boost short-term profits, and approve dividends when the bank is in a vulnerable position – all noted as findings from the FDIC investigation.
Additionally, she demanded a list of the rulemakings the Fed has completed either individually or with other regulators to address the weaknesses of the regulatory framework.
Warren wants Powell to answer the questions by March 24.
Senate Banking Committee Chair Tim Scott, R-SC, has also pressed Powell for not firing any employee in relation to the supervisory failure that led to SVB’s collapse. Powell, however, said the problems were systemic and could not be attributed to any staff.
“It wasn’t actually fair to the employees to say you violated our practices in some way. That wasn’t really what happened,” Powell said at a Senate Banking Committee hearing in February. “What happened was a lot of focus on process and on governance and controls, and not enough focus on basic bread and butter banking: credit risk, liquidity risk, interest rate risk, things like that.”
