Federal Reserve Vice Chair for Supervision Michael S. Barr told senators that regulators warned Silicon Valley Bank of interest rate and liquidity risks, as Republicans and at least one Democrat seek to blame regulators for the bank’s failure. 

Barr, in testimony before the Senate Banking Committee on Tuesday, detailed warning signs and deficiencies that regulators found in the Santa Clara, Calif., bank in the year and a half leading up to its collapse in early March. The warnings are normally kept confidential between regulators and banks.

“This is a textbook case of bank mismanagement. The risks that they faced, interest rate risks and liquidity risks, those are bread-and-butter banking issues,” Barr said. “The firm was quite aware of those issues. It had been told by regulators. Investors were talking about problems with interest rate risks publicly. It didn’t take the actions necessary.”

The Federal Deposit Insurance Corporation took over SVB and Signature Bank of New York City this month after a run on the institutions. Federal regulators stepped in to guarantee all deposits at both institutions, including those higher than the $250,000 insurance cap.

SVB fell prey to rising interest rates that undermined the value of the bank’s investments in long-term Treasurys. As depositors concluded that the bank was in trouble, they began withdrawing their money, accelerating the bank’s demise. The FDIC said Sunday that First-Citizens Bank and Trust Co. of Raleigh, N.C., would take over SVB’s deposits and about $72 billion of its assets as of Monday. The assets were priced at a $16 billion discount, it said.

Regulators warned the bank in October and again in November last year of its exposure to interest rate risk and flagged it as a “matter requiring immediate attention,” Barr said. They warned SVB for more than a year of inadequate risk management, he said, including by downgrading the bank’s management rating from “fair” to “deficient” in summer 2022 and flagging deficiencies in SVB’s liquidity stress testing, contingency funding and liquidity risk management in late 2021.

Barr is overseeing the Fed’s review of what went wrong in the collapse of SVB and Signature Bank. His report is due out by May 1. 

“The report will include confidential supervisory information, including supervisory assessments and exam material, so that the public can make its own assessment,” Barr said. “Of course, we welcome and expect external reviews as well.”

Republicans and at least one Democrat expressed frustration that regulators knew about the risks faced by SVB but didn’t force the bank to address the issue before it failed. 

“It looks to me like the regulators knew the problem but nobody dropped the hammer,” said Sen. Jon Tester, a Democrat facing a tough reelection race in Montana next year. 

“We can have all the regulations on the books,” Tester said. “But yet for over a year — correct me if I’m wrong, Mr. Barr — for over a year, regulators were saying to this bank, ‘Straighten up and fly right,’ and they never did a damn thing about it.”

Sen. Kyrsten Sinema of Arizona, who has left the Democratic Party to become an independent, also criticized the Fed for failing to act earlier. She has faced criticism from Rep. Ruben Gallego, D-Ariz., who is running in the Democratic primary for Sinema’s seat, for her vote in favor of a 2018 law that eased capital requirements for midsize banks. 

Barr said bank management is responsible for fixing problems flagged by regulators but the regulators should have done more. 

“It’s ultimately, in the first instance, bank management’s responsibility to fix these problems. And they failed to do it,” he said. “We didn’t take enough action at the Federal Reserve. Supervisors didn’t take enough action. We’re going to be talking about that in our review.”

Ranking member Tim Scott, R-S.C., criticized Treasury Secretary Janet L. Yellen and Federal Reserve Chair Jerome Powell for sending deputies to testify before the committee rather than appearing themselves. Nellie Liang, Treasury undersecretary for domestic finance, testified on behalf of the department.

“It is hard to believe the Biden administration seriously is concerned about the failure that we’re seeing when they themselves are shielding the top official at the Department of Treasury,” Scott said. “Nor do we have Chair Powell here. Instead, we have the vice chair of supervision here to use our committee as a platform to talk about the wrongs under his supervision.”

Sen. John Kennedy, R-La., criticized the focus of the Fed’s stress tests conducted at banks in 2022, although SVB wasn’t subject to one. SVB wouldn’t have been subject to one until 2024 under the regulator’s rules. 

“Even if you had stress-tested Silicon Valley Bank in 2022, it wouldn’t have made any difference,” Kennedy said. “You stress-tested these 34 banks for falling GDP, spiking unemployment and defaults in commercial real estate.”

“But it’s like somebody going in for a test for COVID and getting a test for cholera,” Kennedy said. 

“I don’t know enough about either of those tests to know,” Barr said. 

Stress tests are not the primary way regulators identify interest rate risks, but rising rates have been incorporated into this year’s testing scenarios, Barr said. 

Meanwhile, Democrats pressed Barr and FDIC Chairman Martin Gruenberg to strengthen regulations on banks through rules rather than wait for action by Congress. 

“Each of you at this table has authority that you can exercise right now: strengthen rules for big banks to ensure that our banking system and our economy are safer,” said Sen. Elizabeth Warren, D-Mass. “I urge you to use that authority, and I urge my colleagues here in Congress to do our part to protect American families and small businesses from yet another crisis.”

In response to Warren’s questions, Barr said he expects to increase capital and liquidity standards for banks with more than $100 billion in assets.