Republican Louisiana Sen. John Kennedy blamed regulators for not examining Silicon Valley Bank (SVB) before its collapse.
Regulators shut down SVB and Signature Bank after its stock plunged in early March. Kennedy questioned Federal Reserve Vice Chair Michael Barr on his agency’s efforts to examine and regulate the banks prior to the collapse during Tuesday’s Banking, Housing and Urban Affairs hearing.
Kennedy first confronted Barr on the agency not having stress tested Silicon Valley Bank. The test assesses whether banks are “sufficiently capitalized to absorb losses during stressful conditions” while still having the ability to fulfill obligations to creditors. The Federal Reserve stress tested 34 banks in 2022.
“You didn’t test Silicon Valley Bank,” Kennedy said.
“We did not apply a stress test to Silicon Valley Bank,” he said. “It was of course using its own stress test.”
“Did you have the authority to do it?” the senator asked.
“Under our existing regulations, no. We would have to change our regulations to have that authority,” Barr answered.
Kennedy pointed to an amendment to the 2018 Dodd-Frank Wall Street reform law, which exempted many banks from the law enacted to prevent another financial crisis. Many critics accused the amendment of allowing the collapse of the two banks due to a lift in regulations.
The senator argued that the federal government did in fact give the Federal Reserve the authority to stress test Silicon Valley Bank. Barr said the agency could have changed the regulations under that law.
“But you didn’t, did you?” Kennedy argued.
“The Federal Reserve did not do that,” Barr said.
“If you had stress tested Silicon Valley Bank in 2022, it wouldn’t have made any difference, would it?” Kennedy said.
“I don’t know the answer to that question,” Barr said.
Kennedy said the Federal Reserve stress tested for the “wrong thing” since the agency should have examined inflation, high interest rate and loss of value in government bonds. Barr agreed, and argued that the agency does not use a stress test for interest rate value.
“It’s like somebody going in for a test for COVID and getting a test for cholera, isn’t it?” Kennedy said.
“I don’t know enough about either of those tests to know,” Barr answered.
“Well, they’re different,” the senator said. “So all this business about the amendment to Dodd-Frank kept them from stress testing, the way I see it, you chose not to stress test and if you had stress tested Silicon Valley Bank, you wouldn’t have caught the problem.”
Kennedy argued the Federal Reserve had knowledge that Silicon Valley Bank held too many funds in interest rates and bonds. Barr said the agency knew the bank had interest rate risk, but it did not anticipate the collapse.
He then argued that the agency cited the problems and required them to take action on these issues after Kennedy accused it of “doing nothing” to prevent the crisis.