Silicon Valley Bank's liquidity crisis and subsequent downfall sent waves of panic through the financial system in early March, setting off a chain reaction of chaos with which regional banks are still grappling.
Now, lawmakers are set to begin their investigation into what led to the second-largest and third-largest bank collapses in US history — and how to prevent something similar from happening again.
On Tuesday morning, members of the Senate Banking Committee will probe federal regulators: Martin Gruenberg, chairman of the board of directors of the Federal Deposit Insurance Corporation; Nellie Liang, under secretary for domestic finance at the US Treasury; and Michael Barr, vice chair for supervision at the Federal Reserve, about the tumultuous events that sent financial systems into a frenzy.
Tuesday's hearing doesn't begin until 10 a.m. ET, but all three federal regulators have already released their prepared testimony.
Here's some of what you can expect to hear from each panelist.
▸ In his prepared testimony ahead of the hearing, Gruenberg of the FDIC said that the failures of SVB and Signature Bank "demonstrate the implications that banks with assets over $100 billion can have for financial stability. The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk."
One preliminary lesson learned from the collapses, wrote Gruenberg, 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."
▸ In his testimony released on Monday, Barr, the Fed's vice chair for supervision, detailed how SVB leadership failed to effectively manage interest rate and liquidity risk.
SVB's failure is a "textbook case of mismanagement," Barr said in his remarks.
The Fed official pointed out that SVB's belated effort to fix its balance sheet only made matters worse.
"The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank's failure," said Barr, adding that there was "inadequate" risk management and internal controls.
▸ Under Secretary for Domestic Finance Liang's testimony echoed earlier speeches made by Treasury Secretary Janet Yellen. "As Secretary Yellen has said, we have used important tools to act quickly to prevent contagion. And they are tools we would use again if warranted to ensure that Americans' deposits are safe," she said.
Liang also added that this turmoil was very different from the financial crisis of 2008. "Back then, many financial institutions came under stress because they held low credit- quality assets. This was not at all the catalyst for recent events," she said.
"Our financial system is significantly stronger than it was 15 years ago. This is in large part due to post-crisis reforms for stronger capital and liquidity requirements."
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