Key takeaways from first major Silicon Valley Bank collapse hearing

Key U.S. banking regulators testified before lawmakers on Tuesday in the first hearing after the spectacular collapse of Silicon Valley Bank that sparked panic about the financial system's health.

Why it matters: Officials faced tense questions about how SVB's troubles flew under the radar, eventually prompting extraordinary steps from regulators to backstop the banking sector.

Details: The Fed's top banking regulator Michael Barr, the FDIC's chairman Martin Gruenberg and the Treasury Department's under secretary for domestic finance Nellie Liang appeared before the Senate banking committee on Tuesday.

Here are key takeaways from the hearing.

Fed flagged problems at Silicon Valley Bank for months

In opening remarks, Barr acknowledged that supervisors at the Fed had pointed out risks to Silicon Valley Bank executives as early as 2021. The bank "waited too long to address its problems," Barr said.

• Weeks before the bank's collapse, the Fed highlighted risk management issues that would ultimately lead to SVB's downfall, Barr said.
• "Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank's vulnerability was not apparent until the unexpected bank run on March 9," Barr said.

Lawmakers say regulators were MIA

Senators from both parties who sit on the committee why the Fed — SVB's main regulator — didn't act more aggressively to push the bank to take action on risks flagged months earlier by supervisors.

• "Our regulators appear to have been asleep at the wheel," said South Carolina Sen. Tim Scott, the ranking Republican on the committee.
• Sen. Jon Tester (D-Mt.) said: "It looks to me like the regulators knew the problem, but nobody dropped the hammer."

Of note: For years, Republicans had been in favor of relaxing rules and oversight for mid-sized banks.

• Scott, however, said this episode did not warrant giving more power to regulators: "If you can't stay on mission and enforce the laws as they already are on the books, how can you ask Congress for more authority with a straight face?"

In response, Barr pointed back at Silicon Valley Bank, saying "its management failed to appropriately manage interest rate risk and liquidity risk."

• Barr and Gruenberg said they were examining fresh rules that could head off similar collapses in the future.

Senators also asked why the Fed hadn't appropriately probed for some of the problems that plagued Silicon Valley Bank, including the risk of the Fed's months-long campaign to raise interest rates swiftly to crush inflation.

• The Fed periodically conducts "stress tests" to examine the health of the nation's largest institutions. But Silicon Valley Bank was not subject to these exams.
• Even if it had been subject to those tests, Sen. John Kennedy (R-La.) said those tests didn't account for the scenario that helped bring down Silicon Valley Bank: rising interest rates.
• "It's like someone going for a test for COVID, and getting a test for cholera," Kennedy said.

Regulators defend move to backstop the banking system

The FDIC chair defended the government's decision to invoke the rare "systemic risk exception" after SVB's collapse, saying it allowed them to take huge steps to prevent problems from spreading across the banking sector.

• "There would have been a contagion, and I think we'd be in a worse situation today, with consequences for the actors in our economic system," FDIC's Gruenberg said.

Catch up quick: Silicon Valley Bank's collapse was the biggest in a string of recent bank collapses, including Signature Bank, a key bank for the crypto industry, and crypto-bank Silvergate.

What's next for the nation's deposit insurance program

The FDIC will release a report next month outlining, in part, new policies options related to deposit insurance coverage levels that are currently capped at $250,000, Gruenberg said.

• Gruenberg also told lawmakers that the FDIC's decision to cover all depositors at the failed institutions was "consequential" with "implications for the entire system."

Fresh details on Silicon Valley Bank's run of deposits

Barr said that the bank was anticipating $100 billion in deposits were set to "go out the door" the day the government rescued the institution.

• The day before, depositors yanked roughly $42 billion from the bank — a huge amount that outpaces any other bank run in U.S. history.
• The bank had a giant hole in its balance sheet as its bond investments had lost significant value, leaving them without adequate cash to cover those deposits fleeing at at unprecedented pace.

What's next: The officials will also appear before the House Financial Services committee on Wednesday.

Go deeper: Silicon Valley Bank: The big picture

Editor's note: This story has been updated with additional developments.