Fed’s Barr: Regulators to Ensure ‘All Deposits’ Are Safe

The Federal Reserve’s top regulatory official will tell Congress regulators are committed to ensuring all U.S. bank deposits are safe and are prepared to use their tools for any size institution if needed to protect the system.

In prepared testimony, Fed Vice Chair for Supervision Michael Barr added that the banking system is “strong and resilient.” But he also said the Fed is reviewing its actions leading up to the collapse of Silicon Valley Bank and how to tighten rules on banks going forward.

Barr said SVB’s collapse was a “textbook case of mismanagement,” citing the firm’s concentrated business model, exceedingly fast growth, failure to manage its interest rate risk, and reliance on uninsured deposits.

Barr said supervisors for the Fed, which was the bank’s primary regulator, found several deficiencies with the bank in 2021 and 2022, and ultimately imposed restrictions on its growth. Supervisors told bank senior management in October 2022 of its concern with the bank’s interest rate risk profile, Barr said.

He added Fed leaders in Washington were briefed on the impact of rising interest rate on some banks’ financials, and SVB was highlighted. But, he noted, the full extent of the bank’s weakness was not apparent until the March 9 bank run, and it was up to management to address underlying issues.

“It is not the job of supervisors to fix the issues identified; it is the job of the bank’s senior management and board of directors to fix its problems,” his testimony states.

The Fed is undertaking an internal review of its supervision of the bank, and Barr said he welcomes external reviews as well.

On regulation, Barr said the Fed is looking into whether SVB would have better managed its risk if it had still faced stricter oversight, as well as higher capital and liquidity requirements. Banks between $100 billion and $250 billion saw their scrutiny relaxed as part of a 2018 bank deregulation bill.

Going forward, Barr said the Fed plans to propose a long-term debt requirement for larger regional banks to give them a bigger capital cushion. He will also push to enhance the Fed’s annual stress test of big bank finances, and how to tweak liquidity rules to improve resiliency in the financial system.