Who Crashed the Banks? Lawmakers Find Plenty of Suspects

Who’s to blame for the banking crisis? Maybe an easier question to answer is: who isn’t?

In hearings on Capitol Hill Tuesday, lawmakers, bank executives, and regulators dissected the recent spate of bank failures and pointed fingers at a host of possible culprits: bonuses for bank executives, the Trump-era relaxing of federal banking regulations, lax regulators, inflation, Joe Biden, social media, unprecedented circumstances, and even, plain old stupidity.

Bank executives testified before the Senate’s banking committee at the same time that federal regulators testified to the House of Representatives finance committee. Lawmakers used the hearings to probe how and why three medium-sized banks—Silicon Valley Bank, Signature Bank, and First Republic, have failed since March. 

The crisis began with SVB’s sudden collapse. The California bank, which specialized in serving the tech industry, was brought down by the fastest bank run in history, a social media-fueled panic in which depositors withdrew $42 billion over 10 hours—more than $1 million a second. 

Gregory W. Becker, former CEO of Silicon Valley Bank, Scott Shay, cofounder and chairman of Signature Bank, and Eric Howell, CEO of Signature Bank, defended their actions leading up to the crisis and faced scathing questions from Senators. 

By Becker’s account, the bank run that brought down his institution was unexpected, kicked off after depositors conflated SVB’s situation with that of Silvergate, an unrelated crypto-focused bank that had decided to wind down. 

“There were a series of unprecedented events that occurred,” Becker said.

Elizabeth Warren, a Democrat from Massachusetts and a longtime critic of banks, highlighted Congress’s 2018 rollback of the Dodd-Frank rules, which had been put in place to reduce bank risk in the wake of the Great Financial Crisis.

“The last time this committee received testimony from Mr. Becker, the CEO of Silicon Valley Bank, he was lobbying Congress to do away with the Dodd-Frank rules designed to protect our nation's banking system,” she said. “Unfortunately, too many people in Congress listened. And now here we are three bank collapses later, picking up the pieces of Mr. Becker's successful efforts at deregulation.”

Others focused on SVB’s heavy investment in long-term government-backed securities, which lost value because of the Federal Reserve’s campaign of anti-inflation interest rate hikes—a development that lawmakers said the bankers should have seen coming.

“You made a really stupid bet that went bad,” Senator John Kennedy, a Louisiana Republican, told Becker. “You put all your eggs in one basket.” 

Sherrod Brown, the Ohio Democrat who chairs the banking committee, blamed SVB’s bonus structure, which he said encouraged risk-taking by executives because they were tied to profits.

Montana Senator Steve Daines, a Republican, pointed to the role of inflation and blamed the Biden administration for stoking price increases with government spending. 

In separate testimony to the House finance committee, Federal Reserve Vice Chairman for Supervision Michael Barr said SVB mismanaged its interest rate risk. He also faulted regulators, including the Fed, for not recognizing how vulnerable the bank was, and for not pressing the bank’s leaders hard enough to fix “serious problems” they had discovered at the bank as early as 2021.

The aftermath of SVB’s failure may spur changes in how the government regulates the financial system, and who pays when things go wrong. For example, officials have floated changing the FDIC’s $250,000 limit on insured bank accounts. Warren touted a bipartisan bill she introduced in March that would seize bonuses from executives of failed banks. 

“They can lobby for weaker bank regulations,” Warren said. “They can load up their banks with risk, they can pay themselves tens of millions of dollars in bonuses and stock options,” Warren said during the hearing. “When the banks blow up, Mr. Becker and Mr. Shea get to keep all the money, and that is just plain wrong. And if we don't fix it, every CEO for these multibillion-dollar banks will keep right on loading up on risks and blowing up banks, and everybody else is going to have to pay for it.”