Failed bank executives explain collapse to lawmakers.

Former Bank Executives Blame Depositor Panic for Bank Failures

Former executives from Silicon Valley Bank and Signature Bank testified before the Senate on Tuesday, claiming that their institutions failed due to panic from depositors. The implosion of Silicon Valley Bank, where most account balances exceeded the FDIC-insured threshold, prompted the government-backed company to secure insured and uninsured accounts in early March to prevent additional bank runs. Signature Bank collapsed days later, while other regional financial institutions continued to struggle.

What Went Wrong?

Former Silicon Valley Bank CEO Greg Becker claimed that the firm was “adequately capitalized” before the sale of a portfolio that had diminished in value due to Federal Reserve actions to increase the target federal funds rate, which in turn raised interest rates across the economy. He added that withdrawals started as Silvergate Bank, a company that served cryptocurrency users, decided to “voluntarily wind down and liquidate,” inducing fears among Silicon Valley Bank depositors. However, the Federal Reserve published a report last month that concluded that the implosion of the bank was a “textbook case of mismanagement” as senior leadership “failed to manage basic interest rate and liquidity risk” and board members “failed to oversee senior leadership and hold them accountable.”

Former Signature Bank President Eric Howell insisted to lawmakers that his firm was “well-capitalized, solvent, and had sufficient borrowing capacity” before the FDIC seized control of the company. Former Signature Bank Chairman Scott Shay added that the volatility in the cryptocurrency sector likewise translated to panic among the company’s depositors and prompted the rapid withdrawals despite a “solid plan to continue in operation.”

Lawmakers Respond

Lawmakers referenced the analysis from the Federal Reserve as they contended that Becker and the other executives should return their executive compensation. Sen. Elizabeth Warren (D-MA) said she filed legislation that would confiscate payment from executives who “blow up their banks,” while Sen. Tim Scott (R-SC) noted that Silicon Valley Bank had several open risk management positions at the time of the company’s failure, asserting that managers were “more focused on chasing profitability than stability.”

President Joe Biden previously said that members of Congress should increase federal authority to “hold senior management accountable when their banks fail” or enter into the control of regulators. Current law allows the FDIC to prohibit bank executives from receiving new positions at other banks if they engage in “willful or continuing disregard for the safety and soundness” of their institution; administration officials called on lawmakers to “strengthen this tool by lowering the legal standard for imposing this prohibition,” as well as expand authorization for the FDIC to collect fines “when their actions contribute to the failure of their firms.”

What’s Next?

Other regional banks, such as PacWest and Western Alliance, have witnessed significant turmoil in the stock market and increased withdrawal levels in recent weeks. Nearly half of Americans are presently concerned about the security of their bank deposits, according to a recent survey from Gallup, even as the FDIC will continue backing small accounts.

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