```

[Senate Hearing 118-447]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 118-447

 OVERSIGHT OF FINANCIAL REGULATORS: FINANCIAL STABILITY, SUPERVISION, 
      AND CONSUMER PROTECTION IN THE WAKE OF RECENT BANK FAILURES

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                                   ON

            EXAMINING THE EFFECT OF THE RECENT BANK FAILURES
                               __________

                              MAY 18, 2023
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Available at: https: //www.govinfo.gov /
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
57-144 PDF                WASHINGTON : 2024  

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                       SHERROD BROWN, Ohio, Chair

JACK REED, Rhode Island              TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
JON TESTER, Montana                  MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada       CYNTHIA M. LUMMIS, Wyoming
TINA SMITH, Minnesota                J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona              KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania         STEVE DAINES, Montana

                     Laura Swanson, Staff Director

               Lila Nieves-Lee, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                  Amber Beck, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                       Pat Lally, Assistant Clerk

                                  (ii)

                            C O N T E N T S

                              ----------                              

                         THURSDAY, MAY 18, 2023

                                                                   Page

Opening statement of Chair Brown.................................     1
        Prepared statement.......................................    47

Opening statements, comments, or prepared statements of:
    Senator Scott................................................     3
        Prepared statement.......................................    48

                               WITNESSES

Michael S. Barr, Vice Chair for Supervision, the Federal Reserve.     6
    Prepared statement...........................................    49
    Responses to written questions of:
        Chair Brown..............................................   210
        Senator Scott............................................   211
        Senator Tester...........................................   217
        Senator Cortez Masto.....................................   217
        Senator Warnock..........................................   219
        Senator Vance............................................   220
        Senator Cramer...........................................   224
Martin J. Gruenberg, Chair, Federal Deposit Insurance Corporation     7
    Prepared statement...........................................    88
    Responses to written questions of:
        Chair Brown..............................................   228
        Senator Scott............................................   235
        Senator Tester...........................................   246
        Senator Cortez Masto.....................................   251
        Senator Warnock..........................................   256
        Senator Hagerty..........................................   260
        Senator Vance............................................   262
Todd M. Harper, Chair, National Credit Union Administration......     8
    Prepared statement...........................................   118
    Responses to written questions of:
        Chair Brown..............................................   269
        Senator Scott............................................   271
        Senator Tester...........................................   272
        Senator Cortez Masto.....................................   272
        Senator Warnock..........................................   275
        Senator Vance............................................   276
Michael J. Hsu, Acting Comptroller, Office of the Comptroller of 
  the
  Currency.......................................................    10
    Prepared statement...........................................   124
    Responses to written questions of:
        Chair Brown..............................................   281
        Senator Scott............................................   282
        Senator Cortez Masto.....................................   285
        Senator Tester...........................................   288
        Senator Vance............................................   290
        Senator Warnock..........................................   292

                                 (iii)

Adrienne A. Harris, Superintendent, New York State Department of 
  Financial Services.............................................    11
    Prepared statement...........................................   128
    Responses to written questions of:
        Chair Brown..............................................   294
        Senator Scott............................................   295
        Senator Tester...........................................   297
        Senator Cortez Masto.....................................   299
        Senator Warnock..........................................   302
Clothilde V. Hewlett, Commissioner, California Department of 
  Financial Protection and Innovation............................    12
    Prepared statement...........................................   134
    Responses to written questions of:
        Chair Brown..............................................   305
        Senator Scott............................................   306
        Senator Tester...........................................   307
        Senator Cortez Masto.....................................   308
        Senator Warnock..........................................   310

              Additional Material Supplied for the Record

Letter submitted by NAFCU........................................   312
Letter submitted by CDFPI........................................   315
``Executive Pay at Silicon Valley Bank Soared After Big Bet on 
  Riskier Assets'', Financial Times, Ltd.........................   319
``Silicon Valley Bank Execs Enjoyed Generous Compensation in 
  Recent Years, With CEO and CFO Packages up 30 Percent From 
  2018'', MarketWatch............................................   325

 
 OVERSIGHT OF FINANCIAL REGULATORS: FINANCIAL STABILITY, SUPERVISION, 
      AND CONSUMER PROTECTION IN THE WAKE OF RECENT BANK FAILURES

                              ----------                              

                         THURSDAY, MAY 18, 2023

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:30 a.m., in room SD-G50, Dirksen 
Senate Office Building, Hon. Sherrod Brown, Chair of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIR SHERROD BROWN

    Chair Brown. The Senate Banking, Housing, and Urban Affairs 
Committee will come to order.
    On Tuesday, we heard from the former executives of Silicon 
Valley Bank and Signature Bank. Their obsession with stock 
prices and their own compensation--this profit-at-all-cost 
mentality--led their banks off a cliff, putting the paychecks 
of small businesses and workers at risk.
    We heard over and over that they just could not have known 
the Fed would raise interest rates, despite regulators and 
other banks and investors warning over and over about interest 
rate risk. That they just could not have predicted the social 
media panic, despite knowing for years that their customer 
bases were concentrated and posed a risk. They just could not 
have known that growing so fast to grow their bonuses would put 
their bank at risk, despite repeated warnings.
    It was basically ``the dog ate my homework'' for 3 long 
hours.
    These bank executives failed at Banking 101. Their banks 
grew too fast, and they doubled down on risky bets and riskier 
lines of business, never stopping to worry about whether their 
decisions made any sense, as long as the profits kept going up 
and up and up.
    This spring those bad decisions finally caught up with 
them, though not before they tried, as we all know, to cash 
out.
    Just a few years earlier, they complained about supposed 
``regulatory burden'' that they felt was unfairly foisted upon 
them.
    In 2015, Silicon Valley Bank CEO Greg Becker said, quote, 
``Because SVB's business model and risk profile do not pose 
systemic risk, imposing the numerous Dodd-Frank requirements 
that were designed for the largest bank holding companies would 
place an outsized burden on us, with minimal corresponding 
regulatory benefit.''
    Three years later, Signature Bank cofounder Scott Shay 
said, raising the stakes on Becker's comments, said, ``We find 
it ridiculous and unacceptable that by virtue of growing 1 day 
past $50 billion, we will be burdened with rules intended for 
the mega `too-big-to-fail' banks. We strongly believe that we 
are not even in the same ZIP code as being systemically 
important to the U.S., to New York, or even to midtown 
Manhattan.''
    Turns out they were both very, very wrong.
    On Tuesday we also heard a lot of blame placed on 
regulators. We know that regulators warned these banks over and 
over that there were glaring risks on their balance sheets. It 
is also fair to say, though, that the regulators should have 
been tougher and stronger. They should have, as Senator Tester 
said in this hearing 2 days ago, they should have ``dropped the 
hammer.''
    But let's think about why the hammer did not come down so 
hard. The strongest hammers were taken out of their toolbox.
    It is not a coincidence that both banks' rapid growth 
started in 2019, right after the Trump bank regulators rolled 
back rules for banks of this size. Bankers, like Greg Becker 
and Scott Shay, and their lobbyists begged for weaker rules and 
begged for lax oversight. And lo and behold, weaker rules and 
lax oversight are what they got.
    The former FDIC Chair said that if bankers feel examiners 
are overstepping their authority, quote, ``let us know.''
    The former acting comptroller said the OCC is trying to 
improve its, quote, ``responsiveness to our customers, which 
are the banks.''
    Think about that--the regulator actually said the banks are 
the customer. We are all friends here. That was the mentality. 
It was the weaker rules on the books, and it was the culture 
they created at the top and allowed to fester.
    The former Fed Vice Chair for Supervision, Vice Chair 
Barr's predecessor, said, ``Markets are always ahead of the 
regulators, and frankly that is how it should be. It is 
analogous to the advice that my father provided me, that if you 
do not miss at least two or three planes a year, you are 
spending too much time in airports.''
    He continues, ``If the regulators aren't a little behind 
the market in a few areas at any given time, they would be 
stifling innovation and evolution.''
    In other words, it is better to let wealthy Wall Street 
profiteers go unchecked because they might figure out another 
``creative'' way to boost their stock prices and pad their 
pockets.
    Regulators do not just miss the plane. They allowed a 
couple of plane crashes.
    Let's be clear. Banks are not regulators' customers. They 
are not your friends. They are not your clients. Regulators 
serve the public, or they should. You are the ones who are 
supposed to police these powerful banks and give people peace 
of mind that their money is indeed safe.
    The purpose of these hearings is not just to place blame. 
It is to actually fix what went wrong. We need to undo the 
damage the last Administration did, as they weakened rules, and 
preached about it, I might add. And we need to strengthen our 
guardrails, like capital and liquidity and stress tests. We 
need to address some of the issues that regulators have 
identified in their reviews on the failed banks, like staffing, 
which is a result of years of budget cuts and shifting 
priorities under the former Administration.
    The examiners and regulators need to have the tools and 
resources and the support they need to protect the public. We 
need to consider options for deposit insurance reform to 
protect financial stability for consumers and small businesses.
    We need to improve our merger policy so that failed bank 
acquisitions by megabanks are only a last resort. And we need 
to restore the culture of supervision that puts the public 
interest ahead of bank executives' stock portfolios.
    Of course it is good for our economies and our communities 
and the public when we have successful banks. No one disagrees 
with that, of course. What we have seen in too many cases, 
though, is not just banks being successful, banks turning a 
reasonable profit.
    SVB and Signature's profits soared, and so did their 
executives' compensation, always linked in these banks, as they 
pushed for ever more uncontrolled growth.
    Profits cannot come at the expense of everything else, and 
regulators cannot allow them to. Banks must be well-managed and 
resilient and put their customers first. We must hold everyone 
responsible for these failures accountable. And at the top of 
that list must be the CEOs and executives who ignored warnings 
and run their banks into the ground.
    I am working with the Members on this Committee on both 
parties--I hope there will be bipartisan support--on 
legislation to strengthen your ability to hold bank executives 
accountable for their wrongdoing. I want to see meaningful 
punishments and deterrent, not just slaps on the wrist or 
paltry fines that are barely a speedbump in their race for 
profits.
    And I urge you to use all your authority to protect the 
public, and the many bank and credit union executives out there 
who are doing right by their customers--that is most of them, 
of course--by holding failed bank executives accountable for 
their failures, for their greed and incompetence.
    Our witnesses all know you work for the American people. I 
look forward to hearing how we can strengthen financial 
stability, stay ahead of risks, and protect the workers, 
families, and small businesses that power our economy.
    Senator Scott.

             OPENING STATEMENT OF SENATOR TIM SCOTT

    Senator Scott. Thank you, Mr. Chairman.
    Today's hearing is about regulatory supervision and 
congressional oversight, something we all take very seriously. 
I hear a lot from our friends on the Left that this is somehow 
a legislative failure, that you did not have the power needed 
to supervise the banks. There is nothing further from the truth 
than that concept, that you did not have the legislative power 
necessary to do your jobs. That is just false. We can point to 
S. 2155 all day long, but if you read S. 2155, you come to the 
conclusion that the supervisors had the ability to enforce a 
regulatory regime to keep America's financial institutions 
safe. They just--you did not--use the tools in the toolbox to 
do the job that was necessary.
    People at home take this opportunity to view the six 
alphabet-soup agencies and try to figure out what we are here 
talking about. We are talking about the safety and the security 
of the greatest financial system in all the world. For the 
average viewer at home, they are asking real questions about is 
the system safe for me? For those who are ``unbanked'' or 
``underbanked,'' who have challenges having confidence in the 
banking system, this is a challenging day. For those who want 
to have more confidence in the system that they have never had 
confidence in before, this is a serious day. For those who look 
at this situation and ask themselves why do they have to pay 
higher interest rates or higher fees on products from banks, 
because bank execs did not do their jobs and regulators were 
not paying attention, so far, we have no answers.
    Each of you are working on broad proposals and regulations 
that will affect our financial institutions, and I expect we 
will hear a lot about that today. But what I am concerned about 
is that we will not really get to the fundamental question 
about why, when you had an opportunity to do the job assigned 
to you, it just was not done.
    When we look at the failures of both Silicon Valley Bank 
and Signature Bank, we come to a couple of conclusions. And I 
have said this a few times before, but I think it bears 
repeating, that the situation that we saw that led to two of 
the largest bank failures in American history was caused by 
three things: bank mismanagement, supervisory failure, and 
soaring inflation caused by the Biden administration.
    Today, we are here to focus on the supervisory failures. 
From the beginning, regulators called these failures 
idiosyncratic events. This implies that they just popped up out 
of nowhere like mushrooms after a rainstorm, that there is no 
way in the world you could have forecasted what was going to 
happen. But after listening to the CEOs on Tuesday, the one 
thing we walked away with from Silicon Valley Bank's CEO, Mr. 
Becker, is that for 20 years they had the same business model 
that had over 80 percent of their deposits uninsured. Two 
decades the deposits were uninsured over 80 percent. That is 
not idiosyncratic to me. It seems pretty much like the norm.
    We also heard from Mr. Becker that the flashing lights, the 
warning lights had been going off since the first quarter of 
2022. That is a long time before March 9th of 2023. And then 
your reports reinforce the fact that the warning lights were 
going off well before the first quarter of 2022.
    You all have failed. Many of you have failed the American 
people, failed the American people in keeping their confidence 
high in our financial system. I want that to sink in.
    You get to come to Congress. You spend 5 minutes answering 
questions from each one of us, with the ability to play 
dodgeball for those 5 minutes. And then you go back to your 
respective agencies, and you hold no one accountable, even 
though your reports say that there was failure within your 
agencies. And yet not a single employee or yourselves are held 
responsible.
    Mr. Barr, it seems like, as we talked about last time you 
were here, about the reports that were going to come out on May 
1st and what it would find. The one thing that is clear is that 
it found that the Federal Reserve did not do their job. And yet 
here we sit again. Your report says you acknowledge that the 
supervisors at the Federal Reserve failed to act swiftly and do 
their jobs. But in the next breath, you point the blame at 
Congress and S. 2155. And I read through the legislation just 
to make sure that I did not misunderstand what part of the 
legislation withdrew your ability to provide the supervisory 
responsibilities. I could not find it because it is not there.
    I find it ironic that the ultimate takeaway was to ask for 
more authority. Not less. More authority, as if somehow it was 
stripped away, and it simply was not.
    But that to me, is exactly what happens in Washington when 
something bad happens. No one takes responsibility, and we take 
more authority in the regulatory framework of this country. And 
what happens when we take more authority in the regulatory 
framework of the country? Mike, you know, and I certainly know 
it as a small business owner, the more capital that you push to 
the sidelines in hopes of solving a problem that had to do with 
liquidity and not capital, you actually rob small business 
owners, women small business owners, minority small business 
owners, everyday small business owners, rural small business 
owners, of the capital necessary to borrow the money to create 
a more sustainable, more resilient, healthier community.
    When the failure happens, ultimately the new level of 
supervision that says we are going to put more capital on the 
sidelines only impacts entrepreneurs, only impacts seniors 
hoping for a better return, only impacts everyday Americans 
living paycheck to paycheck, trying to figure out how to make 
this economy and this system work for them.
    I do not know how we explain to the small business owner 
who cannot get a loan because we have improved the capital 
standards by having more cash on the sidelines so there are 
fewer dollars to loan out. That, because you did not do your 
jobs, sounds like doubling down and making the average person 
in the country pay a very high price for your failures. I think 
you are making it more and more difficult for the average 
American in the average place to contribute to a thriving 
economy.
    Chair Brown. Thank you, Senator Scott.
    I will introduce today's witnesses. Federal Reserve Vice 
Chair for Supervisor, Michael Barr, welcome. FDIC Chair Marty 
Gruenberg, welcome. NCUA Chair Todd Harper. Welcome to all 
three of you. You have been here many times. Acting Comptroller 
of the Currency, Michael Hsu, welcome back. New York Department 
of Financial Services Superintendent Adrienne Harris, welcome 
to the Committee. California Department of Financial Protection 
and Innovation Commissioner Clothilde Hewitt, welcome.
    Mr. Barr, please begin your testimony.

 STATEMENT OF MICHAEL S. BARR, VICE CHAIR FOR SUPERVISION, THE 
                        FEDERAL RESERVE

    Mr. Barr. Chairman Brown, Ranking Member Scott, and other 
Members of the Committee, thank you for the opportunity to 
testify today.
    Overall, the U.S. banking system remains strong and 
resilient, and depositors should be confident that all deposits 
in our banking system are safe. At the same time, recent stress 
in the banking system shows the need to be vigilant as we 
assess and respond to risks.
    My review of Silicon Valley Bank's failure demonstrates 
that there are weaknesses in regulation and supervision that 
must be addressed, and I am committed to doing so. I am also 
committed to maintaining the strength and diversity of the 
banking system so that it can continue to provide financial 
services and access to credit for households and businesses. As 
we consider adjustments to our rules and supervisory practices, 
I am sensitive to how changes may affect banks in the current 
economic environment.
    My written testimony and accompanying Supervision and 
Regulation Report provide detail on conditions in the banking 
sector and supervisory and regulatory efforts of the Federal 
Reserve over the last 6 months.
    Let me turn to the SVB review. Immediately following SVB's 
failure, I led a review of the Federal Reserve's supervision 
and regulation of the bank. Staff who were not involved in the 
supervision of SVB conducted the review. The resulting report 
takes an unflinching look at the conditions that led to the 
bank's failure, including the role of Federal Reserve 
supervision and regulation.
    There are four key takeaways from the report.
    First, SVB's board of directors and management failed to 
manage the bank's risks.
    Second, Federal Reserve supervisors did not fully 
appreciate the extent of the vulnerabilities as SVB grew in 
size and complexity.
    Third, when supervisors did identify vulnerabilities, they 
did not take sufficient steps to ensure that the bank fixed 
those problems quickly enough.
    Fourth, the Board's tailoring approach impeded effective 
supervision by reducing standards, increasing complexity, and 
promoting a less-assertive supervisory approach.
    The four key takeaways show failures by SVB's board and 
senior management and failures by the Federal Reserve.
    I will outline how we can strengthen both our regulation 
and supervision, based on what we have learned and based on 
Federal Reserve's existing authorities.
    On the regulatory side, SVB's failure confirms the 
importance of strong levels of bank capital. While the 
proximate cause of SVB's failure was a liquidity run, the 
underlying issue was concern about its solvency. Stronger 
capital will guard against the risks that we may not fully 
appreciate today and will also reduce the costs of bank 
failures.
    In addition, we need to reconsider our prudential 
requirements. These include evaluating how we treat available-
for-sale securities in our capital regulations, how we 
supervise and regulate a bank's management of interest rate 
risk, how we supervise and regulate liquidity risk, and how we 
oversee incentive compensation practices. Any adjustments to 
our rules would, of course, go through normal notice and 
comment rulemaking and have appropriate transition periods.
    I also plan to improve the speed, force, and agility of 
supervision. Supervision should intensify at the right pace as 
a bank grows in size or complexity. Once identified, issues 
should be addressed more quickly, both by the bank and by 
supervisors. Moreover, we need to ensure that we have a culture 
that empowers supervisors to act in the face of uncertainty.
    I want to reiterate that the banking system remains strong 
and resilient. Recent events demonstrate that we, as 
regulators, must do better, and we will.
    Thank you, and I look forward to your questions.
    Chair Brown. Thank you, Mr. Vice Chair.
    Chair Gruenberg.

   STATEMENT OF MARTIN J. GRUENBERG, CHAIR, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Brown, 
Ranking Member Scott, and Members of the Committee, thank you 
for the opportunity to appear at today's hearing on oversight 
of financial regulators.
    The U.S. banking industry has proven to be quite resilient 
during this period of recent stress. Earlier reports from first 
quarter 2023 indicate that first quarter aggregate bank net 
income was roughly unchanged compared to the fourth quarter of 
last year, excluding the effects on acquirers' incomes of their 
acquisitions of failing banks. In addition, asset quality 
metrics remain favorable, and the industry remains well 
capitalized. Recent declines in medium- and long-term interest 
rates have reduced somewhat the volume of unrealized losses on 
securities.
    Still, insured depository institutions will continue to 
face significant challenges in the near term. Risks to the 
outlook include the potential for weakening credit quality and 
profitability that could result in further tightening of loan 
underwriting, slower loan growth, and higher provision 
expenses.
    Commercial real estate loan portfolios, particularly loans 
backed by office properties, face challenges should demand for 
office space remain weak and property values continue to 
soften.
    The FDIC continues to monitor liquidity closely, including 
deposit trends across the industry, and will publicly release 
data on the first quarter of this year as part of its Quarterly 
Banking Profile later this month.
    Last week, the FDIC board of directors approved a Notice of 
Proposed Rulemaking providing for the special assessment 
required by law to recover the loss to the Deposit Insurance 
Fund attributable to covering the uninsured deposits of Silicon 
Valley Bank and Signature Bank. Under that proposed rule, the 
FDIC would apply an annual special assessment rate of about 
12.5 basis points to an assessment base that would equal an 
insured depository institution's estimated uninsured deposits, 
reported as of December 31, 2022. The assessment is defined in 
such a way that no banking organizations with total assets 
under $5 billion would be subject to the special assessment.
    On May 1st, the California Department of Financial 
Protection and Innovation appointed the FDIC as receiver for 
First Republic Bank. The FDIC was able to market and sell First 
Republic concurrently with its closure by entering into a 
purchase and assumption agreement with JPMorgan Chase Bank, 
following a competitive bidding process to assume all of the 
deposits and substantially all of the assets of First Republic. 
The FDIC estimates that the failure of First Republic will cost 
the Deposit Insurance Fund about $13 billion.
    The FDIC recently released two reports on the FDIC's 
supervision of Signature Bank and options for deposit insurance 
reform. The report on Signature Bank, conducted by the FDIC's 
Chief Risk Officer, found that the root cause of Signature's 
failure was poor management, but also identified areas where 
the FDIC's supervisory efforts could have been more timely, 
forward looking, and forceful, findings that will be matters of 
close attention by the FDIC.
    The report on options for deposit insurance reform 
identified increased targeted coverage for business payment 
accounts as capturing many of the financial stability benefits 
of expanded coverage while mitigating moral hazard effects.
    Finally, the failures of Silicon Valley Bank and Signature 
Bank demonstrate the implications that banks with assets of 
$100 billion or more can have for financial stability. The 
prudential regulation and supervision of these institutions 
merit additional attention, particularly with respect to 
capital, liquidity, and interest rate risk.
    My prepared testimony goes into all of these matters in 
considerable detail. The FDIC remains committed to engaging 
with the public, industry stakeholders, and Members of Congress 
on the policies and priorities outlined in my testimony.
    That concludes my statement, and I would be glad to respond 
to questions.
    Chair Brown. Thank you.
    Chair Harper.

   STATEMENT OF TODD M. HARPER, CHAIR, NATIONAL CREDIT UNION 
                         ADMINISTRATION

    Mr. Harper. Chairman Brown, Ranking Member Scott, Members 
of the Committee, thank you for the invitation. My testimony 
outlines the state of the credit union industry, some of the 
NCUA's recent efforts to strengthen the system, and several 
legislative requests. So I will focus here on only a few key 
issues.
    Overall, the performance of federally insured credit unions 
remains stable. Total loans, assets, insured shares, and 
deposits all increased last year. What's more, the system's 
aggregate net worth ratio rose to 10.75 percent.
    Significantly, 9 out of every 10 dollars in share deposits 
within federally insured credit unions are insured. That has 
contributed to stability within the credit union sector in 
recent months.
    The NCUA's Share Insurance Fund also continues to perform 
well. Although the fund's equity ratio is 3 basis points below 
the desired operating level, no premiums are expected at this 
time. That is because the system is currently well positioned 
to handle any dislocation resulting from a moderate recession. 
Nevertheless, during the last year, we have experienced growing 
interest rate and liquidity risks within the system, including 
at several billion-dollar-plus institutions.
    Aggregate cash positions have declined and are below 
prepandemic levels as well. Further, unrealized losses in 
securities limit their utility as a source of liquidity. The 
recent increase in these risks underscores the value of the 
NCUA's Central Liquidity Facility. Otherwise known as the CLF, 
the facility asks a shock absorber to contain or avert 
liquidity crises before they escalate.
    However, with the termination of the temporary CLF 
statutory enhancements last December, more than 3,000 credit 
unions, each with less than $250 million in assets, lost access 
to the CLF, contracting the facility's capacity by almost $10 
billion.
    With risks rising in the financial system and at individual 
credit unions, now is not the time to cut a liquidity lifeline. 
As such, the NCUA board fully supports restoring the ability of 
corporate credit unions to serve as CLF agents on behalf a 
subset of their members. Notably, the Congressional Budget 
Office has scored these reforms at no cost to the taxpayer.
    Additionally, with increased industry concentration, 
intensifying cyberthreats, and greater outsourcing of core 
business functions, the Government Accountability Office, the 
Financial Stability Oversight Council, and the NCUA's inspector 
general have all recommended congressional action to restore 
the NCUA's statutory examination authority over third-party 
vendors. I fully agree and respectfully request that Congress 
close this growing regulatory blind spot.
    Last, the NCUA defers to Congress on determining what 
statutory changes, if any, should be made to deposit insurance 
coverage levels and account types. But if Congress does act in 
this area, the NCUA has two requests. First, we ask Congress to 
maintain parity between the share insurance coverage provided 
by the NCUA and the deposit insurance coverage provided by the 
FDIC.
    And second, because an expansion of coverage will generally 
increase resolution costs, the NCUA requests greater 
flexibility for administering the share insurance fund. This 
flexibility, which would be more in line with the FDIC's 
current administrative powers, includes allowing the NCUA board 
to establish a higher normal operating level and modifying the 
current limitations on assessing premiums.
    Together, these changes would better enable the NCUA board 
to build reserves during economic upturns so that sufficient 
money is available during economic downturns.
    In sum, the credit union system currently remains well 
capitalized, stable, and well positioned to handle a relatively 
broad range of economic outcomes, and the NCUA stands ready to 
respond to any economic uncertainty, and will continue to work 
through the supervisory process with any individual credit 
union experiencing problems. In doing so, we will be forward 
looking, risk focused, and ready to act expeditiously.
    Consumers, therefore, should remain confident that their 
insured share deposits at federally insured credit unions are 
safe, and the NCUA stands ready to work with Congress on any 
legislative reforms to strengthen and safeguard the system.
    Thank you again. I look forward to your questions.
    Chair Brown. Thank you, Chair Harper.
    Comptroller Hsu.

STATEMENT OF MICHAEL J. HSU, ACTING COMPTROLLER, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Hsu. Thank you, Mr. Chairman. Chairman Brown, Ranking 
Member Scott, Members of the Committee, I am pleased to appear 
today to offer my observations about the recent market stress 
and to answer any questions you may have regarding the 
activities and priorities of the OCC.
    Since March, I have worked especially closely with my peers 
at the other banking agencies to maintain financial stability 
and confidence in the financial system. Adequate levels of 
capital going into the recent turmoil have helped to limit the 
risk of contagion. Despite the market stress, the Federal 
banking system has remained resilient, and national banks and 
Federal savings associations have remained well positioned to 
serve their customers.
    None of the four large banks that failed were regulated by 
the OCC. Notwithstanding, we are closely monitoring the 
conditions of the institutions we supervise and working with 
them to ensure that their liquidity and capital positions 
remain sound and that they are on the balls of their feet with 
regard to risk management. Many have taken steps to reduce risk 
in light of market conditions, and to date the vast majority of 
OCC-supervised banks have not experienced stress with regard to 
their depositors or business customers.
    Over the past 2 years, I have consistently emphasized to 
bankers the importance of guarding against complacency and 
having strong risk management policies and practices in place. 
Most OCC-supervised banks have heeded this message and 
successfully navigated the rise in interest rates and changing 
economic outlook. OCC examiners will continue to actively 
monitor market conditions and engage with banks to help ensure 
that they are prepared to meet future challenges.
    Based on my perspective as Acting Comptroller and 20 years 
of experience as a financial regulator, I want to share some 
observations on steps that can be taken to restore full 
confidence in the banking system.
    First, supervisors need support to act in a timely and 
effective manner. Supervisors at the OCC and the other banking 
agencies play a critical role in keeping the banking system 
safe and sound by exercising discretion. The degree to which 
supervisors feel empowered to exercise that discretion impacts 
their will to act in a timely and forceful manner. Clear 
support to empower supervisors to exercise discretion and act 
when needed will help keep the banking system safe and sound.
    Second, regulations regarding the resilience and 
resolvability of large banks need to be strengthened. Stronger 
resiliency requirements for large banks with regard to capital 
and liquidity would have reduced the probability of recent bank 
failures. Stronger resolvability requirements would have 
facilitated orderly failures with less Government involvement. 
The OCC is working closely with the Federal Reserve and FDIC to 
address these issues.
    Third, deposit insurance coverage should be updated. The 
FDIC's recent report on deposit insurance is worth careful 
consideration, especially its conclusion regarding targeted 
expansion. In the meantime, we have been working with our 
banks, especially those with significant levels of uninsured 
deposits, to ensure that their cash holdings and borrowing 
capacity can meet depositor withdrawals. We remain committed to 
supervising banks so that depositors can rest assured that 
their money is safe.
    Finally, the diversity of the banking system must be 
preserved as the industry evolves. The OCC has been working on 
updating the analytical frameworks related to the bank merger 
guidelines that the Federal banking agencies and DOJ must 
follow when considering bank mergers. The recent turmoil has 
increased the urgency of these efforts.
    The OCC is committed to being open-minded when considering 
merger proposals and to acting in a timely manner on 
applications consistent with the requirements of the Bank 
Merger Act.
    As the industry evolves, I believe strongly that we must 
preserve the diversity of the banking system, from community 
banks to midsized banks to regional banks. Going forward, 
continued industry and regulatory vigilance is critical. Banks 
and supervisors must be attentive to the most salient risks 
today as well as those beyond the daily headlines. That will 
help ensure that the banking systems remains a source of 
strength to the U.S. economy.
    Before closing, Mr. Chairman, I want to be very clear. Our 
customer is the American people, not banks, period, full stop.
    Thank you. I would be happy to answer any questions.
    Chair Brown. Thank you.
    Superintendent Harris, welcome to the Committee.

STATEMENT OF ADRIENNE A. HARRIS, SUPERINTENDENT, NEW YORK STATE 
                DEPARTMENT OF FINANCIAL SERVICES

    Ms. Harris. Thank you so much. Good morning, Chairman 
Brown, Ranking Member Scott, and Members of the Committee.
    On Sunday, March 12, 2023, Signature failed after 
experiencing a propulsive run on deposits on Friday, March 
10th. The run was instigated by the self-liquidation of 
Silvergate Bank on March 8th, and then the failure of Silicon 
Valley Bank on March 10th, following an unprecedented run on 
its own deposits. In order to avoid a disorderly, midday Monday 
shutdown and further contagion across the banking system, on 
the evening of Sunday, March 12th, DFS took possession of 
Signature and appointed the FDIC as receiver.
    Before its failure on March 12th, regulators had documented 
liquidity-related regulatory concerns to the bank, beginning 
with the 2018 Report of Examination. Despite orders from 
regulators, the bank was slow to remediate supervisory 
recommendations, and many issues identified by the regulators 
remained unresolved when the bank failed.
    Signature's inability to remediate the outstanding 
liquidity management issues undoubtedly contributed to its 
collapse. However, the immediate cause of the bank's failure 
was an unprecedented run on deposits, instigated by the self-
liquidation of Silvergate and the subsequent failure of SVB.
    On Friday, March 10th, Signature experienced a runoff of 
$18.6 billion in deposits in a matter of hours, reducing the 
bank's deposit base by 20 percent. Throughout the day Friday 
and into the night, the regulators worked closely with each 
other and Signature to find sufficient liquidity to satisfy the 
significant volume of customer withdrawal requests.
    After avoiding a default on Friday, regulators had time 
over the weekend to assess Signature's condition and come to a 
considered view as to whether the bank could open safely on 
Monday.
    DFS had one objective that weekend--to preserve the safety 
and soundness of the financial system. Three paths were 
identified for the bank in order of preference. The first was 
to find a way for Signature to open in a safe and sound manner 
on Monday and continue as a stable institution. The second was 
to find a purchaser for the bank on an open bank basis. Third, 
DFS and the FDIC worked in parallel to prepare for the last-
resort scenario of taking possession of the bank and appointing 
FDIC as receiver.
    The regulators spent the weekend collecting and evaluating 
information from Signature in order to make a data-driven 
decision about the bank's viability. Signature's inability to 
provide reliable data and a credible liquidity strategy to 
operate in a safe and sound manner on Monday led DFS to take 
possession of the bank and immediately appoint the FDIC as 
receiver.
    At the time DFS took possession, the bank had $4.27 billion 
of certain liquidity available for Monday morning to cover 
known withdrawals ranging between $7.4 and $7.9 billion. These 
withdrawal estimates do not include additional unknown 
withdrawals that could reasonably be anticipated on Monday in 
light of market conditions.
    Taking possession of the bank was the option of last resort 
to avoid a disorderly Monday shutdown and stop any further 
panic and contagion across the broader banking system.
    DFS-regulated financial institutions are safe and sound 
today, but the department has instituted heightened monitoring 
of banks with higher risk profiles and is implementing 
recommendations made by our Office of General Counsel to 
modernize the supervision of the global financial system.
    Thank you, and I look forward to your questions.
    Chair Brown. Thank you, Superintendent.
    Commissioner Hewitt, welcome.

  STATEMENT OF CLOTHILDE V. HEWLETT, COMMISSIONER, CALIFORNIA 
       DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION

    Ms. Hewlett. Chairman Brown, Ranking Member Scott, and 
Members of the Committee, I appreciate the opportunity to 
testify on behalf of the California Department of Financial 
Protection and Innovation.
    My name is Clothilde Hewlett. I have served as Commissioner 
since December 2021. Building on over 100 years of State 
regulation, the current department was restructured in 2020 to 
strengthen California's financial oversight.
    DFPI has broad authority touching every aspect of the 
financial sector in California, including banks and credit 
unions. Through regulation, supervision, and enforcement, DFPI 
promotes safety and soundness and consumer protection.
    State-chartered banks, like Silicon Valley Bank, are 
regulated by both State and Federal regulators. State 
regulators play a vital role in maintaining the strength of the 
dual banking system, particularly for local banks that serve 
diverse communities throughout the country.
    State regulators supervise almost 80 percent of all banks 
in the U.S., which equates to more than 3,800 banks and $8.5 
trillion in assets. This includes overseeing two-hirds of 
agricultural lending and half of small business lending. The 
localized supervision equips State regulators to better 
understand the unique demands faced by banks in local 
communities.
    In California, DFPI supervises 99 State-chartered banks 
with an average asset size of approximately $4 billion. Nearly 
half are under $1 billion in assets, and 9 of our banks are 
over $10 billion. The department also supervises 113 credit 
unions, with an average asset size of $1.4 billion.
    For nearly 40 years, Silicon Valley Bank was an important 
service provider California's tech economy, the life sciences 
and health care sector, nonprofits, and small businesses.
    On March 8, the bank announced a loss of $1.8 billion and a 
capital raise. Depositors reacted by initiating withdrawals of 
$42 billion, or approximately 25 percent of total deposits, 
over a 24-hour period, causing an unprecedented run on the 
bank. At the end of March 9th, the bank had a negative cash 
balance of approximately $958 million.
    We determined the bank was insolvent. On March 10th, the 
DFPI took possession of the bank and appointed the FDIC as 
receiver.
    The DFPI examined the bank in coordination with its primary 
Federal regulator, the San Francisco Federal Reserve Bank. 
Federal examiners led the examination of Silicon Valley Bank's 
compliance with Federal regulations related to enhanced 
prudential standards and review of SVB's liquidity and interest 
rate risk.
    The department and San Francisco Fed flagged concerns about 
the bank's liquidity management beginning in 2021, and interest 
rate risk beginning in 2022. Though it is typical to provide 
time to remediate, the timelines were not acceptable.
    The Department has conducted and published an internal 
review of the supervision and closure of Silicon Valley Bank. 
That review, and the recent failure of First Republic Bank, 
highlight the need to make changes to promote the safety and 
soundness of State-chartered banks.
    The DFPI is committed to working with Federal regulators to 
develop stronger and more effective systems to promptly 
remediate deficiencies and better allocate staff according to 
risk.
    The DFPI will also increase its focus on a bank's level of 
uninsured deposits and require banks to evaluate and account 
for emerging risks posed by technology-enabled activities, such 
as social media and real-time withdrawals.
    I look forward to working with Congress, our Federal 
regulatory partners, and our California State legislature to 
implement changes that strengthen our financial system.
    Thank you very much.
    Chair Brown. Thank you, Commissioner.
    As outlined in the failed bank reviews you conducted, 
regulators identified risks like interest rate risk, liquidity 
risk, and corporate governance issues. As any good banker 
knows, when regulators point out problems, you fix them right 
away. Once issues were identified by the regulators the CEOs of 
SVB and Signature suggested at our hearing on Tuesday that 
their leaders corrected deficiencies in a timely way.
    Mr. Barr, Mr. Gruenberg, Ms. Hewlett, Ms. Harris, answer 
yes or no, if you would. Is that true? Did they quickly fix the 
problems your examiners identified?
    Mr. Barr. They fixed some problems but most of them not. 
There were 31 outstanding Matters Requiring Attention or 
Immediate Attention at the time that they failed.
    Chair Brown. Mr. Gruenberg.
    Mr. Gruenberg. No, Senator.
    Chair Brown. Ms. Harris.
    Ms. Harris. No, Senator.
    Chair Brown. Ms. Hewlett.
    Ms. Hewlett. No.
    Chair Brown. Thank you. This goes to all six of you. Will 
you commit to improving both examinations and enforcement to 
crack down harder and faster on bank executives that just do 
not listen? Mr. Barr.
    Mr. Barr. Yes.
    Mr. Gruenberg. Yes, Mr. Chairman.
    Ms. Harper. Yes.
    Mr. Hsu. Yes.
    Ms. Harris. Yes.
    Ms. Hewlett. Yes.
    Chair Brown. Thank you.
    In response to Senator Rounds' question on Tuesday about 
removing hedges from SVB's investment portfolio, Greg Becker, 
the CEO of SVB, as we know, threw up his hands and, pardon my 
cliche but this one actually fits, pushed his employees under 
the bus. Of course, the CEO of a bank is ultimately responsible 
for crashing his bank.
    Chair Gruenberg, is it difficult to hold senior executives 
in large, complex institutions accountable and ban them from 
driving another bank into the ground?
    Mr. Gruenberg. Senator, we certainly have the authority to 
do that and have done that in the past and have to be prepared 
to do that going forward.
    Chair Brown. Comptroller Hsu, do you agree?
    Mr. Hsu. I agree.
    Chair Brown. OK. We need to close these gaps, and I know 
many Members of this Committee on both sides of the aisle 
agree. I listened to pretty much all of them with Mr. Becker 
and with the two executives from Signature. I am working on 
legislation to make sure executives of big banks like Silicon 
Valley cannot hide behind their subordinates to avoid 
accountability.
    Let me follow up on the impact of fast growth, a subject 
that most of you have touched on and was the subject of much of 
the testimony on Tuesday. Your reports explain that the 
problems of SVB and signature got worse because the rules for 
larger, more complex banks do not apply immediately as banks 
grow larger. A prominent bank lawyer recently testified in a 
House hearing that these rules need to be revisited because 
essentially long transition periods allow a $200 billion bank 
like SVB to be treated like a $50 billion bank.
    This question is for Vice Chair Barr and Commissioner 
Hewlett. How did the transition period that SVB had before the 
large bank rules kicked in contribute to its condition and all 
of its failures?
    Mr. Barr. Under the prior approach they would have had 
heightened prudential standards applying to them as they grew 
in size over the last 3 years. Because of the way the tailoring 
rule worked at the Federal Reserve, they basically had----
    Chair Brown. That was Vice Chair Quarles' tailoring rule, 
Correct?
    Mr. Barr. But the Board as a whole made the decision to put 
that rule in place in 2019.
    Chair Brown. But he had your job at that time. Correct?
    Mr. Barr. He did. He was Vice Chair for Supervision.
    Chair Brown. And he led on that effort, and typical culture 
at the Federal Reserve is if someone is empowered, to do 
certain things. Whether it was Lael Brainard on CRA or Mr. 
Quarles in that job, the Fed generally follows. Correct?
    Mr. Barr. The Vice Chair for Supervision has explicit 
statutory authority to take the lead in supervision and 
regulation.
    Chair Brown. Commissioner Hewlett, your comments on that?
    Ms. Hewlett. Yes. There was a new program, regulations put 
in place by our Federal partners, the Large Foreign Bank 
Organization Program. Silicon Valley Bank was the first bank, 
due to its rapid growth, to move from a being a regional bank 
into that program. And the transition, because it was the 
first, took a much longer time than what it normally would have 
taken if the program had been in place, and that transition is 
a lot of what contributed to the delay.
    Chair Brown. Thank you. It sounds like the so-called 
tailoring rules advocated by the former Vice Chair for 
Supervision were set up to fail, and as I think all of you 
remember, neutral observers who do not see the banks as 
customers or clients in the regulatory process warned about Mr. 
Quarles weakening those rules. And I think we will see a lot 
about fixing that in the future.
    This is for Mr. Gruenberg and Mr. Harper. Earlier this week 
the failed bank executives gave a lot of excuses but failed to 
take responsibility for their mismanagement and their 
incompetence. The community banks and credit unions I talked to 
know the dangers were not hard to spot, like a high 
concentration of uninsured deposits and aggressive growth. As 
we know, 90 percent of top deposits at SVB were uninsured, 
unlike any other bank that I know of comparably sized, 
certainly in my State. Neither SVB nor Signature looked like an 
ordinary bank, in part because of that.
    Chair Gruenberg--and I am running out of time--and Chair 
Harper, if you would, we have seen the risks develop from an 
overconcentration of uninsured deposit base. What tools do the 
regulators have to make sure banks manage those risks?
    Mr. Gruenberg. We certainly have supervisory authorities to 
review and set limits on concentrations. I think that is one of 
the key areas we need to look at going forward, concentration 
of uninsured deposits at institutions. It clearly poses a 
liquidity risk that we need to focus on, going forward, 
Senator.
    Chair Brown. Mr. Harper.
    Mr. Harper. We also have concentration limits as well as 
our liquidity rules that are in place, although, if I could 
reemphasize here the importance of acting on the Central 
Liquidity Facility reforms so that we can make sure that small 
credit unions across the board have access to the facility. 
That would be an important reform for Congress to make.
    Chair Brown. Thank you. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman.
    I find it interesting that today is May 18, 2023, the time 
is 10:22, and I have not wondered recently, but listening to 
this hearing I think the American people may be asking 
themselves, ``What is the definition of scapegoat?'' if we are 
looking for a definition of scapegoat, please watch this 
hearing, because literally what we are hearing today is 
scapegoating.
    I keep hearing about the predecessor, the predecessor, the 
predecessor, who left in December 2021. Mr. Barr, you started 
in July of 2022. According to Ms. Hewlett, the liquidity and 
interest rate risk manifested itself in 2021, which means it 
was already there. Coming into a new job you have an 
opportunity to take responsibility for a very important role in 
maintaining strength and health in our financial system. Yet we 
continue to hear about the predecessor.
    One of the most important values of being an American is 
taking responsibility. It is that simple. When I was a kid, not 
doing well in high school, I wanted to blame somebody else for 
my failures. I wanted to blame my mom because she was working 
long hours, my dad because he was not around. You know, I had 
mentor that taught me, actually, look in the mirror. Blame 
yourself. Because if you want to find the solution, you have 
got to find the problem.
    And today we are dancing around the obvious problem that we 
are not looking in the mirror and blaming yourselves. There are 
things that could have been done to eliminate the risk, but 
instead of that, we are playing a game of scapegoating, and I 
do not think that the American people buy it. And if we all 
wanted to know why the ratings of politicians in this country 
are so darn low, watch this banking hearing. It is pretty 
clear.
    I am struck by the fact that the Fed was able to issue 31 
supervisory findings with the tools they already have, and yet 
somehow they need more. Your cover letter, Mr. Barr, says that 
the Silicon Valley Bank's failure highlights the importance of 
stress testing and other supervisory tools, yet one of your 
first actions as Vice Chair was to pilot a climate scenario 
analysis exercise. Additionally, in your first speech as Vice 
Chair, you highlighted a number of priorities, which included 
financial risks from climate change, but crucially did not note 
any of the risks that actually led to the failure of SVB.
    In fact, the day we learned about the failings at SVB, 
March 9th, you were giving a speech, ``The banks we regulate, 
in contrast''--I assume to crypto--``are well protected from 
bank runs through a robust array of supervisory requirements.'' 
In other words, we have the tools we need to do the job 
assigned to us, but today we are hearing scapegoating.
    It is frustrating when I think about all the people, 330 
million of them, who depend on us just to do our jobs, and when 
we do not do our jobs, we take responsibility for not doing 
them. Today, that is not the conversation we are having, but 
the result of us not doing our jobs and then asking for more 
power, more control over the economy, is, according to the 
survey, lending standards are tightening and that further 
restricts access to credit, and the way we translate that at 
home, in North Charleston, South Carolina, is access to the 
American dreams. It starts to wilt away. Because if the 
American dream is synonymous with home ownership, the American 
dream is synonymous with starting a business, there seems to be 
a leak, and we can detect where the leak is coming from.
    Are you concerned about the ripple effect of the potential 
new regulations on those at the lowest end of the credit 
quality spectrum, given the tightening that we are seeing in 
the marketplace, and more regulation means less capital, which 
means fewer loans, which means fewer people achieving the 
dream? Mr. Barr.
    Mr. Barr. Thank you, Senator Scott. First of all, let me be 
absolutely clear. I accept full responsibility with respect to 
the supervisory failings at the Federal Reserve. I have been 
clear about that from the start, and I remain clear about that 
today.
    Senator Scott. Thank you, Mr. Barr.
    Mr. Barr. The buck stops here.
    Senator Scott. Thank you.
    Mr. Barr. And I am committed to fixing the problems that we 
have had in supervision and regulation going forward.
    Senator Scott. Thank you, sir. Who did you fire?
    Mr. Barr. We have not fired someone as a result of this 
review.
    Senator Scott. Thank you.
    Mr. Barr. We plan to conduct further review of our 
supervisory structure, and as we do that we will be making sure 
we have the right personnel in place to get the job done.
    Senator Scott. I hope that includes making room for the 
right personnel by removing the wrong personnel. Thank you.
    Chair Brown. Senator Reed, of Rhode Island, is recognized.
    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you, panel, for your excellent testimony.
    I want to just take a moment to look back at--we had a 
hearing last week on the SAFE Banking Act, and it is designed 
to provide access to banking for the cannabis industry--I will 
be technical. But in that provision, Section 10 of the SAFE 
Banking Act, there is language that would prohibit supervisors 
from requesting that a bank cut ties with customers in any 
industry, even if those customers present a high risk, unless, 
and there is only one exception, the bank has broken the law by 
maintaining the relationship.
    Mr. Barr, will this adversely affect regulation?
    Mr. Barr. Thank you, Senator Reed. I think it is important 
that Congress is taking on this issue of the potential conflict 
between State and Federal law.
    Let me say with respect to Section 10, you know, on the one 
hand I do not think it is the Federal supervisor's job to tell 
a bank who to lend to or who not to lend to. On the other hand, 
I would be concerned about any language that would limit the 
ability of a supervisor to take prompt action, to take 
aggressive action, to ask hard questions. I think one of the 
things we have seen with respect to the institutions we are 
talking about today is we need supervisors to do that, not to 
hold back.
    And so we would be happy to work with the Committee on any 
reforms that are needed with respect to that provision.
    Senator Reed. Thank you. Mr. Hsu, your position, as Acting 
Comptroller?
    Mr. Hsu. I agree with Vice Chair Barr. It is vitally 
important that supervisors have discretion to identify risks 
and to act on those in a timely manner, and that includes 
requiring remediation. So I am not comfortable with any 
limitations on supervisors' ability to enforce compliance with 
rules such as the BSA/AML Act and the CFT rules.
    Senator Reed. Thank you very much.
    Mr. Barr, capital stress tests were put in effect by Dodd-
Frank. The Federal Reserve organizes, creates the tests, and 
proposes the test upon the banking institution. The results are 
made public so that everyone can know. That is not the case 
with liquidity testing. Is that correct?
    Mr. Barr. Yes. The framework for liquidity stress testing 
and for interest rate stress testing are internal to the 
supervisory process. They are not a public exercise.
    Senator Reed. And in fact, several times SVB was notified 
by the Federal Reserve privately of failing its liquidity test. 
Is that correct?
    Mr. Barr. Yes, that is correct, sir.
    Senator Reed. And no action was taken.
    Mr. Barr. Action was taken but some of it was quite 
counterproductive with respect to the actions taken. So for 
example, one step that the bank took with respect to liquidity 
risk is when it saw that it was breaching its liquidity limits 
it changed the modeling assumptions to make the test less 
conservative.
    Senator Reed. So yeah, it took the test, it failed the 
test, and it rewrote the test, and passed the test, which is, 
you know, good if you can do it.
    I presume and hope that the Federal Reserve is looking 
closely at adopting stronger liquidity rules, very similar to 
the capital rules.
    Mr. Barr. Yes, Senator.
    Senator Reed. Let me ask one other question. The President 
of SVB, Mr. Becker, was also on the board of the San Francisco 
Fed?
    Mr. Barr. Yes. That is correct.
    Senator Reed. Did that in any way influence the treatment 
of this bank?
    Mr. Barr. The evidentiary record that the review looked at 
did not find evidence of that. Of course, you know, the 
structural issues are there.
    Senator Reed. Oh no, absolutely. Again, you have got a bank 
that is changing the test because they failed, and you have got 
a bank being expected, by someone, who is, in a way, directly 
accountable to the president of that bank.
    Mr. Barr. The board structure, the way it works under the 
Federal Reserve Act, a third of those members are selected by 
the local bankers, and are bankers. They are forbidden from 
having anything to do with supervision, as a matter of policy 
and law. And so that is the structural way that the Federal 
Reserve Act intends to deal with those issues.
    Senator Reed. Yeah. But rather than structural or 
institutional in the human dimension, if someone is sitting on 
your board, and even though they have no legal rights, there is 
a certain sensitivity, I would expect, by the inspectors.
    Mr. Barr. Again, the evidentiary record we have from the 
review does not show that in this case.
    Senator Reed. Well, I think that is another area where you 
might look at.
    Thank you very much, Mr. Chairman.
    Chair Brown. Senator Rounds, of South Dakota, is 
recognized.
    Senator Rounds. Thank you, Mr. Chairman, and thank you all 
for attending today and participating.
    Vice Chairman Barr, the Federal Reserve issued an MRA, 
Matter Requiring Attention, for SVB's interest rate risk. This 
was in November of 2022. The supervisory finding stated that 
the firm's interest rate risk simulations were unreliable and 
that they gave a false sense of safety in the rising rate 
environment and really masked the need to take actions earlier 
in the rate cycle.
    Greg Becker, who testified before us, the former SVB CEO, 
told this Committee on Tuesday that findings in writing are 
done in some cases months after the initial verbal feedback is 
given.
    Vice Chair Barr, when did the Fed give the initial feedback 
regarding interest rate risk to SVB, and why was simply an MRA 
issued as opposed to an MRIA?
    Mr. Barr. I believe in that case the writing was actually 
quite close in time to the finding of difficulty with the 
interest rate risk modeling. As you suggested, the basic 
problem was that the model was showing that the firm would be 
earning more money when interest rates rose, and the opposite 
was actually the case.
    In terms of the timing for remediation, I think that one of 
the findings of the review is that the Federal Reserve staff 
could have pushed harder on the firm to move faster with 
respect to remediation. Of course, the timeframe between 
November and March was pretty tight, and the firm failed in 
March.
    Senator Rounds. Was that perhaps because SVB actually had 
about 15 percent in the ratio for their Tier 1 capital on hand 
at that time, which is a pretty high amount of capital.
    Mr. Barr. They did have a high amount of capital. It did 
not really help with respect to their particular interest rate 
risk and liquidity risk.
    Senator Rounds. It was a liquidity issue, not a capital 
issue.
    Mr. Barr. The solvency of the firm, as I said in my 
testimony, was what drove the liquidity risk. That is, 
depositors looked at the balance sheet of the bank, and despite 
its regulatory capital being high, they viewed it as insolvent. 
And one of the reasons for the view of that is that under the 
capital rules that were applied to SVB, SVB did not have to 
pass through its unrealized losses into its capital treatment. 
And so its capital treatment was really a little bit higher 
than it ought to have been if it had passed through those 
unrealized losses.
    Senator Rounds. And if we would have been talking and 
focusing on the liquidity issue, in particular, because 
basically under the rules that they were following the 
liquidity became the issue at the time. At one point their 
capital was up but they were not recognizing the losses that 
would have occurred if they had to convert those bonds that 
they were carrying.
    Mr. Barr. Correct.
    Senator Rounds. OK. Also on Tuesday when he was in here, 
the former SVB CEO claimed that as of early 2023, all but one 
supervisory finding was remediated. Is this true, and if so, 
was this interest rate risk one of those that was remediated?
    Mr. Barr. That is not true, Senator Rounds. At the time the 
institution failed they had 31 outstanding Matters Requiring 
Attention or Immediate Attention, including those that are 
related to interest rate risk and liquidity risk, as well as 
broad issues of risk management at the bank. It was rated 
Deficient 1, Not Well Managed at the time it failed.
    Senator Rounds. They still had 31 supervisory findings when 
it failed.
    Mr. Barr. Correct.
    Senator Rounds. Mr. Gruenberg, I am just curious. You have 
a clawback authority right now, and if I understand it 
correctly for the most part it has to show that there was 
wrongdoing or basically criminal activity involved on the 
clawback for executives, with one exception, and that is if the 
Secretary, as I read it, if there is a written recommendation 
by the Federal Reserve and the FDIC, the Treasury Secretary, in 
consultation with the President, shall appoint the FDIC 
receiver of a covered financial company if, among other 
determinations, the financial company is in danger of default. 
The failure would have serious adverse effects on financial 
stability, and there is no viable private sector alternative to 
failure.
    And this was apparently met, and therefore, after such an 
appointment, the FDIC may recover losses from the compensation 
of any current or former senior executive or director who is 
substantially responsible for the failed condition of the 
institution. Recoupment is limited to a 2-year period preceding 
the date on which the FDIC was appointed as receiver, and the 
FDIC must weigh the financial and deterrent benefits of 
recovery against the cost of execution.
    Mr. Gruenberg, are you recouping or clawing back the 
bonuses that those executive officers received in the SVB bank 
failure?
    Mr. Gruenberg. Thank you for the question, Senator. Under 
the Federal Deposit Insurance Act, we have authority, in the 
case of a failed institution, to investigate the executives and 
the board of the institution for any wrongdoing, and we have 
authority to order restitution if there was improper conduct. 
We also have authority to ban individuals from the business of 
banking.
    Senator Rounds. Are you--did you invoke this and use the 
clawback provisions?
    Mr. Gruenberg. We are pursuing investigations. We obviously 
have to determine the conduct that occurred to determine if 
there was misconduct that would give us the authority to----
    Senator Rounds. With the Chairman's indulgence, I would 
just like to finish this line of questioning, if I could.
    Chair Brown. Sure.
    Senator Rounds. Look, you have got executive officers in a 
bank who not only received bonuses for showing a better rate of 
return because, in part, they eliminated the hedging which was 
protecting those deposits, and at the same time there was a 
change, apparently, within their guidelines during this period 
of time in which they actually received a higher rate of return 
based upon the amount of income or return. So by eliminating 
the expense of protecting the assets of these depositors, they 
bumped their bonuses.
    I guess my question is real simple. Are you in the middle 
of an investigation and do you plan on pursuing, if for no 
other reason, a deterrent to others who might think this is a 
cool way to make a lot of money, like millions of dollars, or 
are we just simply going to wait back and this thing kind of 
floats away?
    Mr. Gruenberg. The answer to your question, Senator, is 
yes.
    Senator Rounds. Thank you.
    Chair Brown. Thank you, Senator Rounds.
    Senator Menendez, of New Jersey, is recognized.
    Senator Menendez. Mr. Barr, your report identified major 
weaknesses in Silicon Valley Bank's incentive compensation 
program, note that, quote, ``encourage excessive risk-taking to 
maximize short-term financial metrics,'' close quote. It goes 
on to say that SVB's compensation practices, quote, ``did not 
adequately reflect longer-term performance, nonfinancial risk, 
or unaddressed audit or supervisory issues.''
    So Mr. Gruenberg, Mr. Harper, and Mr. Hsu, with a simple 
yes or no, do you agree with Mr. Barr's analysis?
    Mr. Hsu. Yes.
    Mr. Harper. Yes.
    Mr. Gruenberg. Yes, Senator.
    Senator Menendez. OK. As I noted in our hearing with the 
executives on Tuesday, the incentive structure SVB put in place 
rewarded breakneck growth and profitability while knee-capping 
efforts to manage growing risks to the firm.
    Mr. Barr, in questions for the record following your 
confirmation hearing, I asked if you would work with the other 
financial regulators to develop and swiftly implement a strong 
incentive-based compensation rule, a rule that is required 
under Dodd-Frank that is more than 10 years overdue, so that we 
can prevent the type of situation we saw at SVB.
    So Mr. Barr, if the 2016 proposed rule on Section 956 had 
been implemented, would that have mitigated some of the 
problems with SVB's incentive compensation that you note din 
your report?
    Mr. Barr. Yes, I think it would have assisted in that 
effort.
    Senator Menendez. Mr. Barr, Mr. Gruenberg, Mr. Hsu, and Mr. 
Harper, can each of your agencies have a role to play in 
finalizing this rule? Will you commit to acting on this rule 
quickly, since it is already 10 years overdue?
    Mr. Barr. Yes.
    Mr. Hsu. Yes.
    Mr. Harper. Yes.
    Mr. Gruenberg. Yes, Senator.
    Senator Menendez. Well, I appreciate that, you know, 
because I have a sense, having sat here through the Great 
Recession, almost the financial collapse, listening to all we 
were asked to do as Members of the Banking Committee back then, 
that when we pass things we seem to get a veto by omission, 
which means maybe the regulators do not like what we say, but 
it is the law, and then nothing happens. A decade--a decade. At 
some point, gentlemen, you have responsibility. So I hope we 
will get to that quickly.
    Vice Chair Barr, your report on the supervision of SVB 
reveals that Federal examiners gave the bank's management 
satisfactory ratings, quote, ``even after supervisors began 
identifying and communicating issues with governance and risk 
management in 2018.'' The Fed continued to award management 
satisfactory ratings, despite identifying significant concerns 
year after year.
    Why are supervisors apparently so reluctant to downgrade 
the bank's ratings? What changes, if any, do you plan to make 
to ensure banks are rated accurately when significant risks are 
identified?
    Mr. Barr. Thank you, Senator. I do think the report 
identified that the supervisors were very slow to change 
ratings when they found problems. Part of that had to do with 
standards that were set. Part of that had to do with the fact 
that it is, as a supervisor, hard to push back on a bank when 
they are earning a lot of profit and growing rapidly and the 
economy is doing well.
    So we need to have a way to make sure that our supervisors 
feel empowered to take action promptly. We need to give them 
the tools to do that, and we need to change the supervisory 
culture.
    One of the first things I did when taking this job was to 
go talk to supervisors around the system, telling them I wanted 
to make sure that they were asking the hard questions, being 
tough, that they were standing true, and that they were agile 
looking for new risks in the system. I think we have to keep at 
that and change the culture.
    Senator Menendez. Well, you know, another item from the 
report that concerns me is that supervisors, quote, ``saw 
financial performance and the lack of realized risk outcomes 
during this period as offsets to underlying concerns related to 
governance and risk management.''
    Now to me this shows that the Fed examiners fundamentally 
misunderstood their role in enforcing a safe and sound backing 
system. Your job is to identify risks proactively and ensure 
that they are fixed before they impact performance. Since we 
have seen time and time again that the banks themselves do a 
poor job of it.
    Can you commit to us, Mr. Barr, that you will sharpen the 
focus of your supervisory efforts on proactively identifying 
and ensuring banks fix vulnerabilities? I mean, from my mind 
the purpose of regulators is to act as the cop on the beat, not 
to give everybody a pass.
    Mr. Barr. Yes. I fully commit to that. I think we need to 
make our supervisory system much more agile, much faster, and 
much more forceful, and we will be doing that.
    Senator Menendez. And I hope the other regulators do so as 
well.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you.
    Senator Vance, of Ohio, is recognized.
    Senator Vance. Great. Thank you, Mr. Chairman, and thanks 
to the panel for tolerating this arctic condition they have put 
this hearing room in. It is really cold in here.
    But I want to direct my questions to Mr. Barr. One of my 
concerns here is that we have the San Francisco Fed that 
clearly was asleep at the wheel. I think a basic examiner's 
review would have said that Silicon Valley Bank had some 
serious problems, and the fact that we did not identify it 
until the bank effectively blew up is a serious problem.
    So one of the things we have seen is the San Francisco Fed 
is clearly focused on diversity, equity, and inclusion 
initiatives and also climate risk, and I, as a person who 
recognizes that if you are focused on one thing, you are 
fundamentally not as focused on other things, I want to sort of 
target this particular thing.
    So instead of focusing on the safety and soundness of our 
banking system, the San Francisco Fed was busy publishing 
economic letters and research on a number of social justice 
causes. Some of the selected titles include ``Disappointing 
Facts about the Black/White Wage Gap'', ``How Are Racial and 
Gender Gaps Limiting the Full Potential of Your State's 
Economy?'' ``Hosting Seminars and Publishing Primers on Racial 
Equity, Making a Commitment that their Equity Goals Would Help 
to Drive their Approach to Hiring'', and that is not to mention 
their involvement in the Fed's ``Racism in the Economy'' 
series.
    Now that is just after a quick scan of the San Francisco 
Fed's website. I worry that when you have the San Francisco Fed 
sounding a little bit more like an Ivy League political science 
or economics department that you miss some things.
    Mr. Barr, could you explain how this research and these 
activities support the Fed's monetary dual mandate or 
supervisory charge to ensure safety and soundness in the 
banking sector? How does this actually help?
    Mr. Barr. Senator, let me start by just talking about the 
particular case of SVB. The review did not find any evidence 
that the supervisors were distracted by other activities. They 
were focused on the right set of risks in the bank, with 
respect to liquidity, risk management, and interest rate risk. 
But the findings were that they did not act forcefully enough 
to get the bank to move quickly enough to change those factors. 
So that is the basic backdrop.
    With respect to your question, you know, the Federal 
Reserve banks do have a wide range of freedom, being able to 
conduct research that they think is important to understanding 
economic drivers in our economy, and some of those economic 
drivers include the issues that you discussed.
    Senator Vance. So here, I guess, is the question. Is it 
your view, Mr. Barr, that if the Fed is doing these seminars on 
climate risk, on diversity, equity, and inclusion, and so 
forth, instead of seminars on risk management--because again, 
there is only so much time in the day--do you just think that 
it does not have any effect on their focus and on the things 
that they are thinking about when they are doing their basic 
job?
    Mr. Barr. The evidence in the review is that the 
supervisors were focused on the right set of risks. They were 
focused on basic, you know, risk management at the firm in 
terms of interest rate risk, liquidity risk. They found that 
the bank was not well managed with respect to its activities. 
They were graded a Deficient 1.
    So the issue, at least with respect to SVB, that we saw was 
that it was about the forcefulness of action that the 
supervisors did not take in time to change the nature of the 
firm.
    Senator Vance. I appreciate that, Mr. Barr, and I 
understand that the review did not find that this was 
distracting enough. But I just wonder, separate what the review 
found and think about the way that human minds work, where if 
we are focused on one thing we are fundamentally not focused on 
something else. There is only so much cognitive bandwidth the 
average human being has.
    I really worry that the more that the regulators are 
focused on things that have nothing to do with systemic or 
individual financial risk, the less and less safe our financial 
system is going to be. And I understand the point that you are 
making, that the Revie found that the focus was not a problem 
here, but this is all over-determined. It is incredibly 
difficult to say, with any conclusive evidence, either in my 
direction or in your direction, that the focus on these 
nonrisky financial issues caused a problem.
    But are you worried that we reach a sort of tipping point 
where the focus on building progressive politics into our risk 
assessment starts to actually harm our ability to really 
analyze whether these banks are a problem?
    Mr. Barr. I do not think politics should play any role in 
risk assessment, and as I said in this case we do not see 
evidence of that in the record.
    Senator Vance. So I agree with that point, that politics 
should not play any role here, and Mr. Chairman, I will yield 
my time. But just to say that, you know--I will say this a 
third time, actually. We can only do so much in a given day, 
and the more that we distract ourselves from focusing on 
financial risk and instead focus on climate risk and other 
things, I worry it is going to cause our financial system to be 
much less safe.
    Thank you, Mr. Barr.
    Chair Brown. Senator Tester, of Montana, is recognized.
    Senator Tester. Thank you, Chairman Brown and Ranking 
Member Scott, for having this hearing, and I want to thank all 
of you for your testimony and thank you for being here. My 
guess is last night probably the only two people who slept well 
were Harper and Hsu, but thank you all for being here.
    This morning the good Senator from North Carolina, Senator 
Tillis, and I are calling for an independent, comprehensive 
investigation into the recent bank failures. The stress these 
recent failures put on our financial system is having negative 
effects on community financial institutions, small businesses, 
hardworking families, and I believe we must get to the bottom 
of the recent failures to ensure our financial system is not 
left on the hook for risky behavior by reckless executives and 
lackluster agency oversight.
    This is a question for all of you, and you can nod or raise 
our hand. Would all of you support an independent review?
    [All witnesses raise their hands.]
    Mr. Gruenberg. Yes, Senator.
    Mr. Barr. We have been clear that we welcome additional 
reviews of all kinds.
    Senator Tester. All right. Good. Let the record reflect it 
is unanimous.
    Mr. Barr, I want to read you your testimony, and then I 
want to ask you what this means. It is on the third page, in my 
copy anyway. ``Finally, the fourth key takeaway is the Federal 
Reserve board's tailoring approach in response to the Economic 
Growth, Regulatory Relief, and Consumer Protection Act and a 
shift in the stance of supervisory policy impeded effective 
supervision by reducing standards, increasing complexity, and 
promoting a less assertive supervisory approach. Absent these 
changes, SVB would have been subject to supervision within the 
LFBO portfolio and subject to heightened standards beginning in 
2019, throughout the bank's period of rapid growth.''
    Is it fair to say that every bank would have been subject 
to those same standards, not just SVB but everybody?
    Mr. Barr. Sir, that was referring to the approach based on 
the size of the asset class of institutions. So other banks 
that were of a higher----
    Senator Tester. Yeah, in that asset class.
    Mr. Barr. ----asset size would also have been subject to 
that rule, but not every bank.
    Senator Tester. No. but everybody in that asset set.
    Mr. Barr. Correct.
    Senator Tester. So let me ask you this. Fundamentally, do 
you believe that the regulations should fit the risk?
    Mr. Barr. Yes, I do, sir.
    Senator Tester. OK. So if you looked at 2155, which is the 
other name for the longer title I just read, is it not pretty 
clear that tailoring is allowed, even to the smallest community 
bank. If they had a risky portfolio you could drop the hammer 
on them, as the Chairman said. Correct?
    Mr. Barr. We have ample discretion under S. 2155 to take a 
risk-based approach to supervision.
    Senator Tester. Thank you for that. So the question 
becomes, Vice Chair Barr, are you going to propose new 
regulations in response to these failures?
    Mr. Barr. I expect both in response to these failures and 
our broader review to look at changes in both supervision and 
regulation going forward.
    Senator Tester. But is not your report relatively clear 
that it is not a regulatory failure, that if the tailoring 
would have been applied correctly, as 2155 talks about, as I 
believe Congress intended, that this problem could have been 
stopped.
    Mr. Barr. The report found that both supervision and 
regulation played a role in contributing to a reduced 
resiliency at the bank, and we will be looking at both.
    Senator Tester. Yeah. But the point is here, and I do not 
mean to bat you around on this, it is just a matter of fact. I 
think regulation needs to fit the risk. I think when 2155 was 
put up it was put up with the idea that if you had a risky 
portfolio, regardless of size, that the Fed and the other 
agencies had the ability to tailor those to whatever threat 
that those risky business dealings done. Right?
    Mr. Barr. Senator, I agree. We are not seeking any change 
in law from this Committee.
    Senator Tester. OK.
    Mr. Barr. And we believe we have ample authority under 
existing law to provide a better approach to supervision and 
regulation going forward, and I am committed to doing that.
    Senator Tester. So one of my main concerns, and it was one 
of the things we talked about several years ago, is that I come 
from a rural State. You know this. I mean, I do not need to 
tell any of you guys what is going on here. You guys deal with 
rural areas. And we do not have--I mean, there ain't a lot of 
banks every other block. It ain't like walking down the street 
in L.A. or New York City. OK? And my concern is that these 
community banks, that do not have a risky portfolio, will end 
up paying the price for a CEO, by the way, that told this 
Committee a couple of days ago that they took care of all the 
problems, and you just pointed out that they had 31 of them 
that they did not.
    So how do you protect the folks who are doing an honest 
job, providing capital, supporting agriculture, supporting Main 
Street businesses, supporting working families, how do you 
protect those? Because in 2008, I stood up here, along with 
Brown and others, and we railed on regulators. We railed and 
railed and railed because they did not do their job. And do you 
know what they ended up doing? They ended up regulating the 
hell out of the banking industry to the point where we made the 
bigger banks bigger.
    Talk to me.
    Mr. Barr. I agree with you, Senator. It is absolutely vital 
that we have a strong and vibrant community banking and 
regional banking sector, as we do today. Community banks around 
the country and in States all over the country are serving 
their communities well. And we are highly attentive to that 
when we think about new approaches here.
    The kinds of rules that I am talking about are for large 
banks, not community banks.
    Senator Tester. OK. I just want to make sure that that does 
not bleed down, OK?
    Marty, just one last thing, with the Chairman's indulgence. 
Senator Brown has brought up some very good points on the 
president of a bank who may not have acted appropriately and 
tried to pad his own pocket. I am not making that accusation. 
But as you do your research, I hope you hold them accountable. 
It sets a very bad form if you do not.
    Mr. Gruenberg. I understand, Senator.
    Chair Brown. Senator Cramer is recognized, from North 
Dakota.
    Senator Cramer. Thank you, Mr. Chairman. Thank you to all 
of the witnesses. Frankly, I love the temperature in here.
    I do not think that there is any question that while we are 
not all exactly in the same place, we do share two concerns. 
One, supervisors did not do enough, and two, managers did the 
wrong thing.
    So I was a soccer referee before I took up this other crazy 
job. And when I would do particularly collegiate men, if I did 
not pull out my yellow card at the first reckless act, that was 
like a license for them to go crazy. But when I did put up my 
yellow card with the first reckless act, everybody on the pitch 
new that if somebody else did it, or if they did it again, it 
could be a red card. If I warned them gently, they often just 
kept playing rough.
    More rules and regulations without appropriate regulating 
will get us nowhere. But we could beat this to death, I 
suppose.
    But I do have something that we have not talked about that 
I want to ask about. What role--or maybe a better way to put it 
would be, what if there had not been a run on SVB? What if 
everything was the same, we know they did some things, made 
some sales that raised some concerns, legitimately. But what if 
there had not been a social media sort of pitch that caused 
this run? Would we even be here today? Is it possible that 
nothing would have ever happened had there not been this sort 
of panic, fear? Fear is a real deal.
    And maybe start with you, Mr. Barr, on that. Am I crazy to 
think that maybe this would not have even happened?
    Mr. Barr. Senator, it is obviously difficult to know, in 
any circumstance, what shock is going to come to the financial 
system. What we focus on as supervisors when we are doing our 
jobs right are the vulnerabilities that a firm faces and making 
sure that the firm is addressing those vulnerabilities, and 
making sure we have resilience in the system with good rules on 
capital and liquidity so that if there is a shock that nobody 
anticipates they are not hit in a way that causes contagion in 
the financial system. So I take your point very much.
    Senator Cramer. And I agree with all of that. I just worry 
that in today's social media world that fear and panic gets 
accelerated, gets elevated. And I do not know what we are going 
to do about it, but I am interested in your view on it.
    One other thing I want to ask, Mr. Gruenberg and Mr. Hsu, 
maybe you could comment on this. There has been a lot of talk 
about the sale of the assets, the sale of First Republic to 
JPMorgan--peaking of big getting bigger, you know, the irony is 
rich--the lack of transparency in that. Could each of you sort 
of tell me, I know the bid price is the big thing, right. That 
is the easy go-to in an auction. But is there more to it? 
Should we have considered other factors in approving that sale 
when there were other bidders?
    Start with you, Mr. Gruenberg, and then Mr. Hsu. I know you 
both played a role in this.
    Mr. Gruenberg. Thank you, Senator. The statute under which 
the FDIC works in these matters is clear and it really gives us 
one factor to consider, which is least cost, and that was the 
only factor we were allowed to consider under the law in 
reviewing the bids that we received for First Republic.
    Senator Cramer. So does the OCC have additional leeway with 
regard to the soundness of the system that could be considered?
    Mr. Hsu. So the factors that we are subject to are laid out 
by the Bank Merger Act, and those statutory factors relate to 
competition, convenience and needs of the community, financial 
stability, BSA/AML, managerial financial resources, et cetera. 
We also have guidelines that we have released that articulate 
the frameworks for reviewing those.
    In a failing bank case, especially where there is a larger 
institution, we also have to take into account the financial 
stability factor which becomes quite important, and it is very 
important for us to ensure that the actions we take, in short, 
are coordinated in timely Government action, support a minimal 
cost to the DIF, and really check the risk of contagion and 
uncertainty. Those are very important.
    Senator Cramer. Timeliness in a crisis is critical, and I 
understand that as well. I just hope the right incentives are 
in place.
    Since I have a few seconds I just want to wrap up with what 
Senator Vance was talking about, Mr. Barr. You kept saying that 
the report finds that the supervisors were focused on the right 
things but not forceful enough sort of regarding their 
findings. Focus and forcefulness sort of go together, in my 
mind. If you are focused, that implies exactly that, focus, but 
it also implies that you have a forceful response. I think 
there is a distraction. I think it is impossible to say, in the 
course of an 8- or 9- or 10-hour day, 40-, 50-hour week, with 
limited resources, that you can just do all things 
intellectually, socially, culturally. It would be better if 
regulators focused on the thing that they are supposed to focus 
on.
    All three of you have articulated your parameters very 
well. Let's stay within the parameters and focus there.
    Thank you, Mr. Chairman.
    Chair Brown. Senator Warner, from Virginia, is recognized.
    Senator Warner. Thank you, Mr. Chairman. I had a really 
good question that I was actually going to say something nice 
about my friend, Senator Kennedy, and maybe I will get to it. 
But I want to pick where Senator Cramer started, which was----
    Senator Kennedy. You can go ahead and talk about me.
    Senator Warner. Do not worry. I may still talk about you 
later. You know, the Chairman gives me a little discretion.
    But I think when you mentioned, we can talk about how we 
got here and what standards are appropriate, what the 
regulators did right or wrong. I was going to compliment 
Senator Kennedy on how he described the qualify the management 
of these institutions.
    But in the case of SVB, $42 billion in 6 hours, on that 
run? I do not know what regulatory structure--that point, at 
least on calculations I saw, that was the equivalent of 25 
cents on every dollar. Nothing would have stopped that. And I 
do not think we have really--and Vice Chair Barr, I give you a 
lot of credit for your report. You had a short period of time 
after you did a good piece of work. I have got a couple of 
follow-up questions.
    But this run--and I am going to start with Michael and 
Marty, but I welcome everybody, but this is mostly focused to 
my Republican colleagues. You know, there were laws back in the 
'30s that if you accelerated a bank run there was a penalty 
paid. Candidly, I think some of the folks from my old industry, 
the old venture industry, very responsibly, the Wednesday night 
before the run exacerbated that, and they were as familiar with 
the institution as any entities around there. And I still would 
like to know where some of that money ended up going.
    But we have not really talked about that. We have not 
really talked as well, and this is where I may get the nods to 
go and know. I know you guys feel that the SEC leadership has 
got too many items on our docket at this point. But one that 
has not gotten a lot of attention is a fulsome look at short-
selling. You know, I think back in the 2008 crisis, then SEC 
Chair, Republican, former House member Cox, put a hold for a 
couple of weeks on short-selling. Later analysis showed it did 
not really work that much. But maybe a fulsome look, to your 
analogy about if your short sellers inappropriate not disclose, 
that may not get you a yellow card. It may get you a red card. 
It might be something that we could collaborate on.
    I want to start with Mr. Gruenberg. You know, this 
internet-driven run, exacerbated by folks who were very 
familiar with the institution, you know, shouting ``fire'' in a 
crowded theater on that Wednesday night, into Thursday morning, 
tools we have got? Suggestions?
    Mr. Barr. It is an area that I think is worth exploring. 
You know, the speed of that run, the ferocity of that run was 
something that I do not think anybody had ever seen. As you 
pointed out, $42 billion in a few hours, another $100 billion 
lined up the next day. So in less than 24 hours, you know, 
losing basically 85 percent of the deposit base is 
unprecedented.
    I do think that it is worth looking at that in relation to 
our banking tools, that the issues that you raise with respect 
to other actors is really an SEC matter.
    Senator Warner. Marty?
    Mr. Gruenberg. Senator, I think we learned some hard 
lessons about liquidity risk in this episode, and there are 
probably three things I would point to. One, not only the 
reliance of the institution on uninsured deposits but those 
uninsured deposits were concentrated among a relatively small 
number of depositors. So the ability for those deposits to go 
fast I think was really underappreciated. Second, obviously, 
online banking facilitates that kind of liquidity risk 
significantly, and the factors you suggested of social media 
can broadcast that out much more quickly than in the past. And 
this is a set of realities that we are really going to have to 
come to grips with going forward.
    We issued a report on deposit insurance, and we talked 
about those things as matters we are going to need to work on 
going forward.
    Senator Warner. Anybody else on the panel want to weigh in 
on this?
    Mr. Hsu. Senator, I think you have highlighted an important 
issue that we need to focus on. The good news is liquidity 
risks do change over time, and we do need to be responsive to 
those changes. There have been examples in the past, in 
wholesale funding markets, where we have made adjustments to 
catch up and make sure that we can address those in a safe and 
sound manner.
    Senator Warner. Yeah. Candidly, I appreciate what everybody 
said, but we have all said this, but I have not heard that many 
worthwhile policy recommendations. You know, I do not think we 
are going to put in place the kind of speed bumps on taking 
money out that we have got in the stock market. I do think if 
we put a little bit more, to Senator Cramer's position about a 
yellow or red card on short-selling inappropriately, that might 
put some hesitancy there.
    But I do think we have to look at is there any 
responsibility, particularly for somebody who has been a long-
term position of capital in these institutions, that does 
this--and SVB's model was so focused on VC, they pulled the 
report. But I would ask you all to think about this.
    My time has expired. I just want to make one last quick 
comment, Mr. Chairman. If I had had another question I would 
have asked Vice Chairman Barr, you know, you put a lot of 
recommendations saying it is going to take you a couple of 
years for the regulators. I do not think we can wait that long. 
I think particularly when so many of us, at least--we all said 
Banking 101 mismatch, making sure that information gets higher 
prioritized to the management, to the board, I think there is 
work we need to do there, and I look forward to working with 
you on it.
    Thank you, Mr. Chairman.
    Senator Kennedy. What about the Kennedy compliment?
    Senator Warner. The Kennedy compliment was going to be, I 
was going to talk about how the executives said they had done 
everything, they love their institutions, you know, they were 
so smart, and you in that kind of----
    Chair Brown. The Senator's time has expired.
    Senator Warner. ----always said to them, you know, you 
called them out for being just plain----
    Chair Brown. Senator Britt, of Alabama, is recognized.
    Senator Warner. ----over the top.
    Senator Kennedy. You are a fine American, Senator.
    Chair Brown. This is 1 minute off your time, Senator 
Kennedy.
    Senator Britt, of Alabama.
    Senator Britt. Thank you, Mr. Chairman. I appreciate all of 
you being here today.
    On Tuesday, we heard from the top executives of SVB and 
Signature Bank, and unfortunately it was disheartening to hear 
the lack of responsibility from these individuals regarding the 
decision they made that put their financial institutions, their 
depositors, their broader banking sector across the Nation, in 
a position of unfathomable risk. I have significant concerns 
around their actions, but today we are here to talk about 
yours.
    I was disappointed when I read the report, Mr. Barr, the 
``Barr Report'' that you put out, because in my opinion, in 
reading that, you did not take adequate responsibility for what 
I believe is under your purview. You know, I read and saw where 
there was blame placed on the San Francisco Fed, where there 
was blame place on your examiners, blame on your predecessors, 
blame on 2155, but I did not hear the blame being put on 
yourself. That is the one entity or person that I did not see 
in the report. I will say, I really appreciate your candor 
today and saying that the buck stops with you. I believe that 
you have to take some personal responsibility for what you have 
done, and I appreciate you doing that today.
    I will say, Mr. Barr, on the day that SVB failed, how long 
had you been in your current role?
    Mr. Barr. I joined in the middle of July of 2022.
    Senator Britt. OK, so about 10 months?
    Mr. Barr. I have not done the math. It sounds like 7 
months.
    Senator Britt. OK, 7 months, 10 months to today. That makes 
sense.
    So in that short time, the Ranking Member mention this, 
obviously Senator Vance mentioned this as well, but you spent 
considerable time, speeches and other things, talking about 
climate issues and a number of those remarks. And what I fear 
is that we are seeing a shift of priority, a shift where 
someone like you, who, as I looked on your website it says that 
your job is to promote the safety and soundness of the banking 
system, to foster stability in the financial markets, and 
ensure individual banks are complying with laws and regulation 
under its jurisdiction. The focus is not there. The focus needs 
to be on the 31 outstanding, you know, the outstanding 
supervisory findings and making sure that we have proper 
answers on those, not on climate risk or changes but what your 
actual job is.
    And so on that note, while you mentioned earlier that the 
day that SVB failed there were 31 supervisory findings that 
were outstanding. Is that correct?
    Mr. Barr. Yes.
    Senator Britt. And so of those, my question is why your 
people did not do more. It is my understanding they could have 
downgraded their supervisory ratings, which obviously would 
have resulted in more frequent supervision and exams, or they 
could have taken enforcement actions like prohibiting dividends 
to shareholders, requiring immediate capital increases, fines, 
other things like that, but they did neither. Is that correct?
    Mr. Barr. The supervisors had downgraded the firm in the 
summer with respect to broad-based problems in governance and 
controls, risk management function, to Deficient 1, which means 
the firm is not well managed. And as a result of that, the firm 
was subject to a 4(m) limitation, which meant that it could no 
longer merge with or acquire nonbanking entities. And the staff 
were also in the process of developing a detailed Memorandum of 
Understanding, which is the first-level enforcement action 
after a deficient downgrade occurs.
    So the steps were in train. What the report found is that 
our supervisors were not moving fast enough with respect to 
those actions.
    Senator Britt. So they had the tools in their toolbox, but 
they were not using them with the force that they could have.
    Mr. Barr. Yes. I think it is fair to say that the tools 
were there----
    Senator Britt. The tools were there. They just did not use 
them with the force. I am hoping, moving forward, I do not 
think we need new tools. I just think, to your earlier point 
about creating a culture where those tools are used, you can do 
that internally. That is a leadership issue. That is not 
something that we do not need more rules or regulations to do 
that.
    And I am almost out of time. Mr. Gruenberg, my question is 
for you. Do you agree that if Silicon Valley Bank was sold 
while it was still an open bank it would have been better for 
the economy, the consumers, and other banks who have now had to 
foot the bill to replenish the DIF?
    Mr. Gruenberg. Yes, Senator.
    Senator Britt. OK. So did you have any interested partners 
with interest to purchase SVB the night before SVB failed?
    Mr. Gruenberg. I am not aware of any, Senator. We were not 
the primary regulator so we would not have been the ones 
necessarily contacted in regard to that.
    Senator Britt. OK. But if they had, if there were 
interested parties, and we find that there were, that certainly 
should have been done the night before versus afterwards. It 
would have saved us all $35 billion at this point.
    Mr. Gruenberg. If there were opportunities for an open 
institution solution, that would have been preferable.
    Senator Britt. Well, if we find that I certainly hope that 
in the future we make those types of choices instead of ones 
that ultimately cause institutions all over the country to have 
to pay. Thank you.
    Chair Brown. Senator Warren, of Massachusetts, is 
recognized.
    Senator Warren. Thank you, Mr. Chairman.
    So earlier this month, when First Republic Bank collapsed, 
multiple banks were interested in buying the failed bank. 
Banking regulators chose JPMorgan Chase, America's biggest 
bank. The result was that a gigantic, poorly supervised bank 
was swallowed up by an even more gigantic bank, and now the 
biggest bank in the country is about $200 billion bigger than 
it was before.
    So in order for the deal to go through, two separate 
regulators had to sign off. When the FDIC sells a failed bank, 
the law requires it to choose the highest bidder that will 
result in the lowest cost to the Deposit Insurance Fund. But 
the law also requires signoff from the OCC, and the OCC's job, 
by law, is to consider whether the merger would pose, quote, 
``risk to the stability of the United States banking or 
financial system,'' end quote.
    Acting Comptroller Hsu, OCC regulations include a list of 
factors that the OCC must consider when evaluating, quote, 
``risk to the stability of the banking system.'' Do you know 
the first item on that list?
    Mr. Hsu. It relates to the financial stability, whether 
there are threats of financial stability to the U.S.
    Senator Warren. Uh-huh, whether or not--but what is the 
item you are supposed to consider? The very first one on the 
list.
    Mr. Hsu. I believe it is whether the merger will have 
financial stability impacts.
    Senator Warren. Because of----
    Mr. Hsu. Because of the merger.
    Senator Warren. No. It is whether the proposed transaction 
would result in a material increase in risks to the financial 
stability due to an increase in the size of the combining 
institutions. It troubles me that you do not remember this.
    So how do we know if a purchasing bank poses more or less 
risk to the banking system? Well, one metric that regulators 
use is the G-SIB score, which estimates the impact on our 
financial system of the failure of each of our largest banks. 
The size of the bank is a big factor in its G-SIB score, so 
let's look at the G-SIB scores and figure out if JPMorgan, 
according to the OCC's own analysis, presented more risk to the 
banking system than the other bidders that have been widely 
reported in the press.
    So PNC tried to buy the failing bank, but you approved 
JPMorgan instead. Acting Comptroller Hsu, is the G-SIB score 
for JPMorgan bigger than the equivalent score for PNC?
    Mr. Hsu. It is.
    Senator Warren. How much bigger?
    Mr. Hsu. I do not know the exact magnitude of it, off the 
top of my head.
    Senator Warren. Do you want to make a guess?
    Mr. Hsu. It is bigger.
    Senator Warren. Eight times bigger--does that sound right? 
Yeah.
    Let's take a look at another bidder, Citizens Bank. Is 
JPMorgan's G-SIB score--that is, the score that shows risk to 
the banking system--bigger than the score for Citizens Bank?
    Mr. Hsu. It is.
    Senator Warren. How much bigger?
    Mr. Hsu. Significantly bigger.
    Senator Warren. Fourteen times bigger?
    Mr. Hsu. Perhaps. I do not have the exact scores in front 
of me.
    Senator Warren. Comptroller Hsu, your job, by law, is to 
determine risk to the system from making big banks even bigger, 
and you have a clear metric for doing that, the G-SIB scores. 
So how do you explain approving a sale to a banking giant that 
increases the risk to the banking system by somewhere between 
nearly 800 percent and 1,400 percent more than selling to other 
bidders? Did you just ignore the fact that a failure at 
JPMorgan would blow a hole in our banking system that would be 
eight times more than the destruction to the financial system 
and let them grow by $200 billion?
    Mr. Hsu. Senator Warren, for every merger application we 
follow the law, we follow our guidelines, we follow our 
policies and procedures. Under the financial stability prong of 
the Bank Merger Act there are a number of factors. You named 
one. Had we followed a strict G-SIB score methodology to the 
exclusion of everything else I fear that there would have been 
greater financial instability that weekend. When we make these 
decisions I have to take into account a range of factors, 
including----
    Senator Warren. So if I can, I know I am nearly out of 
time, but if the Chairman will let me pursue for just a minute 
here. Are you telling me that there are other factors that 
weighed against the other bidders that were not there for 
JPMorgan Chase, and that is how it is that you went with the 
biggest bidder, even though the biggest bidder, by your own G-
SIB scores, increases risk to the financial system?
    Mr. Hsu. What I am saying is that a G-SIB score approach to 
that factor that weekend would not have been a wise one.
    Senator Warren. Because--that is why we are here to 
exercise oversight. You cannot just say, ``I decided on 
something else'' without putting some facts behind that.
    Mr. Hsu. The G-SIB score framework is not part of the 
framework that is listed there. There are a number of factors 
there. What is very important, especially when there is a 
failing bank situation, is that the Government act in a 
coordinated and timely manner, that we minimize losses to the 
DIF----
    Senator Warren. You had----
    Mr. Hsu. ----the risk----
    Senator Warren. ----one job to do, and I appreciate it. I 
am out of time here, and I appreciate your forbearance here, 
Mr. Chairman. But I do want to say, the single biggest threat 
to the U.S. banking system is concentration. We are all pushing 
harder for merger guidelines so that we do not get more 
concentration in the banking system. You are the one person who 
was supposed to use judgment on the question of as between 
multiple sales which one was the right one to go with and which 
one presented more risk to the banking system. According to 
your own metric, you chose the one that gives us more 
concentration in the system. I am very troubled by that 
decision.
    Chair Brown. Senator Tillis, from North Carolina, is 
recognized.
    Senator Tillis. Thank you, Mr. Chairman. I wanted to 
start--I know Senator Tester and I sent a letter today talking 
about an external review. I believe that for the most part, did 
he ask you the question about whether or not you think an 
external review would be helpful?
    Mr. Gruenberg. Yes, Senator.
    Senator Tillis. You answered in the affirmative? Great. 
Then I look forward to us being able to move forward with that.
    Also, Senator Warner spoke about the fact that really no 
bank, even a bank that is well managed, well capitalized, could 
actually withstand the pressure that SVB went over in terms of 
deposit flight. I think what we have seen here now is maybe the 
narrative--a couple of months ago it was all about bad 
management, it was all about bad supervision. Now I think what 
we are seeing is maybe there was a little bit of that plus 
external factors, and I hope that as we get a report we can 
understand it is not as simple as some people have made it to 
be.
    And I am looking forward to seeing to what extent, if any, 
some have said that 2155 was the root cause of the failure. I 
think an external review is probably going to debunk that myth 
that has been shared by some of the Members here.
    But Mr. Barr, I wanted to talk with you. When we had Mr. 
Becker here before the Committee he mentioned that he had 31 
open MRAs or MRIAs. That seems like a large number. So how is 
Congress supposed to view the effectiveness of Fed supervision 
when the Fed allows a firm to rack up those number of MRAs and 
MRIAs, particularly a bank whose activities and portfolio is 
very different from the vast majority of banks?
    Mr. Barr. Senator Tillis, the MRAs and MRIAs are a sign 
that the supervisors are attempting to hold the bank 
accountable. What happened in this case is it failed before it 
finished addressing those concerns. That kind of level of MRAs 
and MRIAs, three times the peer average for that kind of 
institution. So it showed the institution had serious problems. 
The supervisors had downgraded their risk management to 
Deficient, which meant the firm was not well managed. They had 
entered into a 4(m) obligation, which meant that there were 
restrictions on their nonbank activities. And the supervisors 
were in the process of putting in place the first-level 
enforcement action, a Memorandum of Understanding, when the 
bank failed.
    Senator Tillis. I do not want you to respond, but I will 
submit a question for the record, because I am trying to get 
some sense of, it seems like some of these were issued a year 
earlier, if I recall, sometime in 2022. Is there any sort of 
aging or follow-up, particularly for Matters Requiring 
Immediate Attention, and how well did SVB do compared to their 
peers on clearing and addressing these MRAs?
    Mr. Barr. They were slower than they should have been in 
addressing them. They were not consistent with what we see from 
most banks. Most banks, most of the time, respond quickly and 
they are able to fix their problems quickly, and in the case of 
SVB, they did not fix their problems quickly and there were 
serious risks in the institution with respect to interest rate 
risk, liquidity risk, and basic blocking and tackling of risk 
management.
    Senator Tillis. I have spoken with a number of banks over 
the past couple of weeks, and it seems like after SVB's failure 
there has been an expansion, or I should say a dramatic 
increase across the industry in terms of MRAs. I do not know 
about MRIAs, but I do know that the typical flow of MRAs seems 
to have gone up industry-wide. Am I right in that trend, or 
have you had an opportunity to take a look at that?
    Mr. Barr. Senator Tillis, it is a terrific question. I have 
not looked at that, but I will examine it after the hearing.
    Senator Tillis. I was in a meeting with probably 20, 25 
banks represented, and I asked for a show of hands, ``How many 
of you have seen a significant influx since the SVB failure?'' 
Every hand was raised. So I think it would be something helpful 
for us to see. There could be various reasons for doing that. 
You learn from the problems at SVB. But it seems odd that given 
the unique nature of SVB, that suddenly we would see this trend 
across the industry for a very wide variety of institutions. So 
reporting back to that would be helpful.
    We will submit some questions for the record. Thank you all 
for being here.
    Chair Brown. Senator Cortez Masto is recognized.
    Senator Cortez Masto. Thank you, Mr. Chairman, and thank 
you all for being here.
    Mr. Barr, let me start with you. As you have heard we had 
the executives before us just a couple of days ago, and not one 
of them took responsibility for their actions, or lack thereof, 
bad management, and basically throwing others under the bus. 
And just yesterday Greg Becker, the CEO of the failed Silicon 
Valley Bank, testified that no Federal Reserve supervisor 
raised interest rate risk with him prior to the failure of SVB. 
What I am hearing from you is that is not correct.
    Mr. Barr. Senator, that is simply not true. I will just 
give you one example. I will just read from this letter that 
the supervisors sent to Silicon Valley Bank dated November 
15th. It is addressed to Mr. Greg Becker, the CEO of SVB. It 
begins, ``Dear Mr. Becker,'' the first line of the executive 
summary says, ``the firm's interest rate risk simulations are 
not reliable.'' It goes on to say ``changes in net interest 
margin, net interest income and earnings are directionally 
inconsistent with internal projections. Unreliable IRR modeling 
directly impairs management and the board's ability to make 
sound asset liability management decision.'' It includes a 
Matter Requiring Attention, and the letter says quite clearly 
what is the impact of this. ``Unreliable IRR modeling outputs 
impair management and the board's ability to make important 
asset liability management decisions. In the firm's case, 
simulation results gave a false sense of safety in a rising 
rate environment and masks the need to take actions earlier in 
the rate cycle.''
    This letter was sent to Mr. Becker on November 15th. It 
memorializes a conversation with Mr. Becker and other senior 
executives on November 14th.
    Senator Cortez Masto. Thank you, and I have a copy of that 
letter, Mr. Chairman. I would ask to submit this for the 
record.
    Chair Brown. Without objection, so ordered.
    Senator Cortez Masto. Can I ask you, Mr. Barr, based on 
that analysis, was that a cause for some individuals to do a 
run on the bank?
    Mr. Barr. The cause ultimately of why individuals chose to 
run on the bank seems to be related directly to its solvency, 
and the solvency problem was because of poor interest rate risk 
management, outlined in the letter.
    Senator Cortez Masto. Thank you. And it is not true for all 
regulators, you are always concerned about a run on a bank. Is 
that not correct? That is what you are trying to prevent. 
Correct?
    Mr. Gruenberg. Yes, Senator.
    Senator Cortez Masto. Right. So it is nothing new, other 
than you have social media out there now that helps to amplify 
and connect individuals with information just like this, which 
may cause a run on the bank. Correct?
    Mr. Barr. Yes, Senator. That is correct.
    Senator Cortez Masto. But I am concerned about this moral 
hazard issue, because at what point do we continue to bail out 
individuals who should know better, investors who invest money 
in banks without the insurance, the appropriate insurance. 
Should they be bailed out? And I guess this is a question, Mr. 
Gruenberg, that I have for you. What should we be doing here?
    Mr. Gruenberg. I think the weekend of the failures of 
Silicon Valley Bank and Signature Bank really posed, I think, a 
tough judgment for the agencies to make. I think our initial 
view when Silicon Valley Bank failed was it was an 
idiosyncratic failure, and we did not necessarily believe a 
systemic risk exception was warranted. I think when Signature 
Bank failed immediately following and we got reports of serious 
liquidity stress at other institutions, it really became 
apparent that there was a contagion effect here, and I think 
there was a judgment made under the statute----
    Senator Cortez Masto. And I get that. I only have so much 
time. But let me ask you this, and I think it was Mr. Hsu who 
said this, is that we should be looking at deposit insurance 
coverage, and it should be updated. Should we be looking at 
this insurance coverage and what should we be considering here?
    Mr. Gruenberg. So, you know, the FDIC issued a 
comprehensive report on this. We outlined some options. The one 
we thought had the most promise, from both a moral hazard and 
financial stability standpoint would be, arguably, increasing 
coverage for business payment accounts. Those are accounts that 
businesses rely on. They cannot really hold accounts at 
multiple institutions for operational reasons, so it does not 
pose the moral hazard risk. But because of the business payment 
function it can have financial stability concerns.
    So if we are going to look at an option for adjusting 
deposit insurance coverage, and it would require legislation to 
do that, perhaps increased coverage for business payment 
accounts might make some sense.
    Senator Cortez Masto. Thank you. And Mr. Chairman, I am 
going over my time, but one final thing that I think needs to 
be pointed out here. I think we are all in agreement here that 
there is enough blame to go around, whether it was the bad 
management, lack of supervision, a combination of things we 
have to learn from it.
    But one thing that is missing in all of this, and I am 
hearing this from others, including my bankers, the failures of 
First Republic, of Silicon Valley Bank, of Signature Bank is 
having a direct impact and hurting families, small businesses, 
right, workers, community banks. What I am hearing is that it 
has caused banks to reduce their lending, resulting in less 
credit available to individuals and businesses. Does anybody 
disagree with that?
    Mr. Barr. No.
    Senator Cortez Masto. So again, this is having an impact on 
working families and businesses and community banks, and we 
have to address this. It is something we need to come together, 
figure out what went wrong here, prevent it from happening, but 
put the regulation in place, make sure that everybody who was 
responsible for it is held accountable, not just the regulators 
but those executives as well.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Cortez Masto.
    Senator Hagerty, of Tennessee, is recognized.
    Senator Hagerty. Thank you, Mr. Chairman.
    Vice Chair Barr, I would like to start with you. The recent 
case study of the Fed's supervisory failures at Silicon Valley 
Bank frankly highlights a fundamental tension that exists 
between the Fed's competing priorities. Congress has given the 
Fed a dual mandate, of course, a monetary policy mission to 
target both low employment and stable prices, and it is a 
balance that evidently has been pretty difficult to manage in 
the current environment where rates have been driven so high, 
so fast, given the massive inflation that we have incurred 
during this Administration.
    The primary mandate of monetary policy, however, also 
highlights an inherent tension with your supervision 
responsibilities. And I understand there is a firewall between 
monetary policy and supervision at the Fed, and there 
undoubtedly should be. But this conflict seems to be more 
pronounced than ever, because the Fed raises rates which then 
creates bank solvency risks that relate to your supervisory 
role.
    So Vice Chair Barr, how can someone in your role 
objectively vote to raise interest rates to advance the Fed's 
important inflation mandate while also serving as prudential 
supervisor of bank safety, which obviously also will be 
impacted by your interest rate decisions? Is there an inherent 
conflict here?
    Mr. Barr. Senator, I do not believe there is an inherent 
conflict in either role, and I think it is important that when 
we are engaged in monetary policy we are focused on our job at 
the Fed, at the FOMC, which is price stability consistent with 
maximum employment, and that is what we have been doing, and I 
voted to do that in each instance.
    So that is our job. Our job is to understand----
    Senator Hagerty. You also wear a second hat, though, and 
that second hat is a supervisory role, and they are two 
completely different functions. I will not take more time with 
it now except to say it is something I think that we ought to 
take a hard look at. This potential conflict is dynamic, and I 
think it requires more consideration here among our colleagues 
in Congress.
    Chair Gruenberg, I want to turn to you. On Tuesday, in 
front of the Banking Committee here, former SVB CEO Greg Becker 
said that he tried to assist the FDIC in navigating SVB's 
balance sheet and facilitating a sale, but his efforts were 
rebuffed. First, I want to know if this is true, and then 
second, if that is so, why would the FDIC not enlist the help 
of somebody that would have been intimately familiar with the 
balance sheet and be able to perhaps better position the assets 
for sale and perhaps reduce the cost to the American taxpayer?
    Mr. Gruenberg. Senator, thank you for the question. It is 
my understanding that FDIC staff actually did meet with Mr. 
Becker on, I believe it was the Saturday, to get input from him 
on the condition----
    Senator Hagerty. That is contrary to what he said.
    Mr. Gruenberg. I am just reporting the information I have--
to get information from him on the institution as well as got 
input from him on potential acquirers of the institution.
    Senator Hagerty. We will need to get to the bottom of this 
conflict, and I am very interested.
    A different point, something that is deeply concerning to 
me, and it has come out with many, many bankers that I have 
spoken with now, and that is with regard to our posture on 
mergers and acquisitions within the banking sector. As you 
know, last year the FDIC sent a request for information about 
bank mergers, and a request for information sounds benign, but 
when you look at what was imbued in this request it was full of 
ideological opposition to the concept of mergers. If you think 
about it, from the heavy emphasis on the so-called financial 
stability factor to this President's executive order across all 
agencies on consolidation, the reductionist posture that the 
FDIC has taken on bank mergers is quite troubling to me.
    And the market certainly recognizes your agency's 
ideological position. If you just look at First Republic, it 
was clear that this bank was under major duress in the weeks 
leading up to its failure, yet no buyer emerged. I do not think 
it is a controversial opinion to State that America would have 
been much better off had a buyer first purchased First Republic 
rather than waiting until the bank was taken into receivership, 
leaving the American taxpayer to pick up a tab to the tune of 
$13 billion, and that is not to mention the $22 the FDIC had 
already taken from the DIF in March. But if you think about the 
market's perception of regulators' positions on M&A, it is not 
surprising to me that no acquisition took place.
    So I want to ask you, in light of your comments to Senator 
Britt and where we are today, do you agree that an acquisition 
or merger before a bank fails is better for the system and 
better for the American taxpayer?
    Mr. Gruenberg. Yes, I do, Senator.
    Senator Hagerty. And if so, the stance of the FDIC has 
changed in regard to the benefits of mergers and acquisitions 
in the banking sector. Could you update me on the status and 
the timeframe of the FDIC's merger guidance?
    Mr. Gruenberg. We are undertaking a review of the Bank 
Merger Act. There has not been a review, as you may know, for 
25 years. We are doing it in conjunction with the other bank 
regulatory agencies and with the Justice Department, which as 
you know also has a statutory role under the Bank Merger Act. 
And for my side----
    Senator Hagerty. I am out of time, but I think it is 
important to note that you are in agreement that a merger and 
acquisition before a failure is a better outcome for the 
American taxpayer. I hope that will be very clear in your 
review, and I hope that we will see that manifest because the 
banking community, the industry needs to get this sort of 
certainty.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Hagerty.
    Senator Van Hollen, of Maryland, is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman. I thank all of 
you for your testimony here today.
    Mr. Chairman, I would ask unanimous consent to put in the 
record a Financial Times article, which I included in the 
hearing the other day as well, entitled ``Executive Pay at 
Silicon Valley Bank Soared After Big Bet on Riskier Assets''.
    Chair Brown. Without objection, so ordered.
    Senator Van Hollen. And Mr. Chairman, I also ask unanimous 
consent to put in an article entitled ``Silicon Valley Bank 
Execs Enjoyed Generous Compensation in Recent Years with CEO 
and CFO Packages Up to 30 Percent from 2018''.
    Chair Brown. Without objection, so ordered.
    Senator Van Hollen. Thank you. Now Mr. Barr, I am looking 
at the report that you and your team did on Silicon Valley 
Bank, and on page 74 you have a section entitled ``Coverage Of 
Incentive Compensation at SVBFG''. And it reads, in part here, 
``Supervisors concluded that the bank's incentive compensation 
decisions were primarily based on their financial performance 
with minimal to no linkage to risk management and control 
factors.''
    You go on to say that ``risk management deficiencies 
identified by independent risk factors or through regulatory 
examinations have not been meaningfully considered by SVBFG's 
incentive compensation decisions.'' And it goes on to point out 
that they goosed their profits in order to get their return on 
investment up.
    Reading your explanation is an anodyne version of what the 
Financial Times says pretty bluntly, which is that they 
manipulated their profits in a way that increased their risks, 
and had no compensation tied to the fact that they were 
increasing risk.
    So the bottom line, as I see this, in their compensation 
structure, they profited by taking a lot more risk. Is that 
your conclusion?
    Mr. Barr. Yes, Senator. The supervisors found that the way 
the board structured compensation for the firm it did not 
include any appropriate risk management. That was one of the 
reasons why the supervisors downgraded the firm's governance 
and controls to Deficient. The firm was not well managed, and 
they did not have a compensation scheme that was appropriately 
taking risk into account.
    And as you suggest, at several instances they chose to take 
actions that exposed themselves to more risk because those 
increased profits. For example, they took of interest rate risk 
hedges in March through July of 2022, at a time when interest 
rates were rising rapidly. Instead of protecting themselves 
form that interest rate risk increase, they took the profit 
from selling the hedges.
    Senator Van Hollen. Well, exactly. They made a decision to 
boost their bonuses by taking measures to boost their profits 
that added a lot of risk to everybody else.
    And, you know, it would be one thing if you had a private 
enterprise where the only people who were on the hook here were 
the executives and their shareholders, but in this case you 
have all the depositors that are at risk, and the FDIC came in 
with public money.
    So do you agree that we need to better align executive 
compensation rules and packages for banks that are FDIC insured 
with the risks that are being taken? In other words, do you 
agree that we need to take a much better look at what we should 
allow or not allow, and that we should not allow executives to 
be getting these big bonuses, and through their own negligence 
then seeing their banks collapse? Do you agree with that 
proposition?
    Mr. Barr. Yes, Senator. I think we need to take a good, 
hard look at that, and the agencies are working together on a 
rulemaking under the Dodd-Frank Act with respect to that.
    Senator Van Hollen. Right. So I think you are referring to 
Dodd-Frank 956 rule. So I would just urge you, by the end of 
the year, to get this done. Congresswoman Nydia Velazquez and I 
sent you all a letter with some very clear ideas for how we can 
better tie compensation to safety and soundness and not have 
the kind of situation we have here today. It is outrageous.
    I hope we will find a way to claw back compensation in 
these kinds of situations that we have experienced today, but 
even better, to prevent it from happening again, where people 
see CEOs and executives walking out with these huge bonuses, 
weeks before their banks collapse, and the FDIC and the public 
has to come in to support the depositors. So I just hope we 
will look at this as a big part of the reform effort.
    Thank you, Mr. Chairman.
    Chair Brown. Senator Kennedy, of Louisiana.
    Senator Kennedy. I want to thank the Chairman for this 
hearing. It should not go unnoticed, though, that some of our 
banks in America, under your supervision, are hanging by a 
thread, some of them have failed, and there are six of you, and 
we only have 5 minutes to talk to you. So I am hoping our 
Chairman will have another hearing and give us all more time.
    It also should not go unnoticed, it seems to me--I do not 
think it does to the American people--that when someone in the 
Federal Government gets it wrong, no one is ever fired. I mean, 
I have listened to this testimony today and I get the 
impression--how can I put this--if Elizabeth Holmes worked for 
one of your agencies she would probably be getting a bonus.
    Chairman Barr, for whom I have great respect, I have read 
your report. I have listened to your testimony. I have followed 
your remarks in the media. And here is what I hear you saying: 
my people and I, at my agency did not do a good job, and 
therefore Congress should give us more money and power. Is that 
about right?
    Mr. Barr. Senator, I am not seeking any additional 
authority or power or money from this Committee.
    Senator Kennedy. But you are going to promulgate new rules 
to give you and your people more power, are you not?
    Mr. Barr. We are going to use our existing authority to 
strengthen supervision and regulation to make it less likely 
that this kind of event happens in the future. I am committed 
to fixing our system of supervision, making it more agile, 
making it more forceful, making it quicker, and getting the 
right rules in place so we have good rules of the road. I am 
absolutely committed to getting that done.
    Senator Kennedy. OK. Well, let me rephrase my question. 
Here is what I hear you saying: my people and I did not do a 
good job, and therefore we are going to take the steps to make 
sure that we get more money and power. Is that more accurate?
    Mr. Barr. We are not asking for more money or more power. 
We are not asking really for anything. We are committing to 
getting our system of supervision and regulation right, and we 
will do that now.
    Senator Kennedy. Well, here is what else I hear you saying, 
Mr. Chairman. I hear you saying: my people and I screwed up, 
but even though we are adults with free will and 
responsibility, it was not our fault, because Trump ate our 
homework.
    I mean, I looked at your report, and to be more specific, 
Randy Quarles ate our homework. I mean, you said in your 
report, you talked about Trump-era changes, and you say those 
changes, quote, ``impeded effective supervision by reducing 
standards, increasing complexity, and promoting a less-
assertive supervisory approach,'' end quote.
    So I find your acceptance of responsibility, in light of 
your report, to be a bit hollow. The way I read the report--let 
me say it again--you are saying yep, we screwed up, but it is 
not our fault because Trump ate our homework. Is that about 
right?
    Mr. Barr. Senator, I disagree with that characterization. 
First of all, the report does not speak about any politician.
    Senator Kennedy. Is Randy Quarles at fault?
    Mr. Barr. I accept full responsibility for our supervision 
and regulation at the Federal Reserve----
    Senator Kennedy. You did not in your report.
    Mr. Barr.--and the report does as well. The report is 
absolutely clear about that.
    Senator Kennedy. No, it does not.
    Mr. Barr. We accept responsibility----
    Senator Kennedy. I read your report. No, it does not. Did I 
read it wrong?
    Mr. Barr. I believe you did, sir.
    Senator Kennedy. No, I did not. Here it is, bigger than 
Dallas. Go back and read your own report.
    I yield back my 4 seconds, Mr. Chairman.
    Chair Brown. Senator Smith, of Minnesota, is recognized.
    Senator Smith. Thank you, Chair Brown and Ranking Member, 
and thanks to all of you for being here today.
    Let me just follow up a little bit. Mr. Barr, I really 
appreciated the candid appraisal that you provided, that the 
Fed provided, in your review of what happened with these banks. 
And part of what I took from your appraisal was that decisions 
made and actions taken prior to you being in at the Fed had a 
distinct impact on the ways in which regulations were enforced 
and supervision was deployed.
    Do I have that right?
    Mr. Barr. Yes. That was one of the findings of the report 
is that the 2019 tailoring rules contributed to lower 
supervisory standards with respect to firms like SVB----
    Senator Smith. Right.
    Mr. Barr. ----including lower capital requirements, lower 
liquidity requirements, less stringent supervision, and other 
measures.
    Senator Smith. And I think that is just the reality. You 
know, we are in the business of trying to figure out how to fix 
these problems. And I appreciate the tone with which you 
approach this discussion, which is to be kind of on the side of 
solving problems and not just identifying problems, and so I 
just want to thank you for that.
    This gets to kind of the thing that I want to follow up on 
a little bit. You know, some of you have heard, in this 
Committee, that I come from a family of community bankers. My 
grandmother was the president of a small community bank back in 
the 1940s, 1950s, and 1960s. And I remember when I was a little 
kid the frisson that would go through the bank when the bank 
examiners were coming to town. It was a big deal. And you did 
not just ignore the examiners. You listened to what they had to 
say, and if they saw a problem, you fixed it. And I suspect 
that the hundreds of community banks in Minnesota would say 
exactly the same thing in 2023.
    So, you know, what I am struck by, I think about what 
happened at Silicon Valley Bank, how they did not have adequate 
interest and liquidity risk policies in place, the board was 
not fully aware, it appears, of the exposure of the bank as 
interest rates rose, management was not held accountable. In 
fact, as Senator Van Hollen was just identifying, management 
appeared to be rewarded for taking additional risk.
    And so I am just so struck by the lack of urgency. Like why 
was it that these executives seemed to think that the guidance, 
the deficiency ratings that they were getting were just like 
another thing that happened as opposed to thing you just ran 
around town and fixed as quickly as you could?
    Mr. Barr. Senator, I think you raise an absolutely critical 
point. And like you, my experience has been most banks all over 
the country--community banks, regional banks--they, first of 
all, do not get themselves into these difficulties, by and 
large.
    Senator Smith. Right.
    Mr. Barr. And if they do get themselves into some 
difficulty, they are very focused on responding promptly to 
supervisors', to examiners' concerns. And in this instance that 
is not the case. The bank took far too long to respond in 
appropriate ways, and as I said earlier, in some cases went in 
the opposite direction. They kind of changed the test. When the 
test resulted in them failing the test, they tried to change 
the test to make it less conservative on interest rate risk, on 
liquidity risk. That is not a sign of a firm engaging in 
appropriate behavior. They took off interest rate hedges that 
would have helped them have more resiliency in order to boost 
short-term profit. That is not a sign that they are taking 
these measures seriously.
    Senator Smith. And I appreciate in the reports that you 
identify the need for the Fed supervisors to bring more, as you 
say, agility and forcefulness to this process. Because as I 
think about my grandmother's community bank, like there was no 
question that if they did not follow through there was going to 
be accountability, and that is what seems to be missing here. 
There just seemed to be no sense that there was going to be 
accountability if these executives did not do what they were 
being asked to do.
    Mr. Barr. Senator, I agree. Senator Cramer earlier used the 
analogy of the yellow card. I think a lot of yellow cards were 
issued but not enough red cards.
    Senator Smith. Right. Exactly. Well, to me that is the 
avenue that we really need to look at, both from the question 
of accountability for the bank but also accountability for the 
supervisors, to bring that level of, as you say, forcefulness, 
and also to look at the additional changes that might be 
necessary to rules. So I appreciate that very much.
    Mr. Chair, I know I am out of time. But what I will do is I 
will follow up separately with you, Mr. Gruenberg, on the issue 
of the approach that you are recommending, that the FDIC is 
recommending around special assessments to replenish the 
Deposit Insurance Fund. This is, of course, a matter of great 
interest to Minnesota community banks as they think about 
replenishing a pool of money that they had no role in 
diminishing. Thank you.
    Chair Brown. Thank you, Senator Smith.
    Senator Sinema, from Arizona, is recognized.
    Senator Sinema. Thank you, Mr. Chairman, and thank you to 
our witnesses for being here today.
    The Federal Reserve's recent report is crystal clear. 
Despite what you may hear from some in Washington, the Fed knew 
Silicon Valley Bank was in trouble, had all the tools to fix 
it, and failed to respond in time. Furthermore, the FDIC's 
recent self-assessment on how Signature Bank failed on its 
watch was deeply alarming. I am particularly concerned about 
the acute shortage of bank examiners at the FDIC.
    Chair Gruenberg, Vice Chair Barr, I have questions for both 
of you today, but since I have several and limited time, please 
keep your answers as concise and specific to 20 seconds. I will 
interrupt to keep things going, if needed, and we can follow up 
if we need to.
    So first, for Chair Gruenberg, let's start there. My 
understanding is that examiner staffing is measured in hours, 
and that the New York Region, where Signature was based, 
particularly struggles to recruit and retain qualified bank 
examiners. If the FDIC's New York Region is understaffed this 
may not be an isolated incident. Are you confident that other 
banks in the region are being adequately supervised and 
examined?
    Mr. Gruenberg. I believe they are, Senator.
    Senator Sinema. Since you are able to set your own budget I 
would like to know what you are doing to fix the issue in New 
York and in other regions where it exists. I believe your staff 
is briefing my staff on this issue. I look forward to following 
up after the briefing.
    Now Vice Chair Barr, it is good to see you. I was pleased 
to see you acknowledge the need for cultural and operational 
changes at the Fed, but the report was light on details. I 
recognize you are on a tight deadline, but now that the report 
is public it is time to get specific with our goals, roll up 
our sleeves, and get to work.
    With respect to cultural and operational changes at the 
Federal Reserve, how are you defining success?
    Mr. Barr. I think we need to have a workforce that is 
agile, that acts quickly, and acts forcefully to prevent these 
kinds of problems in the future.
    Senator Sinema. And how fast will you achieve that?
    Mr. Barr. I think it will take time. I think cultural 
change is difficult, but I have started that work already and I 
am committed to getting it done.
    Senator Sinema. But you have no timeline.
    Mr. Barr. I do not currently have a timeline. That is the 
next step in the process after the SVB report was released was 
to develop detailed work plans.
    Senator Sinema. And I think that is what we need are 
specific metrics, rather than just a focus on outcomes, which 
say more about a business cycle. What we are interested in is a 
well-designed regulatory process.
    So here is a metric. Turnaround time is a problem at the 
Federal Reserve. The examiners found serious problems at 
Silicon Valley Bank, but the regulators were fatally late in 
responding. So following an examination finding, what is the 
median turnaround time for a Fed regulatory response?
    Mr. Barr. Senator, I would say the bank was fatally late in 
responding to the supervisor's concerns, and when they were 
late the supervisors did not escalate fast enough. The timing 
depends on the precise nature of the finding so I cannot give 
you an answer that would be generalizable.
    Senator Sinema. I understand you do not have an answer 
today, and that is all right, but I would like to get a more 
specific answer. More importantly, I would like to know what 
you would like the answer to be. Is the answer, what will it be 
a year from now? What will the answer be 3 years from now? What 
will the answer be 5 years from now?
    Bank runs are happening faster than ever, and we need 
regulatory processes that can operate at the speed of business. 
In your last appearance before this Committee you and I spoke 
about how sometimes the length was 6 weeks between times of 
communication, including sending the communication through 
mail. We do not really live in that kind of a slow world 
anymore. When a bank run can occur in 4 hours, we probably 
should stop communicating over snail mail.
    So I recognize that the Fed must balance the need to be 
responsive with a historically deliberative approach to complex 
issues.
    So have you identified other metrics that will be used to 
measure success when enacting lasting cultural and operational 
change, and if so, what are those metrics?
    Mr. Barr. As I said, Senator, the next phase in the process 
is to develop detailed work plans, and for each of those work 
plans there will be metrics. But I do not have those for you 
today.
    Senator Sinema. You do not even have general guidelines 
around what the metrics could be?
    Mr. Barr. The three things, as I said, that we are most 
focused on in terms of supervision are increasing the agility 
of our workforce, increasing the speed of action, and 
increasing the forcefulness of action, and those will be at a 
high level, the things that we are going to be looking for.
    Senator Sinema. Thank you. So a couple of quick questions 
for you. Who is leading this process of transformation work at 
the Fed?
    Mr. Barr. I am responsible for it.
    Senator Sinema. And are you delegating it?
    Mr. Barr. I am responsible for it. I will, of course, have 
a large team of people who are working with me to get that 
done.
    Senator Sinema. And will there be staff at the Fed working 
full-time on this issue, or is this something where you will be 
retaining consulting services to help you develop and execute a 
plan?
    Mr. Barr. We will both be using internal staff as well as 
external supports, including consulting services to do that.
    Senator Sinema. And as you are funding independently of 
Congress, how much budget are you allocating for this work, and 
for how long?
    Mr. Barr. We have not detailed a detailed budget plan at 
this time. As I said, that would be the next phase of the 
project is to develop those detailed work plans, to find the 
appropriate staffing, and make sure we have the resources that 
are charged against that task.
    Senator Sinema. And Vice Chair Barr, as you develop that 
plan will you commit to releasing that plan to the American 
public and to Members of this Committee, including specific, 
measurable goals so that we can determine if your efforts have 
been successful in achieving these cultural and operational 
changes?
    Mr. Barr. I would be happy to come back up to the 
Committee, of course, at any time.
    Senator Sinema. Would you be willing to commit to a 
quarterly basis of reporting to this Committee?
    Mr. Barr. I would be happy to work with your office to find 
the appropriate timing and pacing of coming back to discuss 
this with you and the Committee.
    Senator Sinema. Thank you, Vice Chair. The next time we 
meet I expect greater specificity from you and reports of 
progress that we have made in these areas. I appreciate your 
work and I thank you for your service.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Sinema.
    This concludes the hearing. We all seem to agree that 
supervisors need to hold banks accountable to the rules that 
are supposed to keep our banking system safe. I think Senator 
Sinema's questions were right on that way. We know that as 
banks grew too much, too fast, starting in 2019, no one held up 
the yellow card that Senator Cramer said they should have. In 
fact, Congress, President Trump, and former regulators gave 
them a green light.
    The basic rules of the game made it so that banks like SVB 
had weaker capital and liquidity standards, had too much time 
to transition to tougher rules. Now we need to strengthen those 
guardrails in a culture of supervision so that banks have clear 
rules and expectations, and when they are not met, regulators 
are empowered to crack down quickly. We expect that, especially 
from you, Vice Chair Barr.
    One of the more troubling aspects of the events of the last 
couple of months is that it shows what many of us knew all 
along, that trillion-dollar banks are not the only institution 
that are too big to fail. That is why we need to make sure that 
banks like SVB and Signature and First Republic are held to 
higher standards so that we can protect the financial stability 
of the entire banking system and make sure that banks and 
credit unions of all sizes can continue to serve their 
communities and the public.
    Again, thanks to the six of you.
    For Senators who wish to submit questions, those questions 
are due 1 week from today, on Thursday, May 25th. Witnesses, 
please submit your responses to those questions for the record 
no more than 45 days from the day you receive them.
    Thank you again for joining us. Thank you all for your 
public service.
    The Committee is adjourned.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIR SHERROD BROWN
    On Tuesday, we heard from the former executives of Silicon Valley 
Bank and Signature Bank.
    Their obsession with stock prices and their own compensation--this 
profit-at-all-cost mentality--led their banks off a cliff, putting the 
paychecks of small businesses and workers at risk.
    We heard over and over that they just couldn't have known the Fed 
would raise interest rates.despite regulators and other banks and 
investors warning over and over about interest rate risk.
    That they just couldn't have predicted the social media panic. 
despite knowing for years that their customer bases were concentrated 
and posed a risk.
    They just couldn't have known that growing so fast to grow their 
bonuses would put their bank at risk, despite repeated warnings.
    It was basically ``the dog ate my homework'' for 3 hours.
    These bank executives failed at Banking 101. Their banks grew too 
fast, and they doubled down on risky bets and riskier lines of 
business--never stopping to worry about whether their decisions made 
any sense, as long as the profits kept going up and up and up.
    This spring those bad decisions finally caught up with them--though 
not before they tried to cash out.
    Just a few years earlier, they complained about supposed 
``regulatory burden'' that they felt was unfairly foisted upon them.
    In 2015, Silicon Valley Bank CEO Greg Becker said: ``Because SVB's 
business model and risk profile does not pose systemic risk, imposing 
the numerous Dodd-Frank requirements that were designed for the largest 
bank holding companies would place an outsized burden on us, with 
minimal corresponding regulatory benefit.''
    In 2018, Signature Bank cofounder Scott Shay said: ``We find it 
ridiculous and unacceptable that by virtue of . . . growing one day 
past $50 billion, we will be burdened with rules intended for the mega 
`too-big-to-fail' banks. We strongly believe that we are not even in 
the same zip code as being systemically important to the U.S., to New 
York, or even to midtown Manhattan.''
    Turns out they were both very, very wrong.
    On Tuesday we also heard a lot of blame placed on regulators.
    We know that regulators warned these banks over and over that there 
were glaring risks on their balance sheets.
    It's also fair to say, though, that the regulators should've been 
tougher and stronger.
    They should have ``dropped the hammer,'' as Senator Tester said.
    But let's think about why the hammer didn't come down so hard. The 
strongest hammers were taken out of the toolbox.
    It's not a coincidence that both banks' rapid growth started in 
2019, right after the Trump bank regulators rolled back rules for banks 
of this size.
    Bankers--like Greg Becker and Scott Shay--and their lobbyists 
begged for weaker rules and lax oversight.
    And lo and behold, weaker rules and lax oversight are what they 
got.
    The former FDIC Chair said that if bankers feel examiners are 
overstepping their authority, ``let us know.''
    The former acting comptroller said the OCC is trying to improve its 
``responsiveness to our customers, which are the banks.''
    Think about that--the regulator actually said the banks are the 
customer.
    We're all friends here--that was the mentality.
    It was the weaker rules on the books, and it was the culture they 
created at the top, and allowed to fester.
    The former Fed Vice Chair for Supervision said, ``Markets are 
always ahead of the regulators, and frankly that's how it should be.'' 
It's analogous to the advice that my father provided me that if you 
don't miss at least two or three planes a year, you're spending too 
much time in airports.
    ``If the regulators aren't a little behind the market in a few 
areas at any given time, they would be stifling innovation and 
evolution.''
    In other words: it's better to let wealthy Wall Street profiteers 
go unchecked because they might figure out another ``creative'' way to 
boost their stock prices and pad their pockets.
    Regulators didn't just miss the plane--they allowed a couple of 
crashes.
    Let's be clear: Banks are not regulators' customers. They are not 
your friends. They are not your clients.
    Regulators serve the public--or they should.
    You are the ones who are supposed to police these powerful banks, 
and give people peace of mind that their money is safe.
    The purpose of these hearings isn't only to place blame--it's to 
actually fix what went wrong.
    We need to undo the damage the last Administration did. And we need 
to strengthen our guardrails--like capital and liquidity and stress 
tests.
    We need to address some of the issues that regulators have 
identified in their reviews on the failed banks--like staffing, which 
is a result of years of budget cuts and shifting priorities under the 
former Administration.
    The examiners and regulators need to have the tools and resources 
and support they need to protect the public.
    We need to consider options for deposit insurance reform to protect 
financial stability and consumers and small businesses.
    We need to improve our merger policy so that failed bank 
acquisitions by megabanks are only a last resort.
    And we need to restore the culture of supervision that puts the 
public interest ahead of bank executives' stock portfolios.
    Of course it's good for our communities and the economy, and the 
public when we have successful banks. No one disagrees with that.
    What we have seen in too many cases, though, isn't just banks being 
successful, banks turning a reasonable profit.
    SVB and Signature's profits soared--and so did their executives' 
compensation--as they pushed for ever more uncontrolled growth.
    Profits can't come at the expense of everything else. And 
regulators can't allow them to.
    Banks must be well-managed and resilient, and put their customers 
first.
    We must hold everyone responsible for these failures accountable.
    And at the top of that list must be the CEOs and executives who 
ignored warnings and run their banks into the ground.
    I am working with the Members on this Committee--and I hope there 
will be bipartisan support--on legislation to strengthen your ability 
to hold bank executives accountable for their wrongdoing.
    I want to see meaningful punishments and deterrents--not just slaps 
on the wrist or paltry fines that are barely a speedbump in their race 
for profits.
    And I urge you to use all your authority to protect the public, and 
the many bank and credit union executives out there who are doing right 
by their customers, by holding failed bank executives accountable for 
their failures.
    Our witnesses all know you work for the American people.
    I look forward to hearing how we can strengthen financial 
stability, stay ahead of risks, and protect for the workers, families, 
and small businesses that power our economy.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR TIM SCOTT
    Today's hearing is about regulatory supervision and congressional 
oversight. Something we all take very seriously. I hear a lot from our 
friends on the Left that this is somehow a legislative failure, that 
you didn't have the power needed to supervise the banks. There's 
nothing further from the truth than that concept, that you did not have 
the legislative power necessary to do your jobs. That's just false. We 
can point to S. 2155 all day long, but if you read S. 2155, you come to 
the conclusion that the supervisors had the ability to enforce a 
regulatory regime to keep America's financial institutions safe. They 
just--you did not--use the tools in the toolbox to do the job that was 
necessary.
    People at home take this opportunity to view the six alphabet-soup 
agencies and try to figure out what we're here talking about. We're 
talking about the safety and the security of the greatest financial 
system in all the world. For the average viewer at home, they're asking 
real questions about is the system safe for me? For those who are 
``unbanked'' or ``underbanked,'' who have challenges having confidence 
in the banking system, this is a challenging day. For those who want to 
have more confidence in the system that they've never had confidence in 
before, this is a serious day. For those who look at this situation and 
ask themselves why do they have to pay higher interest rates or higher 
fees on products from banks, because bank execs didn't do their jobs 
and regulators weren't paying attention, so far, we have no answers.
    Each of you are working on broad proposals and regulations that 
will affect our financial institutions, and I'll expect we'll hear a 
lot about that today. But what I'm concerned about is that we won't 
really get to the fundamental question about why, when you had an 
opportunity to do the job assigned to you, it just wasn't done.
    When we look at the failures of both Silicon Valley Bank and 
Signature Bank, we come to a couple of conclusions. And I've said this 
a few times before, but I think it bears repeating that the situation 
that we saw that led to two of the largest bank failures in American 
history was caused by three things: bank mismanagement, supervisory 
failure, and soaring inflation caused by the Biden administration.
    Today, we're here to focus on the supervisory failures. From the 
beginning, regulators called these failures idiosyncratic events. This 
implies that they just popped up out of nowhere like mushrooms after a 
rainstorm, that there is no way in the world you could have forecasted 
what was going to happen. But after listening to the CEOs on Tuesday, 
the one thing we walked away with from [Silicon Valley Bank's] CEO, Mr. 
Becker, is that for 20 years they had the same business model that had 
over 80 percent of their deposits uninsured. Two decades the deposits 
were uninsured over 80 percent. That is not idiosyncratic to me. It 
seems pretty much like the norm.
    We also heard from Mr. Becker that the flashing lights, the warning 
lights had been going off since the first quarter of 2022. That's a 
long time before March 9th of 2023. And then your reports reinforce the 
fact that the warning lights were going off well before the first 
quarter of 2022.
    You all have failed. Many of you have failed the American people. 
Failed the American people in keeping their confidence high in our 
financial system. I want that to sink in.
    You get to come to Congress. It's been 5 minutes answering 
questions from each one of us with the ability to play dodgeball for 
those 5 minutes. And then you go back to your respective agencies and 
you hold no one accountable, even though your reports say that there 
was failure within your agencies. And yet not a single employee or 
yourselves are held responsible.
    Mr. Barr, it seems like, as we talked about last time you were 
here, about the reports that were going to come out on May 1st and what 
it would find. The one thing that's clear, it's found that the Federal 
Reserve didn't do their job. And yet here we sit again. Your report 
says you acknowledge that the supervisors at the Federal Reserve failed 
to act swiftly and do their jobs.
    But in the next breath, you point the blame at Congress and S. 
2155. And I read through the legislation just to make sure that I did 
not misunderstand what part of the legislation withdrew your ability to 
provide the supervisory responsibilities. I couldn't find it because 
it's not there. I find it ironic that the ultimate takeaway was [to] 
ask for more authority. Not less. More authority. As if somehow it was 
stripped away, and it simply was not.
    But that to me, is exactly what happens in Washington when 
something bad happens. No one takes responsibility, and we take more 
authority in the regulatory framework of this country. And what happens 
when we take more authority in the regulatory framework of the country?
    Mike, you know, and I certainly know it as a small business owner, 
the more capital that you push to the sidelines in hopes of solving a 
problem that had to do with liquidity and not capital, you actually rob 
small business owners, women small business owners, minority small 
business owners, everyday small business owners, rural small business 
owners, [of] the capital necessary to borrow the money to create a more 
sustainable, more resilient, healthier community.
    When the failure happens, ultimately the new level of supervision 
that says we're going to put more capital on the sidelines only impacts 
entrepreneurs, only impacts seniors hoping for a better return, only 
impacts everyday Americans living paycheck to paycheck, trying to 
figure out how to make this economy and this system work for them. I 
don't know how we explain to the small business owner who can't get a 
loan because we've improved the capital standards by having more cash 
on the sidelines so there's fewer dollars to loan out. That, because 
you didn't do your jobs, sounds like doubling down and making the 
average person in the country pay a very high price for your failures. 
I think you're making it more and more difficult for the average 
American in the average place to contribute to a thriving economy.
                                 ______
                                 
                 PREPARED STATEMENT OF MICHAEL S. BARR
            Vice Chair for Supervision, the Federal Reserve
                              May 18, 2023
    Chairman Brown, Ranking Member Scott, and other Members of the 
Committee, thank you for the opportunity to testify today. Overall, the 
U.S. banking system remains strong and resilient, and depositors should 
be confident that all deposits in our banking system are safe. At the 
same time, recent stress in the banking system shows the need for us to 
be vigilant as we assess and respond to risks.
    My review of Silicon Valley Bank's (SVB) failure demonstrates that 
there are weaknesses in regulation and supervision that must be 
addressed, and I am committed to doing so. \1\ I am also committed to 
maintaining the strength and diversity of the banking system so that it 
can continue to provide financial services and access to credit for 
households and businesses. As we consider adjustments to our rules and 
supervisory practices, I am sensitive to how changes may affect banks 
in the current economic environment.
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     \1\ This testimony uses ``Silicon Valley Bank (SVB)'' to refer to 
both the State member bank, Silicon Valley Bank, and its bank holding 
company, SVB Financial Group.
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    Accompanying my testimony today is the Federal Reserve's 
Supervision and Regulation Report. I am also submitting my report that 
examines the factors that led to the failure of SVB, including the role 
of the Federal Reserve. My testimony will offer an overview of banking 
conditions, the findings of the review, and opportunities for 
strengthening the Federal Reserve's regulatory and supervisory 
framework.
Banking Conditions
    Let me begin with conditions in the banking system. Overall, banks 
have strong capital and liquidity, enabling them to lend and provide 
financial services to households and businesses.
    At the same time, recent stress in the banking system shows the 
need for us to be vigilant as we assess and respond to risks. The 
recent failures of three large U.S. banks have also demonstrated the 
risks of concentrated funding sources and poor management of interest 
rate risks. As interest rates have risen, fair values of investment 
securities have declined significantly. Deposit costs have also 
increased from low levels, and firms are turning to wholesale 
borrowings to address emerging funding needs. Delinquency rates for 
some loan segments have started to increase from the low levels seen 
over the past several years. Banks have increased provisions for credit 
losses in anticipation of asset quality deterioration. Accordingly, 
supervisors are redoubling their efforts to assess banks' preparedness 
for emerging credit, liquidity, and interest rate risks.
SVB Review
    Let me turn to the SVB review. Immediately following SVB's failure, 
I led a review of the Federal Reserve's supervision and regulation of 
the bank. Staff who were not involved in the supervision of SVB 
conducted the review. The resulting report takes an unflinching look at 
the conditions that led to the bank's failure, including the role of 
Federal Reserve supervision and regulation. There are four key 
takeaways from the report.
    First, SVB's board of directors and management failed to manage the 
bank's risks. The bank tripled in size between 2019 and 2021--expanding 
from $71 billion to $211 billion--as the rise in tech and venture 
capital activity led to growth in uninsured deposits, which the bank 
then invested largely in held-to-maturity securities. As the bank grew, 
its board and management failed to effectively oversee the risks 
inherent in the bank's concentrated business model and high level of 
reliance on uninsured deposits. The bank repeatedly failed its own 
liquidity tests, and SVB responded, in part, by changing the 
assumptions that determined its liquidity needs. The bank also 
mismanaged its interest-rate risk. Its senior leadership focused on 
short-term profits, removed interest-rate hedges that would have helped 
to protect the bank in a rising rate environment, and ignored multiple 
breaches of long-term interest-rate-risk limits.
    The second key takeaway is that Federal Reserve supervisors did not 
fully appreciate the extent of the vulnerabilities as SVB grew in size 
and complexity. This meant that SVB remained well-rated through the 
summer of 2022, even as significant risk to the bank's safety and 
soundness were growing.
    The third key takeaway is that when supervisors did identify 
vulnerabilities, they did not take sufficient steps to ensure that the 
bank fixed those problems quickly enough. When SVB became subject to 
heightened supervision in the large and foreign banking organization, 
or LFBO, portfolio in 2021, it was clear to supervisors that there were 
serious problems at the bank. However, Federal Reserve regulations 
provided SVB with a long runway to meet higher standards, and the bank 
entered the LFBO portfolio with a default view as satisfactory, which 
led examiners to wait to accumulate evidence to impose a lower rating. 
Yet supervisors found many serious problems: when the bank failed, it 
had 31 unaddressed safety and soundness supervisory findings--triple 
the number of peer banks. Overall, the supervisory approach at SVB was 
too focused on the continued accumulation of supporting evidence in an 
environment for supervision that emphasized consensus.
    Finally, the fourth key takeaway is that the Federal Reserve 
Board's tailoring approach in response to the Economic Growth, 
Regulatory Relief, and Consumer Protection Act and a shift in the 
stance of supervisory policy impeded effective supervision by reducing 
standards, increasing complexity, and promoting a less assertive 
supervisory approach. Absent these changes, SVB would have been subject 
to supervision within the LFBO portfolio and subject to heightened 
standards beginning in 2019--throughout the bank's period of rapid 
growth. While higher supervisory and regulatory requirements may not 
have prevented SVB's failure, they would have meant that the bank had 
stronger risk management and more financial resources to weather the 
stress.
    The four key takeaways show failures by SVB's board and senior 
management and failures by the Federal Reserve. It is crucial that we 
address those failures. Next, I will outline how we can strengthen both 
our supervision and regulation based on what we have learned and based 
on the Federal Reserve's existing authorities. I highlight a few 
examples below.
Lessons Learned From SVB's Failure
    To start, SVB's failure confirms the importance of strong levels of 
bank capital. While the proximate cause of SVB's failure was a 
liquidity run, the underlying issue was concern about its solvency--the 
bank's ability to absorb the losses on its securities and repay its 
depositors and other creditors. We should be humble about our ability--
and that of bank managers--to predict how losses might be incurred, how 
future financial stress might unfold, and what the effect of financial 
stress might be on the financial system and our broader economy. 
Stronger capital will guard against the risks that we may not fully 
appreciate today and reduce the costs of bank failures.
    A second key lesson is that SVB's distress proved to have broader 
consequences for the banking system, even though SVB was not extremely 
large, highly connected to other financial counterparties, or involved 
in critical financial services. We need to reconsider the requirements 
that apply to banks based on size and risk.
    With respect to capital, we need to evaluate whether our capital 
requirements appropriately measure the ability of banks to absorb 
losses. Had SVB been required to reflect declines in the face value of 
available-for-sale securities in its capital, it may have held more 
capital to cover these losses. Any rule changes such as these that we 
might propose would not be effective for several years because of the 
standard notice and comment rulemaking process and would be accompanied 
by an appropriate phase-in.
    We also should evaluate how we supervise and regulate a bank's 
management of interest-rate risk. While interest-rate risk is a core 
risk of banking that is not new to banks or supervisors, SVB did not 
appropriately manage its interest-rate risk, and supervisors did not 
force the bank to fix these issues quickly enough.
    In addition, we should evaluate how we supervise and regulate 
liquidity risk, starting with the risks of uninsured deposits. For 
instance, liquidity requirements and models used by both banks and 
supervisors should better capture the liquidity risk of a firm's 
uninsured deposit base. We should also consider applying standardized 
liquidity requirements to a broader set of banks. Any adjustments to 
our rules would, of course, go through normal notice and comment 
rulemaking and have appropriate transition periods.
    In addition, our oversight of incentive compensation for bank 
managers should also be improved. SVB's senior management responded to 
the poor incentives approved by its board of directors; they were not 
compensated to manage the bank's risk, and they did not do so 
effectively.
Speed, Force, and Agility of Supervision
    I also plan to improve the speed, force, and agility of 
supervision. Supervisors did not fully appreciate the extent of the 
vulnerabilities as SVB grew in size and complexity, and when 
supervisors did identify vulnerabilities, they did not take sufficient 
steps to ensure that SVB fixed those problems quickly enough.
    Supervision should intensify at the right pace as a bank grows in 
size or complexity. Within our supervisory structure, there should be 
more continuity between the portfolios for banks of different sizes and 
risk so that a bank is ready to comply with heightened regulatory and 
supervisory standards more quickly. We also need to be especially 
attentive to the particular risks that banks with rapid growth, 
concentrated business models, or other special factors might pose 
regardless of asset size.
    Once identified, issues should be addressed more quickly, both by 
the bank and by supervisors. Today, for example, the Federal Reserve 
generally does not require additional capital or liquidity beyond 
regulatory requirements for a bank with inadequate capital planning, 
liquidity risk management, or governance and controls. I believe that 
needs to change in appropriate cases. Higher capital or liquidity 
requirements can serve as an important safeguard until risk controls 
improve, and they can focus management's attention on the most critical 
issues.
    Moreover, we need to ensure we have a culture that empowers 
supervisors to act in the face of uncertainty. Supervisors should be 
encouraged to evaluate risks with rigor and consider a range of 
potential shocks and vulnerabilities so that they think through the 
implications of tail events with severe consequences.
Conclusion
    I want to reiterate that the banking system remains strong and 
resilient. Recent events demonstrate that we--as regulators--must do 
better. We need to ensure that we have strong supervision and 
regulation to make the financial system safer and fairer, in support of 
an economy that serves the needs of households and businesses.
    Thank you, and I look forward to your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

               PREPARED STATEMENT OF MARTIN J. GRUENBERG
              Chair, Federal Deposit Insurance Corporation
                              May 18, 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  PREPARED STATEMENT OF TODD M. HARPER
              Chair, National Credit Union Administration
                              May 18, 2023
    Chairman Brown, Ranking Member Scott, and Members of the Committee, 
thank you for inviting me to discuss the state of the credit union 
system and to provide an update on the operations, programs, and 
initiatives of the National Credit Union Administration (NCUA).
    The NCUA protects the safety and soundness of the credit union 
system by identifying, monitoring, and managing risks to the National 
Credit Union Share Insurance Fund (Share Insurance Fund). The NCUA also 
protects the credit union system and its members by ensuring credit 
unions operate safely and soundly and in compliance with applicable 
laws and regulations, including those related to consumer financial 
protection. Additionally, the agency continues to prioritize equitable 
access to credit union members of safe, fair, and affordable financial 
products and services to ensure that the credit union system fulfills 
its statutory mission of meeting the credit and savings needs of 
members, especially people of modest means. \1\
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     \1\ An Act to establish a Federal Credit Union System, to 
establish a further market of securities of the United States and to 
make more available to people of small means credit for provident 
purposes through a national system of cooperative credit, thereby 
helping to stabilize the credit structure of the United States. 
Preamble. 12 U.S.C. 1751.
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    In my testimony today, I will discuss the state of the credit union 
industry, some of the NCUA's recent efforts to strengthen the system, 
and a few critical legislative requests.
State of the Credit Union System
    First, the overall performance of federally insured credit unions 
(credit unions) and the Share Insurance Fund has remained stable 
despite ongoing inflationary pressures and a higher interest rate 
environment. \2\ Over the past year, total loans, assets, insured 
shares, and deposits all increased. Insured share growth, however, has 
slowed as some members have drawn down built-up savings and accumulated 
more debt. \3\
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     \2\ The term ``credit union'' in this testimony refers to 
federally insured credit unions.
     \3\ See https://www.ncua.gov/newsroom/speech/2023/ncua-chairman-
todd-m-harper-statement-federal-credit-union-loan-interest-rate-
ceiling; Shannon Pettypiece, ``Shrinking savings and rising debt leave 
consumers on shaky financial footing'', NBC News, March 18, 2023. 
Available at: https://www.nbcnews.com/politics/economics/shrinking-
savings-rising-debt-leave-consumers-shaky-financial-footing-rcna75389.
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    Nevertheless, the credit union system, as a whole, is currently 
well positioned to handle any economic dislocation resulting from a 
moderate recession. The NCUA is also prepared to respond to economic 
uncertainty and will continue to work with individual credit unions 
experiencing liquidity and interest rate risks to assist them in 
responding to declines in economic activity or financial market 
instability.
Credit Union System Performance
    As of December 31, 2022, there were 4,760 natural-person credit 
unions with 135 million members. \4\ The system's total assets were 
$2.2 trillion. The system's net worth ratio rose to 10.75 percent, 
representing a recovery of 73 basis points from a pandemic low of 10.02 
percent. Notably, credit unions recorded a 20 percent year-over-year 
increase in loans.
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     \4\ See https://ncua.gov/files/publications/analysis/quarterly-
data-summary-2022-Q4.pdf.
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    During the last decade, the credit union system has grown in size 
and complexity. As of December 31, 2022, the number of billion-dollar-
plus credit unions more than doubled to 421, compared to 193 in 2012. 
Together, these billion-dollar-plus credit unions held $1.6 trillion in 
assets, representing three out of every four dollars within the credit 
union system. This cohort of credit unions also reported the highest 
growth in loans, membership, and net worth over the year ending 
December 31, 2022.
    While the credit union industry has experienced overall growth, 
credit unions with less than $500 million in assets have declined in 
number over the last year and decade. The NCUA recognizes smaller 
credit unions must operate in an increasingly complex and competitive 
financial services landscape with limited resources. Yet, these credit 
unions serve more than 25 million members and form the foundation of 
the credit union system.
    To support smaller credit unions, the NCUA has developed 
streamlined examination procedures for all credit unions with less than 
$50 million in assets. In 2022, the NCUA also launched a support 
initiative for credit unions with assets below $100 million to provide 
additional resources, training, and guidance for credit union 
management. \5\ Further, the agency supports small credit unions 
through webinars, Community Development Revolving Loan Fund (CDRLF) 
grants, and promoting partnerships with organizations and industry 
mentors.
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     \5\ The NCUA has budgeted 4,500 hours of staff support time under 
this initiative in 2023.
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External Factors Impacting the System
    The NCUA expects several external factors to influence credit union 
performance in the months ahead. For example, forecasters expect 
tighter credit conditions to lead to reduced economic growth. Job 
growth is also likely to slow, which would place upward pressure on the 
unemployment rate. That, in turn, could lead to increases in 
delinquencies and charge-offs at credit unions.
    Interest rate increases have also led to rising funding costs for 
depository institutions. The measure and speed of interest rate 
increases necessitate greater discipline for market sensitivity and 
liquidity risk management for all financial institutions, including 
credit unions.
    Thus, the management of interest rate risk will be a crucial factor 
in credit union performance for the remainder of 2023. As rates 
increase, the associated liquidity risk also increases. The potential 
for sudden changes in inflation, the interest rate environment, or the 
economy means credit unions--and the NCUA--must be nimble and vigilant.
    While still adequate, credit union liquidity has decreased from its 
elevated position throughout the COVID-19 pandemic. Cash positions have 
declined and are below prepandemic levels. Further, unrealized losses 
in securities limit their utility as a source of liquidity. This rise 
in liquidity risk has affected credit unions of all sizes, including 
several credit unions with more than $1 billion in assets that pose 
greater risks for the Share Insurance Fund.
    The current inflationary environment creates financial pressure on 
credit union members by increasing costs of living and reducing 
members' ability to repay debts. Higher interest rates also increase 
the costs for borrowers with adjustable-rate loans--for example, 
variable-rate credit cards and adjustable-rate mortgages--and impede 
members' ability to refinance existing debt. Additionally, higher 
interest rates put downward pressure on collateral values, such as 
residential real estate and vehicles, which could increase credit union 
losses.
    As part of its pandemic-response efforts, the NCUA implemented 
enhanced monitoring and updated procedures related to various risks, 
including liquidity and credit. Staff also received training on problem 
resolution, and the NCUA increased specialist staffing after evaluating 
resource needs. Starting in early 2022, the NCUA proactively refreshed 
training and supervisory tools as interest rates rose. Additionally, 
the agency has offered additional staff training related to rising 
interest rates, the associated liquidity risk in credit unions, and 
overall balance sheet management.
    Meanwhile, the Share Insurance Fund adjusted its liquidity target, 
increasing the target to $4 billion, which represents 20 percent of the 
total portfolio. The NCUA is also a party to the interagency effort to 
finalize the ``Policy Statement on Prudent Commercial Real Estate Loan 
Workouts and Accommodations.'' The final policy statement will provide 
resources for credit unions to consider when engaging with commercial 
real estate loan borrowers experiencing financial difficulties.
    Together, these and other actions by the NCUA have better 
positioned the agency and the credit union industry to respond to 
various potential economic conditions in the months ahead.
Performance of the National Credit Union Share Insurance Fund
    In uncertain economic times, it is essential to maintain the 
strength of the Share Insurance Fund. Backed by the full faith and 
credit of the United States, this fund insures individual accounts up 
to at least $250,000. \6\ As of December 31, 2022, the Share Insurance 
Fund protected nearly $1.7 trillion in insured shares and deposits 
across all States, the District of Columbia, and U.S. territories. In 
contrast, total uninsured shares stood at $166.2 billion for the year 
ending December 31, 2022. Thus, the fund insures and protects 91 
percent of total share deposits within the credit union system.
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     \6\ The standard share insurance amount is $250,000 per share 
owner, per insured credit union, for each account ownership category. 
The $250,000 standard share insurance account became permanent through 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. 
See https://ncua.gov/files/publications/guides-manuals/
NCUAHowYourAcctInsured.pdf.
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    The Share Insurance Fund also continues to perform well, with no 
premiums expected at this time. At the end of 2022, the Share Insurance 
Fund reported a net income of $118.7 million, a net position of $20.4 
billion, and an equity ratio of 1.30 percent. \7\ For the period ending 
June 30, 2023, the NCUA projects the equity ratio for the Share 
Insurance Fund to decline to 1.25 percent, below the 1.33 percent 
normal operating level set by the NCUA Board. The decline in the 
projected equity ratio is typical in the first half of the year and 
results primarily from projected share growth. It does not reflect a 
projected increase in credit union failures.
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     \7\ The equity ratio is the overall capitalization of the 
insurance fund to protect against unexpected losses from the failure of 
credit unions. When the equity ratio falls, or is projected within 6 
months to fall, below 1.20 percent, the NCUA Board must assess a 
premium or develop a restoration plan. When the equity ratio exceeds 
the normal operating level and available assets ratio at year end, the 
Share Insurance Fund pays a distribution.
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State of the Central Liquidity Facility
    The increase in interest rate risk and liquidity risk in the 
current economic environment underscores the value of the NCUA's 
Central Liquidity Facility (CLF). \8\ The CLF's ability to respond 
rapidly to economic events can help contain or avert liquidity crises 
before they escalate. As noted earlier, liquidity risk for some credit 
unions, including several with more than $1 billion in assets, has 
recently increased. When liquidity events occur, the CLF can serve as 
an important shock absorber.
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     \8\ Established by statute, the CLF is a mixed-ownership 
Government corporation created to improve the general financial 
stability of credit unions by serving as a liquidity lender to credit 
unions experiencing unusual or unexpected liquidity shortfalls. Member 
credit unions own the CLF, which exists within the NCUA. The CLF's 
president manages the facility under the oversight of the NCUA Board.
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    Under the NCUA's regulations, credit unions with more than $250 
million in assets are required as part of their contingency funding 
plan to have access to a Federal emergency liquidity source--the CLF, 
the Federal Reserve's Discount Window, or both. Credit unions with less 
than $250 million in assets, while not required to have a membership 
with a contingent Federal liquidity source, are required to identify 
external sources as part of their contingency funding plan.
    In December 2022, the temporary statutory enhancements that 
assisted the agent membership of corporate credit unions expired. As a 
result, 3,322 credit unions with less than $250 million in assets lost 
access to the CLF, and the facility's capacity contracted by almost $10 
billion. \9\
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     \9\ Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 
116-136, 134 Stat 281 (March 27, 2020).
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    To address this expiration and growing liquidity risks within the 
credit union system, the NCUA Board has unanimously asked Congress for 
permanent statutory authority to allow corporate credit unions--or 
credit unions serving other credit unions--and other agent members of 
the CLF to purchase capital stock for a subset of the credit unions 
they serve. These statutory adjustments would make the facility a more 
affordable option for corporate credit unions to subscribe to on behalf 
of their smaller credit union members so that this liquidity source can 
assist more institutions. Notably, the Congressional Budget Office has 
scored the CLF reforms at no cost to the taxpayer. \10\
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     \10\ The Congressional Budget Office has traditionally scored 
enhancements to the CLF as having no cost; see text on the bottom of 
page four of the Congressional Budget Office score of S. 414, Credit 
Card Accountability Responsibility and Disclosure Act of 2009.
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NCUA's Efforts To Strengthen the Credit Union System
    In recent months, the NCUA has undertaken several actions to 
enhance cybersecurity, improve consumer financial protections, and 
consider new rules to strengthen the system.
Enhancing Cybersecurity
    The potential for cyberattacks in the financial services industry 
and the credit union system is high and will likely stay that way for 
the foreseeable future. The NCUA, therefore, remains vigilant in its 
cybersecurity posture and continues to focus on advancing consistency, 
transparency, and accountability within the agency's cybersecurity 
examination program. Specifically, the NCUA is:

    Providing credit unions with information and resources to 
        improve their preparedness and resiliency;

    Safeguarding its systems and information; and

    Increasing the credit union system's capacity to reduce the 
        potential for systemic risks.

    The NCUA has also notified credit unions about the increased 
likelihood of cyberattacks resulting from geopolitical and other cyber 
events. As institutions that qualify as U.S. critical infrastructure, 
credit unions of all sizes can be subject to cyberattacks and should 
adopt a heightened state of awareness. The NCUA urges credit unions to 
implement appropriate controls in the technology they use to deliver 
member services.
    Earlier this year, the NCUA deployed updated, scalable, and risk-
focused Information Security Examination (ISE) procedures. These 
procedures focus on compliance with parts 748 and 749 of NCUA 
regulations and align closely with the voluntary Automated 
Cybersecurity Evaluation Toolbox (ACET) maturity assessment. The ISE 
examination initiative offers flexibility for credit unions while 
providing examiners with standardized review steps to facilitate 
advanced data collection and analysis. Together with the ACET maturity 
assessment, the new ISE procedures will assist the agency in protecting 
the credit union system from cyberattacks.
    The agency also recognizes that it must collaborate with credit 
unions in identifying attacks before they become systemic and threaten 
the broader financial services sector. Accordingly, the NCUA Board in 
February approved a new cyber incident reporting rule, which goes into 
effect on September 1, 2023. \11\ The final rule requires a federally 
insured credit union to report cyber incidents that rise to the level 
of a reportable incident as soon as possible but no later than 72 hours 
after it reasonably believes a reportable cyber incident has occurred. 
This final rule aligns with the NCUA's broader focus on cybersecurity 
safeguards requiring faster notifications when incidents occur.
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     \11\ 12 CFR Part 748.
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Improving Consumer Financial Protection
    Because safety and soundness and consumer financial protection are 
mutually reinforcing aspects of the NCUA's mission, the NCUA actively 
examines for compliance with consumer financial protection laws and 
regulations for credit unions within its supervisory authority. \12\
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     \12\ See the NCUA Strategic Plan 2022-2026.
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    For 2023, the agency's consumer financial protection supervisory 
priorities include overdraft protection, fair lending, residential real 
estate appraisal bias, and Truth in Lending Act and Fair Credit 
Reporting Act compliance. The NCUA has also prioritized the examination 
of credit union compliance with the Flood Disaster Protection Act, 
including disclosure requirements, as we evolve our understanding of 
climate-related financial risk. \13\
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     \13\ Letter to Credit Unions, 23-CU-01, ``NCUA's 2023 Supervisory 
Priorities'', available at https://ncua.gov/regulation-supervision/
letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.
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    Notably, the NCUA has increased its focus on overdraft practices at 
credit unions to assess whether the amount and manner of overdraft and 
nonsufficient funds fees are potentially unfair and detrimental to 
credit union members, particularly those of modest means. Overdraft and 
nonsufficient funds fees should be reasonable and proportional, credit 
union members should have the ability to anticipate and avoid fees, and 
credit unions should not overly rely on this fee income for revenue.
    As such, NCUA examiners are focusing on unanticipated overdraft 
fees such as authorized positive/settle negative fees (or fees for 
debit card transactions where the consumer had a sufficient available 
balance when the transaction was initiated and authorized but not when 
the transaction cleared), representment fees charged multiple times in 
close succession for insufficient funds for a single purchase or 
transaction, and return deposit fees for third-party checks that are 
returned unpaid or ``bounce.''
    The NCUA's supervision regarding this service aims to create a more 
equitable system that supports financial stability for credit union 
members, discourages over reliance on fee income from one source, and 
improves transparency.
Rulemaking
    In addition to the final rule regarding cyber incident notification 
referenced earlier, the NCUA Board recently proposed two other 
important rules.
    In December 2022, the NCUA Board published a proposed rule to 
clarify the NCUA's current regulations and provide additional 
flexibility for credit unions to use advanced technologies and take 
advantage of opportunities offered by the fintech sector. \14\ The 
proposal would also make conforming amendments to the NCUA's rule 
regarding loans and lines of credit to members by adding new provisions 
about indirect lending arrangements and indirect leasing arrangements.
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     \14\ 12 CFR Parts 701 and 714; See https://www.regulations.gov/
document/NCUA-2022-0185-0001.
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    In October 2022, the NCUA Board issued another proposed rule in 
response to the Credit Union Governance Modernization Act of 2022. \15\ 
\16\ Pursuant to that act, the NCUA has 18 months following the date of 
enactment to develop a policy by which a Federal credit union member 
may be expelled for cause by a two-thirds vote of a quorum of the 
credit union's board of directors.
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     \15\ See Credit Union Governance Modernization Act of 2022, Pub. 
L. 117-103, 12 U.S.C. 1764 (2022), available at https://amendments-
rules.house.gov/amendments/DELAURO-01-xml220309170415113.pdf.
     \16\ 12 CFR Part 701, Appendix A. See https://ncua.gov/files/
agenda-items/member-expulsion-proposed-rule-20220922.pdf.
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    The NCUA is currently reviewing the comments received on both 
rulemakings and expects to issue final rules during the third quarter.
Legislative Requests
    Last year, the House passed both H.R. 3958, the Central Liquidity 
Facility Enhancement Act, to renew the CLF expiring authority for an 
additional year, and H.R. 7022, the Strengthening Cybersecurity for the 
Financial Sector Act, that restored the NCUA's third-party vendor 
examination authority, as part of the 2023 National Defense 
Authorization Act. As neither bill became law, the NCUA encourages the 
118th Congress to revisit both proposals to strengthen the system.
    The recent failures of Silicon Valley, Signature, and First 
Republic banks are a reminder of the dangers of concentration risk and 
the need for effective risk-management policies and practices to manage 
capital, interest rate risk, and liquidity risk. These fundamentals 
have remained true throughout all economic and regulatory cycles and 
have recently been areas of supervisory focus for the NCUA. Credit 
unions that fail to manage these core issues can and will continue to 
fail.
    Accordingly, to better manage such liquidations in the future, the 
NCUA requests amendments to the Federal Credit Union Act to provide 
more flexibility to the NCUA Board to manage the Share Insurance Fund, 
bringing the fund's operations more in line with those of the Deposit 
Insurance Fund administered by the Federal Deposit Insurance 
Corporation (FDIC). Likewise, as Congress considers amending Federal 
deposit insurance requirements, the NCUA supports maintaining parity 
between the Share Insurance Fund and the Deposit Insurance Fund.
Central Liquidity Facility Reforms
    With liquidity risks rising within the financial system and at 
individual credit unions, now is not the time to cut a liquidity 
lifeline. As such, and as outlined earlier, the NCUA Board fully 
supports restoring the ability of corporate credit unions to serve as 
CLF agents on behalf of a subset of their members.
    On February 28, 2023, Senators Padilla and Cramer introduced a bill 
to allow corporate credit unions to purchase capital stock on behalf of 
a subset of their members. This bill would allow them to contribute 
capital to provide coverage for their smaller members with less than 
$250 million in assets. \17\ Liquidity risks within the credit union 
system are rising, and timely consideration of this bill would better 
protect the credit union system from a future liquidity event.
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     \17\ See U.S. Senate Bill, S. 544, available at https://
www.congress.gov/118/bills/s544/BILLS-118s544is.pdf.
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Restoration of Third-Party Vendor Authority
    Congress should also restore the NCUA's statutory examination 
authority over third-party vendors and enforcement and examination 
authority for credit union service organizations (CUSOs) that expired 
more than 20 years ago. The world's interconnectedness has changed 
considerably in the last two decades. This statutory amendment would 
give the NCUA parity with the other Federal banking agencies that 
supervise and regulate federally insured depository institutions.
    Currently, the NCUA may only review credit union third-party 
vendors with their permission, and vendors often decline these 
requests. Vendors and CUSOs may also reject the NCUA's recommendations 
to implement appropriate corrective actions that mitigate identified 
risks. Thus, the current vendor and CUSO review process falls short of 
protecting the credit union system.
    Accordingly, the NCUA requests visibility into these entities. Such 
visibility will address the credit union system's growing reliance on 
digital services, increased credit union outsourcing of core business 
functions, concentration risks, and evolving cyberthreats that pose a 
national security risk.
    Vendor examination authority would allow the NCUA to discover and 
remediate issues that could cause systemic risk if left untreated. 
Credit unions--a substantive part of our Nation's critical economic 
infrastructure--rely on third parties for core processing services such 
as mortgage and auto lending, online services, information technology 
systems development and maintenance, and other member services subject 
to little or no oversight.
    Moreover, the top five technology service providers serve more than 
half of all credit unions, representing more than 90 percent of the 
credit union system's assets. A failure of one of these third parties 
could cause hundreds of credit unions and potentially tens of millions 
of their members to lose access to their funds simultaneously, 
resulting in a loss of confidence for the credit union industry and the 
entire financial sector.
    For these reasons and others, the Government Accountability Office 
and the Financial Stability Oversight Council have repeatedly 
recommended that Congress approve legislation to restore the NCUA's 
vendor authority to close this growing regulatory blind spot. \18\ The 
NCUA's Office of Inspector General has done the same. And, the preamble 
to the CUSO final rule adopted in October 2021 also noted the NCUA 
Board's ``continuing policy to seek third-party vendor authority for 
the agency from Congress.'' \19\
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     \18\ See NCUA, ``Third-Party Vendor Authority''. Appendix A. 
(March 2022).
     \19\ See https://www.ncua.gov/files/agenda-items/
AG20211021Item2b.pdf.
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    If the NCUA's third-party vendor authority is reauthorized, the 
agency will adopt a program that prioritizes examinations based on the 
risks to the Share Insurance Fund, cybersecurity, consumer financial 
protection, and Bank Secrecy Act/Anti-Money Laundering compliance.
Potential Changes To Share Insurance Coverage Levels and the Share 
        Insurance Fund
    Lastly, in the aftermath of recent bank failures, some have called 
on Congress to adjust the existing $250,000 cap on the share and 
deposit insurance coverage provided by the NCUA and FDIC, respectively. 
Others have suggested increasing the coverage limit for non-interest-
bearing transaction accounts used by small businesses for payroll and 
other purposes. And, some others have called for unlimited coverage.
    The NCUA defers to Congress on determining what statutory changes, 
if any, should be made to share and deposit insurance coverage levels 
and account types. But, if Congress does decide to act in this area, 
the NCUA has two requests. The first is to maintain parity between the 
share insurance provided by the NCUA and the deposit insurance provided 
by the FDIC. Share and deposit insurance parity ensures that consumers 
receive the same level of protection against losses regardless of their 
financial institution's charter type. And second, if coverage levels 
are adjusted in any way, there will be costs associated with those 
adjustments, such as the need to increase reserves. Accordingly, the 
NCUA requests additional flexibility for administering the Share 
Insurance Fund.
    Specifically, the NCUA requests amending the Federal Credit Union 
Act to remove the 1.50-percent ceiling from the current statutory 
definition of ``normal operating level,'' which limits the ability of 
the Board to establish a higher normal operating level for the Share 
Insurance Fund. Congress should also remove the limitations on 
assessing Share Insurance Fund premiums when the equity ratio of the 
Share Insurance Fund is greater than 1.30 percent and if the premium 
charged exceeds the amount necessary to restore the equity ratio to 
1.30 percent. \20\
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     \20\ As part of the Federal Deposit Insurance Reform Act of 2006, 
Congress ended the prohibition on the FDIC's charging of risk-based 
premiums to well-capitalized institutions (which constituted most of 
the industry) when the reserve ratio was at or above its target. See 
section 2107(a) of Pub. L. No. 109-171 (Feb. 8, 2006). Compare with 
1782(c)(2)(B) (providing in relevant part: ``The [NCUA] Board may 
assess a premium charge only if--(i) the [Share Insurance] Fund's 
equity ratio is less than 1.30 percent; and (ii) the premium charge 
does not exceed the amount necessary to restore the equity ratio to 
1.30 percent.'').
---------------------------------------------------------------------------
    Together, these amendments would bring the NCUA's statutory 
authority over the Share Insurance Fund more in line with the FDIC's 
authority as it relates to administering the Deposit Insurance Fund. 
These amendments would also better enable the NCUA Board to proactively 
manage the Share Insurance Fund by building reserves during economic 
upturns so that sufficient money is available during economic 
downturns. A more countercyclical approach would better ensure that 
credit unions will not need to impair their 1-percent contributed 
capital deposit or pay premiums during times of economic stress, when 
they can least afford it.
Conclusion
    In sum, the credit union system currently remains well-capitalized, 
stable, and well-positioned to handle a relatively broad range of 
economic possibilities. Consumers can also remain confident that their 
insured share deposits at federally insured credit unions are safe, 
just as they have been for more than 50 years. And, to protect the 
system and its members going forward, the NCUA will continue to monitor 
credit union performance through the examination process, offsite 
monitoring, and tailored supervision at credit unions experiencing 
problems.
    Thank you again for the invitation to testify. I look forward to 
discussing these issues with the Committee and stand ready to work with 
you in safeguarding and strengthening the credit union system.
                                 ______
                                 
                  PREPARED STATEMENT OF MICHAEL J. HSU
     Acting Comptroller, Office of the Comptroller of the Currency
                              May 18, 2023
Introduction
    I am pleased to testify before the Committee on Banking, Housing, 
and Urban Affairs to provide information about the Office of the 
Comptroller of the Currency's (OCC) actions and responses to recent 
market stress, and to update Members of the Committee on efforts 
underway as we work to ensure that national banks and Federal savings 
associations operate in a safe, sound, and fair manner.
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     Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
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    The OCC charters, supervises, and regulates nearly 1,100 national 
banks, Federal savings associations and foreign branches (collectively, 
``banks''). These institutions range in size from very small community 
banks to the largest, most globally active banks operating in the 
United States. The vast majority of the institutions we supervise have 
less than $1 billion in assets, while 56 have greater than $10 billion 
in assets. Together, OCC-supervised financial institutions hold more 
than $15 trillion in assets--almost 65 percent of all the assets held 
in commercial U.S. banks.
    The Federal banking regulators have worked closely together since 
March to maintain financial stability and confidence in the banking 
system in response to the recent market stress. Adequate levels of 
capital going into the recent turmoil have helped to limit the risk of 
contagion. Despite the market stress, the Federal banking system has 
remained resilient and national banks and Federal savings associations 
have remained well positioned to serve their customers.
    The OCC is closely monitoring the conditions of the institutions we 
supervise and working with them to ensure that their liquidity and 
capital positions remain sound and that they are ``on the balls of 
their feet'' with regard to risk management. The vast majority of OCC-
supervised banks have not experienced stress with regard to their 
depositors or business customers. After the failures of Silicon Valley 
Bank and Signature Bank, we carefully reviewed the condition of the 
Federal banking system, including banks with significant levels of 
uninsured deposits to ensure that their cash holdings and borrowing 
capacity can easily meet potential depositor withdrawals. In addition, 
many have taken steps to reduce risk in light of market conditions.
    Over the past 2 years, I have consistently emphasized to bankers 
the importance of guarding against complacency and having strong risk 
management policies and practices in place. Most OCC regulated banks 
have heeded this message and been able to successfully navigate the 
rise in interest rates and changing economic outlook. OCC examiners 
will continue to actively monitor market conditions and engage with 
banks to help ensure they are prepared to meet future challenges.
    My written statement begins with observations about recent events, 
then provides an overview of our work to advance four critical agency 
priorities that I initiated after becoming Acting Comptroller 2 years 
ago.
Observations on the Recent Bank Failures
    The recent bank failures have prompted several reviews of the 
strengths and weaknesses of bank regulatory frameworks and supervisory 
programs. \1\ While none of the failed banks were regulated by the OCC, 
we are using those reviews to do a ``look across'' and evaluate our own 
supervisory processes to identify any areas that may need adjustment.
---------------------------------------------------------------------------
     \1\ U.S. Government Accountability Office, ``Bank Regulation: 
Preliminary Review of Agency Actions Related to March 2023 Bank 
Failures'', (April 28, 2023); Board of Governors of the Federal Reserve 
System, ``Review of the Federal Reserve's Supervision and Regulation of 
Silicon Valley Bank'', (April 28, 2023); California Department of 
Financial Protection and Innovation, ``Review of DFPI's Oversight and 
Regulation of Silicon Valley Bank'', (May 8, 2023); Federal Deposit 
Insurance Corporation, ``FDIC's Supervision of Signature Bank'', (April 
28, 2023); New York State Department of Financial Services, ``Internal 
Review of the Supervision and Closure of Signature Bank'', (April 28, 
2023).
---------------------------------------------------------------------------
    Based on my perspective as Acting Comptroller and 20 years of 
experience as a financial regulator, I would like to offer some 
preliminary observations on steps that can be taken to restore full 
confidence in the banking system.
    Supervisors need support to act in a timely and effective manner. 
The reviews by the State and primary Federal regulators of Silicon 
Valley Bank (SVB) and Signature Bank shared a consistent theme. 
Awareness and identification of weaknesses were not the problem; 
rather, timely and forceful supervisory action were lacking.
    Supervisors at the OCC and the other banking agencies play a 
critical role in keeping the banking system safe and sound by 
exercising discretion. The degree to which supervisors feel empowered 
to exercise that discretion impacts their will to act in a timely and 
forceful manner. Clear support to empower supervisors to exercise 
discretion and act when needed will help keep the banking system safe 
and sound.
    One challenge with the exercise of supervisory discretion is 
ensuring consistency, particularly across regulatory bodies. To 
minimize the effects of ``charter shopping'' by banks, Federal and 
State banking agencies should commit to leveling up supervision and 
ensuring uniform and consistent standards across agencies. One of my 
priorities as Chair of the Federal Financial Institutions Examination 
Council will be getting back to basics, focusing on the Council's 
mission to promote uniform principles and standards in the supervision 
of financial institutions.
    Regulations regarding the resilience and resolvability of large 
banks need to be strengthened. The failures of SVB and Signature Bank 
required the invocation of the systemic risk exception in order to 
avoid contagion and financial instability. Stronger resiliency 
requirements for large banks with regard to capital and liquidity would 
have reduced the probability of their failures. Stronger resolvability 
requirements--such as bail-in-able long-term debt to absorb losses and 
separability to enable rapid sales to third parties--would have 
facilitated orderly failures with less Government involvement. \2\ The 
OCC is working closely with the Federal Reserve and FDIC to address 
these issues.
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     \2\ Remarks of Acting Comptroller Michael J. Hsu before the 
Wharton Financial Regulation Conference 2022, ``Financial Stability and 
Large Bank Resolvability'', (April 1, 2022).
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    Deposit insurance coverage should be updated. The recent bank 
turmoil has been driven in part by uncertainty about the safety of 
uninsured deposits. The FDIC's recent report on deposit insurance 
presents several options for Congressional consideration. \3\ The 
report's analysis is worth careful consideration, especially its 
conclusion that expanding FDIC insurance in a targeted manner to cover 
business payment accounts may have the greatest potential to meet the 
objectives of deposit insurance and financial stability while 
constraining moral hazard.
---------------------------------------------------------------------------
     \3\ FDIC, ``Options for Deposit Insurance Reform'', (May 1, 2023).
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    An updated and properly calibrated FDIC deposit insurance system 
would be the most effective and efficient way to address the liquidity 
risk of uninsured deposits. In the meantime, we have been working with 
our banks, especially those with significant levels of uninsured 
deposits, to ensure that their cash holdings and borrowing capacity can 
meet depositor withdrawals. We remain committed to supervising banks so 
that depositors can rest assured that their money is safe.
    The diversity of the banking system must be preserved as the 
industry evolves. The recent turmoil has increased the market's 
scrutiny of regional and midsize bank business models, outlooks, and 
valuations. The OCC has been working on updating the analytical 
frameworks related to the bank merger guidelines that the Federal 
banking agencies and Department of Justice must follow when considering 
bank mergers. \4\ The recent turmoil has increased the urgency of these 
efforts. It also presents an opportunity to shape a more competitive, 
more community-oriented, and more resilient banking system. The OCC is 
committed to being open-minded when considering merger proposals and to 
acting in a timely manner on applications, consistent with the 
requirements of the Bank Merger Act.
---------------------------------------------------------------------------
     \4\ The OCC hosted a symposium on bank mergers on February 10, 
2023. Video of the symposium is available through the OCC's Digital 
Media Library.
---------------------------------------------------------------------------
    As the industry evolves, I believe strongly that it is paramount 
that we preserve the diversity of the banking system, including the 
community banking model. Community banks--as well as regional and 
midsize banks--play an invaluable role in supporting the 
extraordinarily diverse range of economies, small businesses, and 
individuals across the country. I have spoken to many community, 
regional and midsize bankers about this and will continue to engage 
with them on this important priority.
Guarding Against Complacency by Banks
    Two years ago, when I became Acting Comptroller, I prioritized and 
highlighted the need to guard against complacency. \5\ Since then, I 
have emphasized the importance of both paying attention to tail risks 
and being disciplined with regards to ``blocking and tackling,'' e.g., 
interest rate and credit risk management. \6\
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     \5\ Statement of Michael J. Hsu, Acting Comptroller of the 
Currency, before the Committee on Banking, Housing, and Urban Affairs, 
United States Senate (Aug. 3, 2021); Statement of Michael J. Hsu, 
Acting Comptroller of the Currency, before the Committee on Financial 
Services, United States House of Representatives (May 19, 2021).
     \6\ Remarks of Acting Comptroller of the Currency Michael J. Hsu 
at the RMA Risk Management Virtual Conference, ``Promoting Prudent 
Credit Risk Management and Diversity and Inclusion'', (December 5, 
2022); Remarks by Acting Comptroller of the Currency Michael J. Hsu 
before the American Bankers Association on Tail Risks (March 31, 2022).
---------------------------------------------------------------------------
    Continued industry and regulatory vigilance is critical. \7\ 
Elevated interest rates put pressure on banks' cost of funding. Asset-
liability management practices, including liquidity and interest rate 
risk modeling, stress testing, and sensitivity analysis, are critical 
risk management practices for banks. The commercial real estate market, 
in particular office space, is expected to experience credit strains 
due to higher vacancy rates and higher interest rates as loans 
refinance. We also expect delinquency and loss rates in the retail and 
mortgage space to increase from their historically low levels. Banks 
will need to anticipate and manage these trends and have contingency 
plans to mitigate adverse impacts.
---------------------------------------------------------------------------
     \7\ Remarks of Acting Comptroller of the Currency Michael J. Hsu 
at the Bloomberg Risk & Regulation Week 2022, ``When the Tide Goes 
Out'', (May 17, 2022).
---------------------------------------------------------------------------
    To effectively guard against complacency, we must also be attentive 
to risks beyond the daily headlines. The OCC remains focused on risks 
associated with IT operations and cybersecurity, and we have encouraged 
banks to stay abreast of new technologies and threats. Banks need to 
invest appropriately to guard against these risks notwithstanding the 
temptation to postpone updating legacy IT systems or to defer 
maintenance of existing technology. \8\
---------------------------------------------------------------------------
     \8\ Remarks of Acting Comptroller of the Currency Michael J. Hsu 
before the Joint Meeting of the Financial and Banking Information 
Infrastructure Committee and the Financial Services Sector Coordinating 
Council (Aug. 2, 2022).
---------------------------------------------------------------------------
    In an environment of uncertainty, bank capital remains 
foundational. As we have seen, strong capital requirements have proven 
repeatedly to be a critical element of the bank regulatory framework 
and help to ensure that the banking industry serves as a source of 
strength during times of economic stress. The OCC remains committed to 
implementing the enhanced regulatory capital requirements that align 
with the final set of Basel III standards, and it is important that we 
move forward as soon as possible. The implementation of these standards 
for large banking organizations will strengthen the resilience of the 
domestic banking system. \9\
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     \9\ Remarks of Acting Comptroller of the Currency Michael J. Hsu 
at the IIB Annual Washington Conference, ``Trust and Global Banking: 
Lessons for Crypto'', (March 6, 2023).
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    Banks that remain vigilant and guard against complacency in these 
and other areas will promote a safe, sound, and fair banking system 
that continues to support the individuals, communities, and businesses 
they serve.
Reducing Inequality in Banking
    Persistent economic inequality can erode trust in the banking 
system. Americans who lack access to traditional financial products and 
services or feel exploited by banks may conclude that the system is 
working against them, rather than for them. The OCC is focused on 
several initiatives to address this problem including efforts through 
Project REACh--the OCC's Roundtable for Economic Access and Change--and 
through membership in the Property Appraisal and Valuation Equity 
(PAVE) task force sponsored by the Department of Housing and Urban 
Development. This year, the OCC also undertook efforts to focus on 
measuring and improving the financial health of consumers, and recently 
produced its second discussion in the Financial Health: Vital Signs 
video series focused on the importance of building assets.
    The OCC has been working with the Federal Reserve and FDIC to 
modernize and strengthen the Community Reinvestment Act (CRA). The CRA 
is a critical tool for bank regulators to expand financial inclusion 
and opportunity for all Americans, especially the underserved. The 
agencies received hundreds of detailed and thoughtful comments on the 
Notice of Proposed Rulemaking, including from Members of this 
Committee, and we are working together to consider the suggestions.
    In addressing inequality, I am mindful that it is expensive to live 
paycheck to paycheck and overdrafts can be part of that expense. While 
bank overdraft programs can be helpful for consumers facing short-term 
liquidity issues, they also present a variety of risks to consumers and 
to banks, including compliance, operational, reputation and credit 
risks. Last month, the OCC published a bulletin to provide guidance to 
bankers to address the risks associated with bank overdraft protection 
programs, identify certain practices that may result in heightened risk 
exposures, and describe practices that may assist banks with managing 
these risks. \10\ The guidance also encourages banks to explore 
offering low-cost accounts, or other lower cost alternatives for 
covering overdrafts, such as overdraft lines of credit or linked 
accounts to consumers. The guidance furthers the agency's support for 
solutions that help banks meet the evolving needs of their consumers, 
businesses, and communities. \11\
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     \10\ OCC Bulletin 2023-12, ``Overdraft Protection Programs: Risk 
Management Practices'' (Apr. 26, 2023).
     \11\ Remarks of Acting Comptroller of the Currency Michael J. Hsu 
at the NCRC's 2023 Just Economy Conference, ``Elevating Fairness'', 
(Mar. 30, 2023).
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Adapting to Digitalization
    The business of banking is becoming increasingly digitalized. 
Technology firms are expanding into financial services, and bank 
partnerships with fintechs are now commonplace. I believe that 
financial technology generally, and fintech and big technology 
companies specifically, will warrant even more attention in the future.
    On March 30, 2023, the OCC announced the establishment of an Office 
of Financial Technology to enhance the agency's expertise and ability 
to adapt to the rapid pace of technological changes in the banking 
industry. \12\ The Office of Financial Technology broadens the OCC's 
focus in this area and contributes to the agency's leadership and 
agility in adapting to the evolution of banking services. It expands 
upon the significant work and considerable successes of the OCC's 
Office of Innovation, which was established in 2016 to coordinate the 
agency's efforts around responsible innovation. The office is 
responsible for the analysis, evaluation and discussion of relevant 
trends in financial technology, emerging and potential risks, and 
enhancing our expertise on matters relating to digital assets, fintech 
partnerships, and changing technologies and business models.
---------------------------------------------------------------------------
     \12\ OCC News Release 2023-31, ``OCC Establishes Office of 
Financial Technology'' (Mar. 30, 2023).
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    We are also working closely with our interagency peers to ensure 
that banks appropriately manage their risks associated with third-party 
relationships, including relationships with financial technology 
companies. Banks need to be mindful that partnering with third parties 
does not diminish their responsibility to ensure the activity is 
performed in a safe and sound manner and in compliance with applicable 
laws. In addition, as open banking gains attention in the United 
States, bank regulators must prepare and engage with stakeholders to 
ensure that the safety, soundness, and fairness of banks' operations 
are maintained as consumer rights with regards to their financial data 
are strengthened.
Managing Climate-Related Financial Risks to the Federal Banking System
    The OCC's focus on climate-related financial risk is firmly rooted 
in our mandate to ensure that national banks and Federal savings 
associations operate in a safe and sound manner. It is not our role to 
tell bankers who they can and cannot serve. We do not pick winners or 
losers, but focus on ensuring that banks understand the climate related 
financial risks they face and have robust risk management programs in 
place to control and monitor those risks.
    The OCC continues to consider the comments received on its proposed 
Principles for Climate-Related Financial Risk Management for Large 
Banks issued in December 2021 and is working with the other banking 
agencies to determine next steps. Our focus is on large banks with at 
least $100 billion in consolidated assets because that is where the 
risks are most complex and material. In our work to date, we have found 
that most large banks have established board governance and senior 
management structures to address climate-related financial risks, and 
continue to develop processes to measure and monitor the potential 
exposures to those risks.
The OCC Supports Community Banks and MDIs
    The safety and soundness of community banks is central to the OCC's 
mission, and the agency is committed to fostering an environment that 
allows well-managed community banks to grow and thrive.
    Revitalizing of Minority Depository Institutions (MDI). MDIs are on 
the front lines of serving low-income, minority, rural, and other 
underserved communities and are a critical source of credit for them. 
However, the number of MDIs has decreased, and they have historically 
faced challenges with accessing capital, adopting new technology, and 
modernizing their infrastructures. In July 2022, the OCC issued an 
updated policy statement on MDIs that reaffirms the agency's commitment 
to these institutions and describes the range of programs in place to 
support MDIs. \13\ The policy statement serves to focus the agency's 
efforts to ensure MDIs remain a bedrock of financial access and 
inclusion.
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     \13\ Refer to OCC News Release 2022-92, ``OCC Updates Policy 
Statement on Minority Depository Institutions'' (Jul. 27, 2022).
---------------------------------------------------------------------------
    Regulation Based on Size and Complexity. It is imperative that 
regulatory expectations for banks are differentiated based on several 
factors, including banks' size and complexity. We are mindful of 
concerns from community bankers that requirements for large banks 
should not trickle down to smaller banks, as such requirements can pose 
an undue burden and unnecessarily tie up scarce personnel and other 
resources. The OCC will remain diligent in guarding against such 
outcomes, while ensuring the Federal banking system remains safe, 
sound, and fair. We plan to continue to engage directly with each 
community bank that we supervise, and our two Federal Advisory 
Committees, the Minority Depository Institution Advisory Committee and 
the Mutual Savings Association Advisory Committee, will continue to 
assist in this effort.
Conclusion
    Throughout the recent financial stress, the OCC has closely 
monitored the conditions of the national banks and Federal savings 
associations we regulate. We have reviewed the recent reports issued by 
our peer regulators. We are continually evaluating our approach to 
supervision to ensure it remains effective and properly calibrated.
    At the same time, the OCC has made progress advancing several 
priority areas. The Federal banking system remains a source of strength 
to the U.S. economy and the institutions we regulate remain prepared to 
serve their customers, businesses, and communities in a safe, sound, 
and fair manner.
                                 ______
                                 
                PREPARED STATEMENT OF ADRIENNE A. HARRIS
    Superintendent, New York State Department of Financial Services
                              May 18, 2023
    Good morning, Chairman Brown, Ranking Member Scott, and Members of 
the Committee on Banking, Housing, and Urban Affairs. I am Adrienne 
Harris, Superintendent of New York's Department of Financial Services 
(DFS or the Department). Thank you for inviting me to today's hearing.
The Supervision and Closure of Signature Bank
    On Sunday, March 12, 2023, Signature Bank (Signature or the Bank) 
failed after experiencing a propulsive run on deposits on Friday, March 
10. The run was instigated by the self-liquidation of Silvergate Bank 
on March 8, and then the failure of Silicon Valley Bank (SVB) on March 
10 following an unprecedented run on its own deposits. The resulting 
panic caused a run on Signature that was faster than any other bank run 
in history, save the run that had just taken place at SVB. \1\
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     \1\ See Frank Salmon, Axios, ``The Largest Bank Run in History'', 
available at: https://www.axios.com/2023/03/11/the-largest-bank-run-in-
history.
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    The Bank narrowly survived through Friday night. DFS worked that 
weekend to assess the liquidity of the Bank and its ability to open the 
following Monday, March 13 in a safe and sound manner. Signature was 
unable to present a credible liquidity plan to meet its known 
outstanding deposit withdrawals, let alone the new deposit withdrawals 
it could expect on Monday following the events that had transpired and 
a weekend of panicked news coverage. In order to avoid a disorderly 
mid-day Monday shutdown and further contagion across the banking 
system, on the evening of Sunday, March 12, DFS took possession of 
Signature and appointed the Federal Deposit Insurance Corporation 
(FDIC) as receiver.
    Before its collapse, Signature was a full-service commercial bank 
chartered in 2001 by DFS's predecessor agency, the New York State 
Banking Department. Signature was subject to joint, continuous 
supervision and examination by DFS and the FDIC (the Regulators). The 
DFS and FDIC examination teams were in continuous contact with the Bank 
as part of the normal course of supervision, reviewing Bank data and 
examining operations on an ongoing basis.
    The Bank's business model focused on providing high-touch service 
to mid-sized commercial companies. Its main lines of business were 
commercial real estate and commercial and industrial lending. While the 
Bank grew steadily from its founding, growth accelerated significantly 
between 2019 and 2021. A substantial portion of the growth was fueled 
by expansion into new business activities and deposit customer types, 
such as mortgage servicing and digital assets-related deposits, 
significantly increasing the level of uninsured deposits. Over that 
time, Signature's total assets more than doubled, growing from $51 
billion at the end of 2019 to $118 billion at the end of 2021, 
primarily due to growth in uninsured deposits. At the end of 2019, 
Signature had 40 billion in deposits, out of which $33 billion were 
uninsured. By the end of 2021, deposits more than tripled, growing to 
$106 billion, of which $97 billion, or 92 percent of Signature's total 
deposits, were uninsured.
    Signature's reliance on uninsured deposits posed a risk that the 
Bank had to manage carefully to ensure adequate liquidity while 
maintaining a safe and sound business. However, the Bank's growth 
significantly outpaced the development of its risk control framework. 
The Regulators began to document liquidity-related regulatory concerns 
to the Bank beginning with the 2018 Report of Examination.
    In 2018, the Regulators identified several breaches of the 
liquidity risk metrics established by Signature's Board of Directors 
(the Board). The Regulators considered the issue to be sufficiently 
material to warrant issuing a Matter Requiring Board Attention (MRBA) 
to the Bank. \2\ The Bank subsequently remediated this MRBA but the 
liquidity-related regulatory concerns only persisted and escalated.
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     \2\ For any bank, MRBAs represent significant issues that 
necessitate immediate board attention, and boards are required to place 
high priority on remediating such issues. Remediation of all MRBAs is 
critical to the overall risk management and internal control processes 
of a bank.
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    In 2019, the Regulators downgraded Signature's liquidity rating 
from a ``2,'' representing a ``satisfactory'' rating, to a ``3,'' 
representing a ``less than satisfactory rating'', \3\ and issued a new 
liquidity-related MRBA consisting of 18 supervisory recommendations. 
The liquidity-related supervisory recommendations identified material 
weaknesses in Signature's contingency funding plan and liquidity stress 
testing, including unsupported critical assumptions, particularly with 
deposit run-offs in adverse liquidity stress testing scenarios and 
internal controls.
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     \3\ The Regulators used the CAMELS rating system to evaluate the 
condition of the Bank.
---------------------------------------------------------------------------
    In 2020 and 2021 Reports of Examinations, the Regulators required 
Bank management and the Board to promptly implement corrective actions 
to remediate the identified liquidity-related weaknesses that were 
languishing unresolved since 2019. The Regulators warned the Bank that 
it was imperative to hasten remediation efforts in developing and 
implementing an appropriate liquidity management framework and a 
contingency funding plan that was commensurate with the Bank's 
increasing liquidity risk profile and level of funding concentrations. 
The Regulators told the Bank it needed to adequately control its 
liquidity risk and limit potential adverse impacts on the financial 
condition of the Bank.
    The management, while acknowledging regulatory findings, did not 
heed the Regulators' orders. The Bank was slow to remediate supervisory 
recommendations, and many issues identified by the Regulators remained 
unresolved when the Bank failed.
    While the 2022 examination was still in progress when the Bank 
failed, on March 11, 2023, the Regulators issued an interim ratings 
downgrade letter to Signature. The Bank's Liquidity and Management 
component ratings and the composite rating were downgraded to a ``5,'' 
the lowest rating possible, from ``3'' and ``2,'' respectively. \4\ The 
decision to downgrade the rating was driven in part by Bank 
management's continued failure to remediate several longstanding 
liquidity risk management deficiencies, the preliminary findings of the 
2022 examination cycle, and Bank management's failure to adequately 
respond to the events of the preceding week, including the events of 
March 10 in particular.
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     \4\ See ``CAMELS Ratings Definitions'', Appendix.
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    Signature's failure to remediate the outstanding liquidity 
management issues undoubtedly contributed to its collapse. However, the 
immediate cause of the Bank's failure was an unprecedented run on 
deposits instigated by the self-liquidation of Silvergate Bank and the 
subsequent failure of SVB.
    On Friday, March 10, Signature experienced a runoff of $18.6 
billion in deposits in a matter of hours, reducing the Bank's deposit 
base by 20 percent. For context, this is 10 times the volume of deposit 
withdrawals on a normal day. While some in the market perceived 
Signature as a ``crypto bank,'' the reality is deposits from crypto 
companies only accounted for around 20 percent of the bank's diverse 
deposit base as of March 2023. The 1,600 withdrawal requests received 
on that Friday, from across the bank's diverse depositor base, placed a 
significant strain on Signature's liquidity position. The percentage of 
digital asset customer withdrawals was relatively proportional to the 
percentage of digital asset customers in the deposit base overall. The 
Bank needed an emergency loan from the Federal Reserve Bank of New York 
(FRBNY) late that night to close the resulting cash deficit of nearly 
$4 billion.
    DFS's primary goal that day was to work with Signature to avoid a 
default that evening. Throughout the day and into the night, the 
Regulators worked closely with each other and Signature to find 
sufficient liquidity to satisfy the significant volume of customer 
withdrawal requests. The FRBNY loaned Signature $5.6 billion, secured 
by $6.5 billion of collateral Signature had already posted with the 
Federal Home Loan Bank (FHLB). The process of pledging that collateral 
held at the FHLB to FRBNY was significantly challenged, however, 
because Signature did not have existing arrangements in place to pledge 
any available collateral directly to the FRBNY. As an accommodation, 
and given the urgency of the situation, FHLB agreed to subordinate its 
interest in Signature collateral to the FRBNY in light of Signature's 
critical liquidity needs and its lack of timely viable alternatives.
    The Federal Reserve also assisted Signature operationally. While 
Fedwire typically closes at 7 p.m. Monday through Friday, the Federal 
Reserve made the decision to keep the wire open until 11:30 p.m. on 
Friday. With this extension, Signature was able to process some 692 
wires totaling approximately $14 billion and avoid a technical default 
on its payment obligations. That left approximately 1,000 remaining 
wires, representing $4.6 billion left to process when the Bank opened 
on Monday, March 13. \5\
---------------------------------------------------------------------------
     \5\ Based on the information provided by Signature, DFS estimated 
Signature had $4.6 billion of deposit withdrawals left to process after 
Friday night. Signature's estimates of outstanding deposit withdrawals 
varied throughout the weekend. As of noon on Saturday, March 1, 
Signature estimated $3 billion in outstanding deposit withdrawals. As 
of Saturday evening, Signature estimated the amount to be between $1.6 
billion and $2.3 billion.
---------------------------------------------------------------------------
    After avoiding a default on Friday, Regulators had time over the 
weekend to assess Signature's condition and come to a considered view 
as to whether the Bank could open safely on Monday.
    DFS had one objective that weekend: to preserve the safety and 
soundness of the financial system. Three paths were identified for the 
Bank, in order of preference. The first was to find a way for Signature 
to open in a safe and sound manner on Monday and continue as a stable 
institution. The second was to find a purchaser for the Bank on an open 
bank basis. Third, DFS and the FDIC worked in parallel to prepare for 
the last resort scenario of taking possession of the Bank and 
appointing FDIC as receiver. It was critical that all regulators were 
aligned on decision-making and process so that in the event we were 
forced to take this third course of action, we would be prepared, and 
not have to scramble.
    The Regulators spent the weekend collecting and evaluating 
information from the Bank in order to make a data-driven decision about 
the Bank's viability. During an early afternoon call on Saturday, March 
11, with Signature executives and the Board, the Regulators made clear 
to the Bank that the Bank's viability was uncertain and that the 
Regulators needed timely, accurate, and complete information to assess 
the condition of the Bank. When Signature would not commit to providing 
information by a particular time, the Regulators pushed Signature to 
provide the data no later than 4:00 p.m. that day. Despite this frank 
conversation, Signature only started producing information in response 
to the Regulators' requests at 4:44 p.m. on Saturday, and even then, 
the data the Bank provided was incomplete. Regulators did not receive a 
comprehensive liquidity plan from Signature until Sunday, March 12, at 
noon.
    Signature needed to provide reliable and realistic data concerning 
immediately available liquidity and deposit withdrawals to inform the 
analysis the Regulators and Signature needed to perform to understand 
the Bank's liquidity position. Once Signature began providing any data 
on these key issues, the Regulators found the data was inconsistent and 
that it continuously changed in material ways.
    To open in a safe and sound manner on Monday, March 13, Signature 
needed to identify and pledge assets that were immediately acceptable 
to the FRBNY to raise the liquidity needed to meet outstanding and new 
withdrawal requests. Signature struggled over the weekend to identify 
readily pledgeable assets.
    Signature held $18 billion in capital call loans that the Bank 
sought to pledge to the FRBNY. Signature knew, however, that the FRBNY 
would not accept these loans as collateral because of the involvement 
of foreign investors. Signature and its counsel had previously failed 
to convince the FRBNY to accept these loans as collateral. Over the 
weekend, Signature implored Regulators to intercede on the Bank's 
behalf with the FRBNY.
    For other assets, such as the Bank's commercial real estate loan 
portfolio, Signature made assumptions regarding the immediate ability 
to convert these assets to cash, which the FRBNY noted would take weeks 
to assess. Although the Bank knew the FRBNY would not accept this 
collateral in the necessary timeframe, Signature continued to report to 
the Regulators that liquidity for these assets would be available as 
early as Monday, March 13.
    Further, over the weekend, Bank executives insisted there were $5 
billion in unpledged securities available for Monday. The Regulators 
repeatedly asked for details about those assets, which were not 
forthcoming. Finally, on a phone call at 10:00 p.m. on Saturday, March 
11, without explanation, Bank executives reduced the estimate of 
unpledged securities from over $5 billion to just $900 million.
    While Signature struggled to identify readily available liquidity, 
estimates of pending deposit withdrawals steadily increased. Between 
Saturday night and Sunday morning, Signature's deposit withdrawal 
estimate increased from $2 billion to $4 billion, and then nearly 
doubled again by Sunday evening with estimates ranging between $7.4 
billion and $7.9 billion.
    These withdrawal numbers excluded any additional, unknown deposit 
withdrawal requests that Signature would receive on Monday. Bank 
executives continuously insisted that additional deposit withdrawals 
would be minimal. But the idea that, in the first business day 
following an unprecedented bank run and a weekend of panicked news 
coverage, the Bank would not see significant unplanned withdrawals was 
at best improbable. The Regulators assessed that the Bank had to be 
prepared for another run of at least 20 percent of remaining deposits 
on Monday. Another run of that size would amount to approximately $11 
billion on top of the pending withdrawal requests.
    Signature advised the Regulators that its available liquidity on 
Monday would be bolstered by substantial deposit inflows from clients 
following SVB's failure. Given the run that Signature experienced 
following the failure of SVB, the Regulators assessed Signature's 
position that its liquidity would be aided by large deposit inflows 
from SVB clients to be overly optimistic.
    Moreover, Signature claimed $5 billion of its projected $6 billion 
deposit inflow would come from a DFS-regulated virtual currency 
company. As a result of DFS's oversight of that entity, DFS had 
information that contradicted the Bank's representations. Specifically, 
that entity advised DFS that the amount being transferred from SVB to 
Signature was approximately half what Signature was representing and, 
because of delays caused by SVB being placed into receivership, the 
money would not be available until Tuesday at the earliest.
    As of Sunday, March 12, Signature had $4.27 billion of certain 
liquidity available for Monday morning to cover known withdrawals 
ranging between $7.4 and $7.9 billion. See ``Signature's Projected 
Liquidity vs. Known Withdrawals'', Figure 1 below. Starting at noon on 
Sunday, the Bank began producing a comprehensive liquidity plan for the 
coming week, which included a breakdown of the sources and value of 
liquidity, inclusive of new deposit inflows. The liquidity plan 
provided by the Bank was constantly changing. Between noon and 3:09 
p.m. that day, Signature provided four different liquidity plans. The 
listing of available liquidity changed from plan to plan with no 
explanation for the change and, as referenced before, Signature 
constantly represented that certain liquidity would be available Monday 
morning even though the Bank knew the FRBNY would take weeks to review 
the potential collateral.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Based on the information the Regulators had obtained from the FRBNY 
regarding the Bank's pledgeable assets, and the Bank's unrealistic 
deposit inflows assumptions, the Regulators deemed these liquidity 
projections as inaccurate and unreliable. In fact, the last three 
liquidity projections provided by Signature bore the disclaimer that 
they were prepared ``solely for information purposes'' and Regulators 
``should not definitively rely upon it or use it to form the definitive 
basis for any decision, contract, commitment or action whatsoever, with 
respect to any proposed transaction or otherwise.''
    By Sunday afternoon, the Bank's inability to provide reliable data 
and a credible liquidity strategy to operate in a safe and sound manner 
on Monday led DFS to take possession of the Bank at approximately 5:30 
p.m. and immediately appoint the FDIC as receiver.
    The decision to take possession of a bank is one no regulator takes 
lightly. Over the weekend, DFS had begun to identify potential 
acquirers for the Bank but found that without Federal loss-sharing, 
potential partners were not interested in acquiring Signature. Taking 
possession of the Bank was the option of last resort to avoid a 
disorderly mid-day Monday shutdown and stop any further panic and 
contagion across the broader banking system.
    A confluence of events--the liquidation of Silvergate, the collapse 
of SVB, and rapidly spreading social media posts--led to a panic and an 
unprecedented outflow of deposits from Signature on Friday, March 10. 
The Bank was ill-prepared to handle the run. Signature's response to 
the crisis was hampered by a control framework and liquidity management 
plan which did not mature in line with the Bank's growth and deposit 
mix. Given the prevailing panic, and the size and speed of the deposit 
run that occurred at SVB, it is unclear whether, if Signature had 
opened on March 13 in a better liquidity position, the Bank could have 
survived a new old-fashioned bank run.
DFS Actions and Recommendations Following Signature's Closure
    In addition to the work with Signature, beginning that weekend, I 
took two additional immediate actions. First, I instituted enhanced 
supervision of banks with higher risk profiles, which continues today. 
DFS has been monitoring the liquidity of these institutions on a daily 
basis, which entails frequent engagements with these institutions, as 
well as close coordination with our Federal counterparts. We continue 
to work with the FHLB and the FRBNY to facilitate the process for 
accessing liquidity, including access to the Federal Reserve's Bank 
Term Funding Program.
    Second, on Monday, May 13, I directed DFS's Office of General 
Counsel to review the collapse of Signature and produce a public report 
on the supervision and closure of the Bank. The report, released on 
Friday, April 28, identified recommendations the Department is 
implementing to modernize supervision of today's global financial 
system. I am proud of how quickly DFS and Federal regulators acted to 
protect the consumers and small businesses banking with Signature, but 
in the aftermath of a crisis there is always an opportunity to learn 
and improve.
    Current regulatory processes do not move at the speed and 
complexity of today's financial services sector. Recognizing this 
critical gap, since joining the Department in 2021, I have begun to 
rebuild the agency to improve its ability to effectively regulate 
financial services institutions, including a specific focus on staffing 
and examination capacity, as well as examiner training.
    I have prioritized hiring since I was appointed to lead DFS in 
September 2021. The State's FY23 budget, enacted in 2022, fully funded 
DFS for the first time in its history, allowing the agency to hire 
staff that had been needed for years. Pursuant to my strategic staffing 
plan, DFS has overhauled its hiring process, onboarding 205 new staff 
and promoting 199 existing members of the team since January 2022. 
Furthermore, DFS has onboarded the first new class of financial 
services examiners since 2018, critical staff needed to increase 
capacity to examine banking organizations.
    Even with DFS's recent hiring success, however, a long-running 
failure to maintain adequate staffing levels, combined with ongoing 
attrition \6\ requires DFS to continue this important work of hiring in 
order to fully execute on its mission. As DFS continues to advance its 
recruitment, hiring, and retention strategies, it will do so bearing 
identified inefficiencies in the examination process in mind.
---------------------------------------------------------------------------
     \6\ Among other issues, including attrition to Federal financial 
regulators who pay on average 30 to 50 percent more for similar roles.
---------------------------------------------------------------------------
    DFS has begun reviewing examiner training to ensure new and 
existing DFS examiners are receiving the most up-to-date training, 
including ensuring the examination team is kept current on new and 
emerging issues that may affect a bank's safety and soundness.
    While DFS and the FDIC used the available tools to identify risks 
and require the Bank to take remedial actions, the Bank failed to fully 
address key concerns of the Regulators in a timely manner. DFS is 
currently developing new internal procedures for escalating supervisory 
areas of concern, revisiting the assumptions used to model and manage 
liquidity risk, and considering the addition of operational stress 
testing to ensure banks are ready to collect and produce accurate 
financial data rapidly in a crisis.
    Furthermore, to better hold banking institutions responsible for 
regulatory failures, DFS will explore potential policy action and 
legislative recommendations to ensure DFS has additional necessary 
authority to hold executives accountable for critical management 
failures.
    This critical review of DFS's supervision of Signature builds upon 
my longstanding commitment to data-driven policymaking, which includes 
examining and strengthening our processes and staffing to ensure we can 
meet the needs of consumers today and in the future.
    Thank you and I look forward to your questions.
                                 ______
                                 
               PREPARED STATEMENT OF CLOTHILDE V. HEWLETT
    Commissioner, California Department of Financial Protection and 
                               Innovation
                              May 18, 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                      FROM MICHAEL S. BARR

Q.1. SVB's ability to opt-out of AOCI under the Fed's existing 
rules and its efforts to modify its interest rate risk models 
meant that it was not required to build as much capital as it 
perhaps should have been. Why is it important to have a strong 
leverage capital requirement in addition to risk-based capital?

A.1. Leverage capital requirements serve an important role in 
our capital framework as a transparent measure of bank 
resilience. While risk-based capital requirements vary based on 
the riskiness of a firm's exposures. Leverage capital 
requirements are a simple measure of a firm's regulatory 
capital relative to its on-balance sheet assets. In this way, 
they provide a credible, risk-insensitive backstop and 
complement to our risk-based capital requirements.

Q.2. The OCC has been working on updating the analytical 
frameworks related to the bank merger guidelines that the 
Federal banking agencies and DOJ must follow when considering 
bank mergers, and the recent turmoil has increased the urgency 
of these efforts. What is the Federal Reserve doing to update 
its bank merger guidelines?

A.2. The Federal Reserve is currently reviewing its bank merger 
framework to determine whether any adjustments would be 
appropriate to improve our merger analysis. We are particularly 
focused on potential changes to how we analyze proposed 
acquisitions' effects on financial stability, competition for 
banking products and services, the financial and managerial 
resources and the future prospects of the institutions 
involved, and the combined firm's ability to meet the 
convenience and needs of the communities it serves. As part of 
this process, Board staff has been engaging in discussions with 
staff of the Department of Justice and the other banking 
agencies regarding our bank merger frameworks.

Q.3. In your failed bank review, did you find evidence that the 
tone or focus of supervisors had changed to be less aggressive 
at the Fed and FDIC in 2018-2021? Are there other periods in 
history when that type of shift occurred? If so, were there 
supervisory problems?

A.3. A key takeaway of the Silicon Valley Bank (SVB) report is 
that the Board's tailoring approach and a shift in the stance 
of supervisory policy impacted effective supervision by 
reducing standards, increasing complexity, and promoting a less 
assertive supervisory approach. \1\ Staff interviews conducted 
during the preparation of the report mentioned changes in 
expectations and practices, such as a desire to reduce burden 
on firms, meet a higher burden of proof for a supervisory 
conclusion, and demonstrate increased due process when 
considering supervisory actions. As I testified in May, we are 
exploring how to make our supervisory program faster, and more 
forceful and agile, as appropriate. Supervision must intensify 
at the right pace, especially as a firm grows in size or 
complexity, and issues should be addressed quickly by banks and 
supervisors.
---------------------------------------------------------------------------
     \1\ See https://www.federalreserve.gov/publications/review-of-the-
federal-reserves-supervision-and-regulation-of-silicon-valley-bank.htm.
---------------------------------------------------------------------------
    As part of the recent review, we have identified lessons 
learned from earlier bank failures. The SVB report identifies 
other reviews completed following the Global Financial Crisis 
in 2008 and 2009. These reviews identified issues similar to 
those observed in the SVB experience, such as supervisors not 
having a comprehensive view of large firms' vulnerabilities, 
rapid growth in size and complexity not being addressed 
appropriately within existing prudential standards, supervisors 
not acting in a timely manner, and banks' internal risk-
management processes being ineffective at times.

Q.4. Federal Reserve Banks have several roles within and 
perform several functions for the Federal Reserve System. What 
are the Reserve Bank's significant roles and functions? How is 
the independence of supervision maintained among the Reserve 
Bank's roles and functions? How is research and other work on 
topics such as financial stability, climate change, and 
diversity, equity, and inclusion undertaken at a Reserve Bank? 
Is there anyway it could interfere with bank supervision? Is 
there any overlap with staff who have research responsibilities 
and those with supervision or examination responsibilities?

A.4. The Reserve Banks serve banks, the U.S. Treasury, and, 
indirectly, the public. A Reserve Bank is often called a 
``banker's bank,'' storing currency and coin, and processing 
checks and electronic payments. Reserve Banks also supervise 
commercial banks in their regions. As the bank for the U.S. 
Government, Reserve Banks handle the Treasury's payments, sell 
Government securities and assist with the Treasury's cash 
management and investment activities. Reserve Banks conduct 
research on regional, national, and international economic 
issues. Research plays a critical role in bringing broad 
economic perspectives to the national policymaking arena and 
supports Reserve Bank presidents who all attend meetings of the 
Federal Open Market Committee.
    The Federal Reserve's supervisory programs are designed to 
ensure that supervised institutions are safe and sound and 
operate in compliance with relevant laws and regulations. 
Independence of supervision is very important. The Federal 
Reserve's supervisory programs are designed to ensure that 
supervised institutions are safe and sound and operate in 
compliance with relevant laws and regulations.
    Research undertaken by the Reserve Banks does not interfere 
with supervision; rather, it can help to inform both 
supervision and other functions within the Federal Reserve 
System. For example, financial stability and surveillance 
research is important to identify and explore risks to 
supervised institutions and the financial system.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                      FROM MICHAEL S. BARR

Q.1. You have continuously blamed the Federal Reserve's 
supervisory failures on a culture created by your predecessor. 
Your cover letter on the Federal Reserve's report on Silicon 
Valley Bank's failure highlights the importance of stress 
testing and other supervisory tools, yet one of your first 
actions as Vice Chair for Supervision was to pilot a climate 
scenario analysis exercise. Additionally, in your first speech 
as Vice Chair for Supervision, you highlighted a number of your 
priorities, which included ``financial risks from climate 
change'', but crucially did not note any of the risks that 
would ultimately lead to SVB's failure.
    Do you believe that the culture and priorities which you 
brought to the Federal Reserve could have played a role in the 
supervisory failings?
    Will you realign your focus and priorities to align with 
the real problems facing banks today?
    Given the obvious supervisory failures at a rudimentary 
level, shouldn't a comprehensive review of the Federal Reserve 
System and Regional Banks' supervisory capabilities and 
performance be priority number one above all else?

A.1. As I've testified to Congress, I am committed to ensuring 
that the Federal Reserve fully accounts for any supervisory or 
regulatory failings, and that we fully address what went wrong. 
\1\ Since joining the Board, I have emphasized the importance 
of agile, tough supervision. The importance of these 
competencies have been borne out by the experiences at Silicon 
Valley Bank.
---------------------------------------------------------------------------
     \1\ See ``Testimony by Vice Chair for Supervision Barr on Bank 
Oversight--Federal Reserve Board'' at https://www.federalreserve.gov/
newsevents/testimony/barr20230328a.htm.
---------------------------------------------------------------------------
    As a follow up to the SVB report, I am working to improve 
the speed, force, and agility of bank supervision, as 
appropriate. As part of this work, I am looking at making 
supervision more effective within the current supervisory 
framework, and over the longer term, considering changes to 
strengthen the supervisory and regulatory framework.
    As we undertake this work, we will be attentive to the need 
for the supervisory and regulatory approaches to take account 
of the differences in size, risk, and complexity of banks, and 
we will be focused on ensuring that our approaches support the 
diversity of sizes and types of institutions in our economy.

Q.2. In a speech on May 12, 2023, Governor Bowman stated that 
``[m]any of the issues related to the recent bank failures have 
been identified in bank management and supervision. Therefore, 
a broad-based imposition of new capital requirements on all 
banks with more than $50 billion in assets would be a far more 
costly solution than taking the time to specifically identify 
and address known management and supervisory process issues.''
    Will you fully incorporate the views and input of all your 
fellow board members in the process of any proposed regulatory 
or supervisory changes?
    What steps have you taken so far to brief your fellow board 
members on the supervisory failings uncovered in your review?
    If you have briefed your fellow board members, what 
suggestions have they provided for improving the supervisory 
process?

A.2. I routinely have discussions with my fellow Federal 
Reserve Board (Board) members on supervision and regulatory 
matters, including key takeaways from the SVB report.
    As a follow up to the SVB report, I am working to improve 
the speed, force, and agility of bank supervision, as 
appropriate. As part of this work, I am looking at making 
supervision more effective within the current supervisory 
framework, and over the longer term, considering changes to 
strengthen the supervisory and regulatory framework.
    I conveyed to my colleagues that I am looking forward to 
engaging with them, as we make progress on this initiative.

Q.3. In a speech on May 19, 2023, Governor Bowman stated that 
``one of the most effective steps the Federal Reserve could 
take would be to engage an independent third party to analyze 
the events surrounding the failure of these banks, so that we 
can fully understand what led to the failures.'' This request 
echoes similar requests from Members of the Senate Banking 
Committee during your testimony on May 18, 2023.
    Then, on May 22, 2023, Neel Kashkari, President and CEO of 
the Minneapolis Federal Reserve wrote that ``[c]entral bankers, 
including me, and most market participants, didn't see high 
inflation coming. Our traditional stress test models assumed 
rising rates were actually good for banks, because they raise 
deposit rates slowly so their margins go up when rates rise. 
Key banking regulations assumed that Government bonds carried 
no risk.''
    Given the failures highlighted by Governor Bowman and Mr. 
Kashkari, do you believe an independent third party should be 
furnished with unfettered access to provide an unbiased 
accounting of the supervisory failures by the Board of 
Governors and the Federal Reserve Bank of San Francisco 
(FRBSF)?

A.3. As I have said previously, we welcomed external reviews 
into the Board's supervision of SVB, including the GAO and the 
Board's Office of the Inspector General. Like our report, the 
Government Accountability Office's preliminary report and the 
Federal Reserve's Office of Inspector General's Material Loss 
Review found weak risk management at SVB and inadequate 
supervisory responses given the firm's deficiencies. \2\ We are 
incorporating these findings into our efforts to strengthen the 
Federal Reserve's framework of bank supervision and regulation 
e.
---------------------------------------------------------------------------
     \2\ See Government Accountability Office (2023), ``Preliminary 
Review of Agency Actions Related to March 2023 Bank Failures (PDF)'', 
GAO-23-106736 (Washington: GAO, April) at https://www.gao.gov/assets/
gao-23-106736.pdf, and Board of Governors of the Federal Reserve System 
(2023), ``Material Loss Review of Silicon Valley Bank (PDF)'', 
Evaluation Report 2023-SR-B-013 (Washington: Board of Governors, 
September 25) at https://oig.federalreserve.gov/reports/board-material-
loss-review-silicon-valley-bank-sep2023.pdf.

Q.4. In 2018, the Federal Reserve processed merger and 
acquisition applications in 57 days on average. In the first 
half of 2022, processing time increased to 81 days. What is 
responsible for this significant delay in processing merger and 
---------------------------------------------------------------------------
acquisition applications?

A.4. The Federal Reserve endeavors to act on applications 
involving mergers and acquisitions on a timely basis. While I 
did not join the Board until July 2022, my understanding is 
that the increase in the average processing time for 
applications during the first half of 2022 is attributable to a 
relatively small number of M&A applications which had 
substantially longer than average processing times during that 
period. There were a number of specific reasons these cases 
required additional processing time, including several cases 
which involved complex or novel fintech-related proposals and 
delays in receiving information from applicants and/or other 
regulators necessary to complete the record.
    In the first half of 2023, the average processing time 
improved substantially, with an average processing time of 45 
days, and a median of 32 days.

Q.5. According to the Federal Reserve's May 2023 Economic Well-
Being of U.S. Households in 2022 report, financial well-being 
fell sharply and was among the lowest observed since 2016. In 
light of this information, will you carefully consider any 
procyclical impacts that any proposed policy changes may have?

A.5. On July 27, 2023, the Board, together with the Federal 
Deposit Insurance Corporation (FDIC) and the Office of the 
Comptroller of the Currency (OCC) (collectively, the agencies), 
issued a notice of proposed rulemaking to modify large bank 
capital requirements to better reflect underlying risks and 
increase the consistency of how banking organizations measure 
their risks. \3\
---------------------------------------------------------------------------
     \3\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20230727a.htm.
---------------------------------------------------------------------------
    The vast majority of banks in the country would not be 
subject to the recent proposal on bank capital. The proposal 
affects only the very largest banks--less than 40 of more than 
4,000 banks in the system.
    For the largest banks, as you noted, the proposal is 
projected to raise capital requirements, which may result in 
higher funding costs. But this is only half the story. As we 
indicated in the preamble to our capital proposal, historical 
experience--particularly our experience during the Global 
Financial Crisis--demonstrates the severe impact that distress 
or failure at individual banking organizations can have on the 
stability of the U.S. banking system. Fifteen years ago, the 
Global Financial Crisis starkly revealed the cost to society of 
a banking system that had insufficient capital. In the lead-up 
to the financial crisis, the rules didn't fully capture the 
risks of asset classes like subprime mortgages, 
securitizations, and derivatives, which led to enormous losses 
at banks. Banks were woefully undercapitalized for these 
losses. The financial crisis upended lives and did severe 
damage to the economy, causing the worst and longest recession 
since the Great Depression. It took 6 years for employment to 
recover, during which time long-term unemployment ran for long 
periods at a record high, and more than 10 million people fell 
into poverty. Six million families lost their homes to 
foreclosure. And these costs occurred even with an 
unprecedentedly large response by Government.
    The effective rise in capital requirements related to 
lending activities in the current proposal is a small portion 
of the estimated overall capital increase. The bulk of the rise 
in required capital anticipated in the proposed rule is 
attributed to trading and other activities besides lending-
activities that have generated outsized losses at large banks 
and areas where our current rules have shortcomings.
    Over the last several months, I have engaged with a wide 
range of parties: policymakers and staff from the Federal 
Reserve and other agencies, banks and financial sector groups, 
public interest groups, members of Congress, and academics to 
get a broad perspective on how the Federal Reserve's capital 
standards interact with each other and the result they together 
achieve. And with the issuance of the agencies' proposal, I 
look forward to the public comment process.
    To further refine estimates of the potential impact, the 
Board will collect data additional data from the banks affected 
by the proposal. \4\ This additional data will further clarify 
the estimated effects of the proposal and inform any final 
rule, with summaries to be made public. The agencies have also 
extended the comment period on the proposal to January 16, 
2024, in order to allow interested parties more time to analyze 
the issues and prepare their comments. \5\
---------------------------------------------------------------------------
     \4\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020b.htm.
     \5\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020a.htm.
---------------------------------------------------------------------------
    Finally, it is important to note that the proposal 
contemplates an effective date of July 1, 2025, for the 
proposed changes, with an extended transition period--so the 
changes will not be effective for some time. The Board 
implements regulatory changes through a notice-and-comment 
process, and generally allows for phase-in periods that allow 
for a gradual introduction of the new rules.
    This phase-in will allow ample time for banks to adjust 
their balance sheets and activities, and to build capital over 
time. In fact, most banks already have enough capital today to 
meet the proposed requirements. For the banks that would need 
to build capital to meet the proposed requirements, assuming 
that they continue to earn money at the same rate as in recent 
years, we estimate that banks would be able to build the 
requisite capital through retained earnings in less than two 
years, even while maintaining their dividends.

Q.6. The Federal Reserve's April 28 review states that 
``[b]oard staff provided the FRBSF team a waiver to delay the 
initial set of ratings under the LFI rating system by 6 months 
until August 2022.'' Why did FRSBF request this waiver and why 
did Federal Reserve Board staff grant it?

A.6. After its assets exceeded $100 billion, SVB transitioned 
from the Regional Banking Organizations (RBO) portfolio to the 
Large and Foreign Banking Organizations portfolio (LFBO) during 
2021. SVB became subject to heightened supervisory expectations 
and a new supervisory ratings framework, the LFI rating system. 
In addition, a new Federal Reserve Bank of San Francisco 
(FRBSF) examination team with new leadership took over 
supervisory responsibilities during the summer of 2021 and 
began conducting supervisory work under LFBO expectations.
    Originally, supervisors planned to issue an LFI rating 
following LFBO-wide ratings vetting in November 2021; however, 
during that vetting, supervisors believed that they needed to 
conduct more supervisory work to support the LFI Governance & 
Controls rating. Accordingly, a waiver was granted so that 
supervisors could conduct a targeted review of SVB Governance 
and Risk Management prior to assigning the LFI ratings. Once 
this work was finalized, the firm received an unsatisfactory 
LFI G&C rating of Deficient-1. \6\
---------------------------------------------------------------------------
     \6\ For more details, refer to p. 42 of ``Review of the Federal 
Reserve's Supervision and Regulation of Silicon Valley Bank'' at 
https://www.federalreserve.gov/publications/review-of-the-federal-
reserves-supervision-and-regulation-of-silicon-valley-bank.htm.

Q.7. The SEC recently proposed a rule related to safeguarding 
customer assets. The proposed rule could dramatically affect 
the provision of traditional bank custodial services that are 
critical to market functioning and adversely impact custody 
bank balance sheets by, among other things, requiring bank 
custodians to segregate cash instead of holding it as a 
deposit.
    Are you aware of the SEC's proposed rule?
    Did the SEC consult with the you and the other prudential 
regulators to ensure that the proposed rule does not conflict 
with Federal banking laws and regulations, including those 
related to safety and soundness?

A.7. We are aware of the SEC's proposal related to safeguarding 
customer assets. The Board is reviewing the proposal and is 
engaged with SEC staff to understand the implications of the 
proposal for our supervised institutions.

Q.8. In your response to a March 28, 2023, question for the 
record, you stated that ``[i]n the case of SVB, the Federal 
Reserve Bank of San Francisco (FRBSF) was the responsible 
Reserve Bank.''
    Please describe any all steps taken to supervise the FRBSF 
and review their performance since SVB failed under their 
watch.
    Please clarify the extent of FRSBF's duties as the 
responsible Reserve Bank for Silicon Valley Bank and how 
exactly those duties were not adequately fulfilled in relation 
to the failure of Silicon Valley Bank.
    Please describe any and all steps that you believe must be 
taken to restore faith in FRBSF's supervisory capabilities.

A.8. The Federal Reserve Act requires the Board to ``at least 
once each year, order an examination of each Federal Reserve 
Bank'' (Reserve Bank). Board staff assesses the effectiveness 
of the Federal Reserve Banks' execution of the supervisory 
authority delegated under the Federal Reserve Act and oversees 
each Reserve Bank's safety and soundness supervisory program 
each year. FRBSF is part of these ongoing oversight activities 
conducted by Board staff in each of the respective portfolios.
    As SVB grew rapidly over a 3-year period, the FRBSF's 
supervisory responsibilities for the bank spanned across two 
different examination teams and supervisory portfolios. While 
in the RBO portfolio, our SVB report found that the execution 
of the supervisory program was ineffective in ensuring the 
bank's risk management was appropriate for its complexity and 
increasing size.
    Within the LFBO portfolio, FRBSF conducted extensive 
continuous monitoring and targeted examinations after the firm 
was onboarded to the portfolio in the summer of 2021 in 
accordance with the LFBO supervisory program guidelines. While 
FRBSF met the existing baseline supervisory requirements, the 
SVB report revealed that there are areas for improvement.
    As a follow up to the SVB report, I am working to improve 
the speed, force, and agility of bank supervision as 
appropriate. As part of this work, I am looking at making 
supervision more effective within the current supervisory 
framework, and over the longer term, considering changes to 
strengthen the supervisory and regulatory framework.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                      FROM MICHAEL S. BARR

Q.1. Restoring stability to our financial system is important 
so that the banks that are safe, sound, and have been following 
the rules can focus on providing capital for small businesses 
to grow and on serving customers in their communities.
    Problems at Silicon Valley Bank had been identified by 
their regulatory supervisors again and again, over years, but 
they never dropped the hammer to get the bank to actually fix 
their problems.
    How are you all going to make sure that folks are following 
the rules on the books today? And that when your supervisors 
identify banks that aren't, that they actually do something 
about it?

A.1. One of the key lessons learned from the SVB failure is 
that, once issues are identified, they should be addressed more 
quickly, both by the bank and by supervisors. Today, for 
example, the Federal Reserve generally does not require 
additional capital or liquidity beyond regulatory requirements 
for a firm with inadequate capital planning, liquidity risk 
management, or governance and controls. As I mentioned in my 
cover letter to the SVB report, we need to change that in 
appropriate cases. Higher capital or liquidity requirements can 
serve as an important safeguard until risk controls improve, 
and they can focus management's attention on the most critical 
issues. As a further example, limits on capital distributions 
or incentive compensation could be appropriate and effective in 
some cases.

Q.2. As I have expressed in the Banking Committee, I am 
concerned that the community banks that don't have risky 
portfolios will end up paying the price for these irresponsible 
bank executives.
    Regulators need to address that lack of action, and make 
sure it doesn't happen again.
    But I'm still concerned about the impact on smaller, 
community banks out there that are going to get the screws put 
to them because some of you overreact or focus on the wrong 
folks.
    Are you planning to propose new regulations in response to 
these bank failures? How will you incorporate consideration of 
banks across size and riskiness of business models when 
considering changes?

A.2. I am committed to maintaining the strength and diversity 
of the banking system so that it can continue to provide 
financial services and access to credit for households and 
businesses.
    As we consider improvements to supervision and regulations, 
we are very mindful of the differences in size, risk, and 
complexity of supervised institutions and the importance of 
maintaining the strength and diversity of banks of all sizes 
that serve communities across the country.
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
           SENATOR CORTEZ MASTO FROM MICHAEL S. BARR

Q.1. Does your agency know the level of uninsured deposits at 
each of your regulated financial institutions currently and 
over time?

A.1. All banks with $1 billion or more in total assets report 
uninsured deposit levels on their quarterly call report 
submissions. The largest banks in the country report uninsured 
deposit information to supervisors on daily basis. For smaller 
banks, more frequent uninsured deposit information can be 
requested through the supervisory process as needed.

Q.2. Does your agency receive information on uninsured deposit 
levels in real time, or do examiners receive it in periodic 
reports? Do examiners and researchers map it over real time to 
assess changes?

A.2. Please see my response to Question 1.

Q.3. If uninsured deposit information arrives in periodic Call 
Reports, how often do examiners receive those reports? Is that 
timing adequate?

A.3. Please see my response to Question 1.

Q.4. Can your agency require a financial institution use a 
system like IntraFi Network to transfer some large accounts to 
other financial institutions to provide a bank or credit union 
customers with deposit insurance and protect customers' funds?

A.4. Given the recent banking turmoil, we have seen banks 
increasing usage of reciprocal deposit arrangements to ensure 
depositors have greater insurance coverage. The Federal Reserve 
does not endorse any vendors or third-party service providers. 
We do encourage banks to have and maintain diversified funding 
sources.

Q.5. Does your agency provide supervisory exam information 
about troubled banks to a Federal Home Loan Bank? How does your 
agency consider rapidly increasing advances to a financial 
institution from a Federal Home Loan Bank? Is a request for a 
great deal of advances in a short period of time seen as an 
indicator of liquidity risk? Do examiners from your agency ever 
request a FHLBank stop providing advances to a certain 
financial institution?

A.5. The Federal Reserve may share supervisory information 
regarding a specific financial institution's financial 
condition with the FHLB upon request. This is consistent with a 
Memorandum of Understanding (MOU) we have in place that 
references Title 12 of the United States Code, section 1442. 
This law directs the Federal Reserve along with other bank 
regulators to make available to any FHLB ``such reports, 
records, or other information as may be available, relating to 
the condition of any member bank for any FHLB or institution to 
which such Bank has had or contemplates having transactions.''
    Most banks generally consider FHLB advances to be a source 
of funding for managing liquidity, including in response to 
changes to their deposit base. In fact, many institutions 
utilize FHLB advances as a source of liquidity even in normal 
environments when funding is not constrained. However, a 
notable increase in utilization of FHLB advances may be 
considered a concern depending on the specific firm and 
circumstances.
    The Federal Reserve does not engage in FHLBs' credit 
decision-making processes.

Q.6. Should executive bonuses be placed in escrow if MRIs and 
MRIAs are not addressed by a bank within 60 days?

A.6. One of the key lessons learned from the SVB failure is 
that, once issues are identified, they should be addressed more 
quickly, both by the bank and by supervisors. Today, for 
example, the Federal Reserve generally does not require 
additional capital or liquidity beyond regulatory requirements 
for a firm with inadequate capital planning, liquidity risk 
management, or governance and controls. As I mentioned in my 
cover letter to the SVB report, we need to change that in 
appropriate cases. Higher capital or liquidity requirements can 
serve as an important safeguard until risk controls improve, 
and they can focus management's attention on the most critical 
issues. As a further example, limits on capital distributions 
or incentive compensation could be appropriate and effective in 
some cases.

Q.7. Are the three elements regulators must prove to prohibit 
someone from working in the banking sector--misconduct, effect 
and culpability--adequate for today's banking sector? Does 
1818(e)'s focus on discrete acts of wrongdoing leave 
regulators with a lack of clear authority to assess 
responsibility for general mismanagement as opposed to criminal 
activity?

A.7. The Board has authority from Congress to prohibit or 
remove bank insiders who engage in misconduct. To do so, the 
Board must have sufficient evidence to prove the elements of 
misconduct, effect, and culpability for every individual that 
is subject to such an action. For example, a claim of ``general 
mismanagement'' against a senior executive would have to be 
supported by sufficient evidence of culpability on the part of 
the individual. Because the statute focuses on discrete acts or 
practices, ``mismanagement'' in the form of oversight or 
supervision failures are frequently not actionable unless 
persistent and egregious. Moreover, larger institutions often 
have multiple layers of management and activities that occur 
across a wide range of business lines and geographic locations 
which can make it difficult to establish a direct link between 
the knowledge and actions of an executive and the bank's unsafe 
or unsound condition. In addition to removal and prohibition 
actions, the Board has authority for other sanctions on 
individual executives, such as personal cease and desist orders 
or civil money penalties, that can be imposed under less 
rigorous standards.
    The decision to pursue a criminal action against a bank 
insider is the responsibility of the Justice Department and 
other law enforcement authorities. In general, the standards 
for pursuing criminal sanctions against an individual require a 
higher standard of proof than pursuing a civil prohibition 
action.
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                      FROM MICHAEL S. BARR

Q.1. Bank runs are news-driven events and technology has 
increased the velocity that the news causing some of these runs 
can spread. Once depositor confidence is lost, whether due to 
news or social media chatter, the eventual collapse of the bank 
can become inevitable. This raises concerns that the runs on a 
few poorly managed small banks can potentially trigger runs on 
well-managed banks within their respective communities.
    How should policymakers and regulators prepare for bank 
runs that can be triggered at a moment's notice?
    Are there any levers in place that would placate a wider, 
more systemic bank run?
    What actions are your agencies exploring to insulate well-
managed banks and depositors from new or even misinformation-
driven bank runs?

A.1. The failure of Silicon Valley Bank was due to inadequate 
levels of capital and liquidity at the firm. This highlights 
the importance of strong requirements for both capital and 
liquidity, as well as other areas of risk, to bolster 
resiliency for individual firms and broadly in the financial 
system. As risks in the financial system continue to evolve, we 
need to evaluate our supervisory and regulatory framework and 
be humble about our ability to assess and identify new and 
emerging risks.
    When the system is hit with a shock that results in 
widespread stress, funding markets are often unable to 
effectively distribute liquidity. In these cases, the discount 
window can be particularly important both to the institutions 
that need liquidity and to the Federal Reserve's efforts to 
stop dysfunction from spreading and restore stability, but, 
only if banks do the work ahead of time and are ready and able 
to use it. As we saw in March, many banks found that having 
more than one option at the ready to monetize assets was 
important. Other sources of funds to banks, even the Federal 
Home Loan Banks, are dependent on private-sector financial 
market functioning to provide liquidity to their customers. 
When the market isn't working, such sources of funding and 
liquidity come under strain.
    In contrast, even when banks find that other sources of 
funds are not available, the discount window can provide 
liquidity to every eligible institution that is prepared to use 
it. In this way, the discount window is an important means of 
supporting financial stability. I have been working to ensure 
that eligible institutions know that supervisors expect them to 
be ready and willing to use the discount window. We recently 
published a joint-agency message on the importance of readiness 
to tap contingency funding sources, including the discount 
window. \1\
---------------------------------------------------------------------------
     \1\ See Board of Governors of the Federal Reserve System, 
``Addendum to the Interagency Policy Statement on Funding and Liquidity 
Risk Management: Importance of Contingency Funding Plans'' (July 28, 
2023), https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20230728a1.pdf.
---------------------------------------------------------------------------
    In addition, the Board is reviewing the way our liquidity 
regulations and supervision measure liquidity risk.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VANCE
                      FROM MICHAEL S. BARR

Q.1. What steps is the Fed taking to ensure that its emergency 
lending facilities are able to match the rapid pace at which 
banks may need liquidity during a stress?

A.1. It is critical that banks are able to access lending 
facilities in times of stress. Operationally, the Federal 
Reserve Banks are able provide same-day liquidity to eligible 
institutions that have signed up for, and pre-pledged 
collateral to, the discount window. The Board also authorized 
the establishment of the Bank Term Funding Program (BTFP) to 
provide liquidity to the financial system and, operationally, 
the BTFP works the same way as the discount window to provide 
same day liquidity to eligible institutions. In outreach to 
depository institutions about the BTFP, Federal Reserve staff 
has emphasized the importance of establishing contingent 
borrowing lines from more than one reliable funding source. In 
line with this guidance, we continue to encourage banks to take 
necessary steps to gain ready access to the discount window and 
the BTFP. Of note, over 7,000 representatives of large and 
small financial institutions have recently participated in 
various Federal Reserve outreach sessions about its lending 
facilities, among them a session solely focused on operational 
steps to access the discount window and the BTFP. In addition 
to outreach, we have issued detailed information and frequently 
asked questions to help eligible firms understand how to access 
and participate in the discount window and the BTFP. \1\ We 
will continue to consider ways to encourage banks to have 
contingent lines of funding, including being ready to access 
the Federal Reserve's facilities in a timely manner.
---------------------------------------------------------------------------
     \1\ See https://www.frbdiscountwindow.org/GeneralPages/bank-term-
funding-program.

Q.2. The SEC recently proposed a rule related to safeguarding 
customer assets. The proposed rule would affect the provision 
of traditional bank custodial services that are critical to 
market functioning and impact custody bank balance sheets by, 
among other things, requiring bank custodians to segregate cash 
instead of holding it as a deposit, as banks are uniquely 
capable of doing.
    Is the Fed aware of the SEC's rulemaking?
    Did the SEC consult with the Fed to ensure that the 
proposed rule does not conflict with Federal banking laws and 
regulations, including those related to safety and soundness?

A.2. We are aware of the SEC's proposal related to safeguarding 
customer assets. The Board is reviewing the proposal and is 
engaged with SEC staff to understand the implications of the 
proposal for our supervised institutions.

Q.3. The Federal Reserve's discount window and the Federal Home 
Loan Bank System have demonstrated in recent months that they 
can serve as important sources of liquidity for banking 
organizations of all sizes, even in periods of market stress. 
Nevertheless, the banking agencies' Liquidity Coverage Ratio 
(LCR) and Net Stable Funding Ratio (NSFR) provide banking 
organizations zero credit for having readily accessible and 
collateralized funding available from the Federal Reserve's 
discount window or the Federal Home Loan Banks. I am concerned 
that, as your agencies reassess the scope and requirements of 
the LCR and NSFR in response to the events affecting Silicon 
Valley Bank, Signature Bank and First Republic Bank, failure to 
provide banking organizations liquidity credit for the 
contingent liquidity they may have available from the Federal 
Reserve's discount window and the Federal Home Loan Banks could 
force banks to hold excessive amounts of liquid securities, 
thereby limiting their ability to make loans to small 
businesses, municipalities and consumers.
    What steps does the Fed plan to take to ensure that banking 
organizations receive credit for the proven contingent funding 
they may have available from these sources under any revisions 
to the LCR and NSFR?

A.3. As I mentioned previously, the Federal Reserve understands 
the importance of the provision of timely liquidity to the 
financial system. In light of recent events, Board staff 
recently published a joint statement with other Federal 
financial institution regulatory agencies on the importance of 
maintaining contingency funding plans. \2\
---------------------------------------------------------------------------
     \2\ See Board of Governors of the Federal Reserve System, 
``Addendum to the Interagency Policy Statement on Funding and Liquidity 
Risk Management: Importance of Contingency Funding Plans'' (July 28, 
2023), https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20230728a1.pdf.
---------------------------------------------------------------------------
    The Liquidity Coverage Ratio (LCR) and Net Stable Funding 
Ratio (NSFR) rules establish standardized minimum liquidity 
requirements designed to strengthen the liquidity positions and 
funding resilience of large firms. Under the NSFR, available 
stable funding could include funding that has been drawn from 
the FHLB and the discount window, depending on the maturity. 
However, unused borrowing capacity is not funding that has been 
received and is not treated as part of a firm's high quality 
liquid asset buffer under the LCR or as available stable 
funding under the NSFR. One aim of these standards is to help 
ensure that large firms maintain appropriate levels of 
liquidity without having to rely on potential draws from 
lenders of last resort or other contingent sources of funding. 
The Board is reviewing the way our liquidity regulations and 
supervision measure liquidity risk and, as part of that 
process, we will of course assess the impact of any potential 
revisions and seek public comment in a manner consistent with 
law.

Q.4. Vice Chair Barr, you have previously indicated that ``Our 
banking system is sound and resilient, with strong capital and 
liquidity,'' and that the failure of SVB was ``a textbook case 
of mismanagement.'' Despite these facts, you have called for 
more bank capital as a solution to the issues we saw.
    Shouldn't the Fed's primary focus be on how they are 
supervising institutions under the current regulatory framework 
before moving forward with a policy response that will increase 
bank capital requirements?

A.4. Robust capital requirements are fundamental to the 
strength and stability of our financial system. Capital helps 
ensure the resilience of firms and our banking system to losses 
and stress. Empirical research supports the social benefits of 
strong capital requirements at banks, particularly when 
economic conditions weaken. Banks need adequate capital to 
lend. And, while poorly capitalized banks may be forced to 
shrink during bad times, better capitalized banks have the 
capacity to support the economy by continuing to lend to 
households and businesses through stressful conditions. On the 
other hand, requiring banks to fund more of their activities 
with equity, instead of debt, could raise the private costs of 
funding to the bank, and cause banks to pass those higher costs 
of credit on to consumers. These considerations must be 
balanced against the public benefits of higher capital.
    I also believe we must have a stronger supervisory 
framework and will focus on improving the speed, force and 
agility of supervision. This includes evaluating how to ensure 
that supervision intensifies at the right pace as a firm grows 
in size or complexity and requiring firms to address issues 
more quickly. This is likely to be accomplished through a 
combination of supervisory tools including enforcement actions 
and fines, higher capital or liquidity requirements while a 
firm remediates it problems, and limits on capital 
distributions or incentive compensation.

Q.5. The lack of clarity and transparency from the Fed has been 
unacceptable. Banks, customers, and the market need to know 
what rules the Fed is going to impose and when they are going 
to apply these rules. The uncertainty has caused turmoil in the 
capital markets.
    Will you commit to a more transparent process of 
regulation?

A.5. Transparency and opportunities for public input are 
critical to the rulemaking process. Any proposed rule changes 
will follow the normal notice and public comment process, which 
includes explaining the basis for the proposed changes, and 
would be subject to a vote by the full Board of Governors.

Q.6. I'm concerned that the Federal banking regulators will use 
the recent bank failures as a pretext for imposing costly 
regulatory requirements on regional banks that unlike SVB, 
Signature Bank, and First Republic Bank, have diverse business 
models and have proper risk management practices.

A.6. SVB's failure has emphasized why strong bank capital 
matters, in addition to strong liquidity requirements. While 
the proximate cause of the bank's failure was a liquidity run, 
the underlying issue was concern about its solvency. As risks 
in the financial system continue to evolve, we need to 
continuously evaluate our supervisory and regulatory framework. 
The risks driving the next stress event may not be--and likely 
will not be--the same as those in the last one. That is why we 
need to bolster resiliency broadly in the financial system.
    Under stress, firms can experience significant draws on 
capital and liquidity. Maintaining adequate capital and 
liquidity resources prior to a severe stress can facilitate a 
firm's orderly bankruptcy or resolution process by providing 
more time, and hence more opportunity for effective action by 
resolution authorities, prior to failure. Any new regulations 
proposing capital or liquidity requirements would be expected 
to go through public notice and comment.

Q.7. When the Fed established the Bank Term Funding Program 
(BTFP) to make additional lending available to depository 
institutions in order to meet any heightened liquidity needs, 
federally insured depository institutions were made eligible, 
but State-chartered, privately insured institutions were 
excluded from accessing the facility. Moreover, ``federally 
insured depository institutions'' includes US-based agents and 
branches of foreign banks.
    On April 19, 2023, Senator Brown and myself sent the Fed a 
letter regarding this and requesting an explanation for the 
exclusion.
    Please explain, in detail, why privately insured credit 
unions and other privately insured depository institutions were 
excluded from the facility?
    Do you have plans to open access to BTFP to privately 
insured depository institutions?
    If privately insured depository institutions are allowed to 
access the Fed's discount window and other Government liquidity 
programs, why can they not access this one?
    Can you explain why agencies of foreign institutions have 
been given liquidity priority over a small group of American 
credit unions serving teachers, firefighters, police, and 
municipal workers?

A.7. The BTFP is intended to help assure that federally 
regulated depository institutions have the ability to meet the 
needs of all their depositors, and it serves as an additional 
source of liquidity against high-quality securities, 
eliminating a depository institution's need to quickly sell 
those securities in times of stress.
    The specific features of programs authorized under section 
13(3) of the Federal Reserve Act vary, but all such programs 
must meet the criteria set out in statute. Among other 
requirements, the statute mandates that the lending Reserve 
Bank be secured to its satisfaction, and that policies and 
procedures be designed to protect taxpayers from losses. \3\ 
The BTFP was launched following the failures of SVB and 
Signature Bank, which led to substantial outflows at certain 
other federally regulated depository institutions. Accordingly, 
the terms of the BTFP address liquidity concerns at federally 
regulated depository institutions.
---------------------------------------------------------------------------
     \3\ See 12 U.S.C. 343(3)(A) and 12 U.S.C. 343(3)(B)(i).
---------------------------------------------------------------------------
    While we are not contemplating any changes to the BTFP at 
this time, we are continuously monitoring financial markets in 
case any additional pressures emerge. Privately insured credit 
unions that are in sound financial condition are generally 
eligible to obtain liquidity through the Federal Reserve's 
discount window.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER
                      FROM MICHAEL S. BARR

Q.1. You mentioned during a recent House hearing that you plan 
to publish a Basel III end game proposal. Your staff and the 
staff of the other Federal banking agencies have been made 
aware that (re)insurers can be a vital source of capital 
through Credit Risk Transfer, something that is more widely 
used in other jurisdictions to mitigate and dampen risk to 
banks. As you prepare your Notice of Proposed Rulemaking (NPR), 
will you add in language to permit (re)insurers to provide 
Credit Risk Transfer and provide U.S. banking institutions with 
meaningful capital relief for transferring credit risk to 
qualified (re)insurers?

A.1. Banking organizations use a number of methods to mitigate 
credit risks. For example, as you allude to in your question, 
many U.S. banking organization a enter into a credit derivative 
with a reinsurer, which guarantees the bank's exposure to 
credit risk. The Federal banking agencies' regulatory capital 
rule currently allows banking organizations to recognize the 
risk-mitigation effects of qualifying guarantees, credit 
derivatives, and collateral for risk-based capital purposes if 
they meet certain conditions--for example, to ensure that a 
banking organization appropriately accounts for its exposure to 
the guarantor, credit protection provider, or collateral.
    The Board, together with the Office of the Comptroller of 
the Currency and the Federal Deposit Insurance Corporation 
(collectively, the agencies), recently proposed amendments to 
the capital rule for large banking organizations for public 
comment. The recently issued notice of proposed rulemaking 
(NPR) would not amend the definition of eligible guarantor. To 
be an eligible guarantor under the capital rule, the guarantor 
needs to meet certain criteria to help ensure it can assume 
credit losses. For example, an eligible guarantor must have 
issued outstanding debt that is investment grade. In addition, 
to address concerns regarding wrong-way risk, credit protection 
provided by an insurance company engaged predominately in the 
business of providing credit protection, such as a monoline 
bond insurance company or reinsurance company, does not qualify 
as an eligible guarantor.
    The proposal included analysis of the expected impacts of 
the proposal, and the agencies are seeking public comment on 
all aspects of the proposal, including economic impacts.

Q.2. Recent reports have indicated increased credit tightening. 
When banks start lending less, it typically hurts underserved 
communities most, including some rural communities in my State. 
In a recent statement, the Fed said, ``The U.S. banking system 
is sound and resilient,'' but that ``tighter credit conditions 
for households and businesses are likely to weigh on economic 
activity, hiring, and inflation.'' Chair Powell recently 
testified that it would be fair to look at the question of how 
changes to capital requirements could impact credit 
availability. As you conduct your holistic capital review, are 
you also looking at the impact changes to our framework will 
have on credit availability and credit tightening--particularly 
to underserved communities? How do you intend to strike the 
right balance between safety and soundness without further 
tightening credit to communities that need it most?

A.2. On July 27, 2023, the Board, together with the Federal 
Deposit Insurance Corporation (FDIC) and the Office of the 
Comptroller of the Currency (OCC) (collectively, the agencies), 
issued a notice of proposed rulemaking to modify large bank 
capital requirements to better reflect underlying risks and 
increase the consistency of how banking organizations measure 
their risks. \1\
---------------------------------------------------------------------------
     \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20230727a.htm.
---------------------------------------------------------------------------
    The vast majority of banks in the country would not be 
subject to the recent proposal on bank capital. The proposal 
affects only the very largest banks--less than 40 of more than 
4,000 banks in the system.
    For the largest banks, as you noted, the proposal is 
projected to raise capital requirements, which may result in 
higher funding costs. But this is only half the story. As we 
indicated in the preamble to our capital proposal, historical 
experience--particularly our experience during the Global 
Financial Crisis--demonstrates the severe impact that distress 
or failure at individual banking organizations can have on the 
stability of the U.S. banking system. Fifteen years ago, the 
Global Financial Crisis starkly revealed the cost to society of 
a banking system that had insufficient capital. In the lead-up 
to the financial crisis, the rules didn't fully capture the 
risks of asset classes like subprime mortgages, 
securitizations, and derivatives, which led to enormous losses 
at banks. Banks were woefully undercapitalized for these 
losses. The financial crisis upended lives and did severe 
damage to the economy, causing the worst and longest recession 
since the Great Depression. It took 6 years for employment to 
recover, during which time long-term unemployment ran for long 
periods at a record high, and more than 10 million people fell 
into poverty. Six million families lost their homes to 
foreclosure. And these costs occurred even with an 
unprecedentedly large response by Government.
    The effective rise in capital requirements related to 
lending activities in the current proposal is a small portion 
of the estimated overall capital increase. The bulk of the rise 
in required capital anticipated in the proposed rule is 
attributed to trading and other activities besides lending--
activities that have generated outsized losses at large banks 
and areas where our current rules have shortcomings.
    Over the last several months, I have engaged with a wide 
range of parties: policymakers and staff from the Federal 
Reserve and other agencies, banks and financial sector groups, 
public interest groups, members of Congress, and academics to 
get a broad perspective on how the Federal Reserve's capital 
standards interact with each other and the result they together 
achieve. And with the issuance of the agencies' proposal, I 
look forward to the public comment process.
    To further refine estimates of the potential impact, the 
Board will collect data additional data from the banks affected 
by the proposal. \2\ This additional data will further clarify 
the estimated effects of the proposal and inform any final 
rule, with summaries to be made public. The agencies have also 
extended the comment period on the proposal to January 16, 
2024, in order to allow interested parties more time to analyze 
the issues and prepare their comments. \3\ Finally, it is 
important to note that the proposal contemplates an effective 
date of July 1, 2025, for the proposed changes, with an 
extended transition period--so the changes will not be 
effective for some time. The Board implements regulatory 
changes through a notice-and-comment process, and generally 
allows for phase-in periods that allow for a gradual 
introduction of the new rules.
---------------------------------------------------------------------------
     \2\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020b.htm.
     \3\ See https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020a.htm.
---------------------------------------------------------------------------
    This phase-in will allow ample time for banks to adjust 
their balance sheets and activities, and to build capital over 
time. In fact, most banks already have enough capital today to 
meet the proposed requirements. For the banks that would need 
to build capital to meet the proposed requirements, assuming 
that they continue to earn money at the same rate as in recent 
years, we estimate that banks would be able to build the 
requisite capital through retained earnings in less than 2 
years, even while maintaining their dividends.

Q.3. European regulators are taking steps to reduce capital 
requirements for European banks. Last June, the Basel Committee 
on Banking Supervision made adjustments that reduced the GSIB 
surcharge for European banks. Recently we have heard the EU 
will not fully implement Basel III, pointing to the current 
economic conditions and the need to have large European banks 
continue to provide lending to European economies. Do you 
believe this disparate approach put U.S. banks at a competitive 
disadvantage?

A.3. The Federal Reserve Board actively monitors and evaluates 
how other jurisdictions are implementing the Basel III reforms. 
The U.S. implementation of the final set of Basel III reforms 
would help to ensure that we have a strong capital framework 
that supports the U.S. financial system. In general, economic 
research and international comparisons suggest strong capital 
requirements support banks and the U.S. economy, as they allow 
the banking sector to serve as a source of strength and to lend 
to creditworthy households and businesses during times of 
economic stress.
    To further refine estimates of the potential impact, the 
Board is collecting data additional data from the banks 
affected by the proposal. This additional data will further 
clarify the estimated effects of the proposal and inform any 
final rule, with summaries to be made public. In addition, the 
agencies have extended the comment period on the proposal to 
January 16, 2024, in order to allow interested parties more 
time to analyze the issues and prepare their comments.

Q.4. In order to mitigate the capital impact on EU banks, and 
in line with the G20 commitment not to significantly increase 
bank capital as a result of the Basel reforms, Europe has 
proposed several material deviations from the Basel accord. In 
addition, Europe has decided to delay the full capital impact 
on European banks until at least 2030 (and longer in some 
areas). Given those developments, will the Board ensure that 
any U.S. implementation also takes appropriate divergences and 
implementation timelines so as to ensure the stated desire of 
international equivalence and a level playing field?

A.4. Please see my response to Question 3.

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

               RESPONSES TO WRITTEN QUESTIONS OF
         SENATOR CORTEZ MASTO FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VANCE
                    FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                      FROM TODD M. HARPER

Q.1. In your testimony, you highlighted that the NCUA's Central 
Liquidity Facility (CLF) is able to respond rapidly to economic 
events and reduce liquidity risks for some credit unions. Can 
you please elaborate on how the expiration of the temporary 
statutory enhancements in December 2022 impacted the 3,322 
credit unions that lost access to the CLF? What would be the 
benefits of reinstating the statutory enhancements that allowed 
the agent membership of corporate credit unions?

A.1. In December 2022, the temporary statutory enhancements 
that assisted the agent membership of corporate credit unions 
expired. As a result, 3,322 credit unions with less than $250 
million in assets lost access to the CLF, and the facility's 
liquidity capacity contracted by almost $10 billion.
    Smaller credit unions operate in an increasingly complex 
and competitive landscape with relatively limited resources. 
Due to their limited capital and infrequent need for emergency 
liquidity, smaller credit unions often choose other uses for 
their capital and do not establish access to Federal sources of 
emergency contingent liquidity. Consequently, these smaller 
credit unions face the very real possibility of being unable to 
secure reliable funding during emergency liquidity events, 
which could lead to a systemic problem.
    One of the benefits of reinstating the expired statutory 
enhancements is that it would again allow the corporate credit 
unions to provide a subset of their credit union members with 
access to the CLF at ``no-cost-to-them.'' The CLF, as a Federal 
contingent backup liquidity source, can then ensure reliable 
funding for a larger number of otherwise creditworthy credit 
unions that would likely struggle to meet their emergency 
liquidity needs through conventional market sources.
    Another important benefit of reinstating the statutory 
enhancements is that doing so will support the safety and 
soundness of the entire credit union system. Because the CLF 
can, by statute, advance funds to the National Credit Union 
Share Insurance Fund (SIF), the CLF can be used to strengthen 
and support the fund during systemic liquidity events. This was 
most recently done during the 2007-2010 Great Recession. During 
that period, the failure of five corporate credit unions, which 
placed the whole of the credit union system at risk of 
collapse, the CLF advanced more than $10 billion to the SIF as 
part of the Corporate System Resolution Program to stabilize 
and protect the credit union system.
    To address this expiration and growing liquidity risks 
within the credit union system, the NCUA Board has unanimously 
asked Congress for permanent statutory authority for the 
previous temporary modifications:

    Flexibility and Affordability for Agent Members: 
        The enhancements offer greater flexibility and 
        affordability to agent members, enabling them to serve 
        smaller groups of covered institutions. As a temporary 
        enhancement, corporate credit unions--credit unions 
        serving other credit unions--were empowered to support 
        credit unions with assets of less than $250 million in 
        accessing emergency funds during liquidity events by 
        purchasing CLF capital stock for this subset of credit 
        unions that they serve. Making this modification 
        permanent would enable smaller credit unions to regain 
        access to emergency liquidity without direct cost, 
        providing them with the necessary support to address 
        short-term liquidity needs effectively.

    Corporate Credit Union Access: Reinstating the 
        enhancements would permit corporate credit unions to 
        join the CLF as regular CLF members and access funding 
        for their own needs. This enhancement would provide a 
        Federal liquidity source for corporate credit unions, 
        which are crucial in providing market funding 
        protection for their member credit unions' liquidity 
        needs.

    Clarity and Flexibility: The expired enhancements 
        also provided the NCUA Board with more clarity and 
        flexibility regarding approved loans. By reinstating 
        these provisions, the NCUA Board may exercise 
        discretion and approve loans that align with the 
        liquidity needs of credit unions. This flexibility 
        ensures that the NCUA can respond effectively to the 
        diverse liquidity needs of credit unions.

    Increased Borrowing Authority: The temporary 
        enhancements increased the CLF's maximum legal 
        borrowing authority from 12 times to 16 times the 
        capital and surplus of the facility. Reinstating this 
        enhancement would enable the CLF to expand its capacity 
        to meet the growing liquidity needs of credit unions, 
        thereby strengthening its financial resilience.

    Collectively, these enhancements would strengthen the 
industry's stability and ensure credit unions can navigate 
future liquidity challenges more effectively. With liquidity 
risks rising, now is the time to bolster a liquidity lifeline.

Q.2. How would third party vendor examination authority support 
the NCUA in discovering and remediating issues that could cause 
systemic risk to the credit union system?

A.2. The Government Accountability Office, the Financial 
Stability Oversight Council, and the NCUA's Office of the 
Inspector General have each called for legislative action to 
fix this growing regulatory blind spot.
    Currently, the NCUA has no examination or enforcement 
authority over third-party service providers and only a limited 
ability to provide oversight over the services provided by 
credit union service organizations (CUSOs). Pursuant to NCUA 
Board-approved policy, the NCUA requests Congress restore the 
NCUA's third-party authority, as the agency previously had 
under the Examination Parity Act, to address systemic risks and 
the potential for cascading failures in the financial sector. 
This lack of authority is a growing regulatory blind spot and 
has the potential to trigger a chain reaction throughout the 
credit union industry and the financial services sector.
    For example, the top five technology service providers 
serve more than half of all credit unions, representing over 90 
percent of total credit union system assets. Considering the 
amount and type of data third parties hold and the functions 
they perform for credit unions, this creates a significant 
systemic risk. A failure or a significant service disruption 
involving even one of these critical third parties could cause 
hundreds of credit unions and their members to lose access to 
their funds. An event like this could result in a loss of 
confidence in the credit union industry and across the entire 
financial sector. Third-party vendor authority would allow the 
NCUA to proactively identify and remediate cybersecurity, BSA/
AML, safety and soundness, consumer financial protection and 
other issues that could cause risk to the credit union system.
    With third-party vendor authority, the NCUA could remediate 
threats and risks proactively. Even when third-party vendors 
agree to submit to NCUA reviews, they are free to reject the 
NCUA's recommended corrective actions to mitigate risks 
identified in the review process. Additional risks posed by the 
NCUA's lack of third-party vendor authority include:

    The NCUA may not receive information about a 
        troubled vendor as early as other regulators or at all 
        because the agency lacks comparable authority and is 
        limited in what information it may disclose to credit 
        union clients.

    The NCUA has limited insight into the risks of 
        other primary, secondary, and tertiary vendors and 
        service providers, such as payment systems and other e-
        banking/fintech solutions that pose similar 
        concentration risks to the credit union system.

    Many credit unions, especially smaller ones, need help 
conducting effective due diligence because vendors are often 
reluctant to provide clients with audits, operating results, 
and the security and vulnerability assessments associated with 
information systems and technology. The third-party vendor 
authority review process would produce valuable insights into 
third-party vendors' risk profiles, enabling the NCUA to 
identify deficiencies and weaknesses and provide credit unions 
with the information needed to make informed decisions when 
managing these relationships. NCUA examinations would also 
supplement the due diligence efforts of credit unions as they 
improve their overall vendor risk management processes. 
Moreover, third-party vendor authority would benefit consumers 
by enabling the NCUA to examine for compliance with consumer 
protection laws and regulations.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                      FROM TODD M. HARPER

Q.1. At NCUA's April 20, 2023, board meeting you approved a 
request for information on climate-related financial risk. In 
the request, it asks the public to provide feedback on amongst 
other things: ``Are there any climate-related opportunities, in 
addition to renewable energy, that credit unions should 
consider? What regulatory changes would be necessary to 
encourage credit unions to develop products and services 
designed to capitalize on opportunities presented by the 
transition to clean energy and a less carbon intensive 
economy?''
    Considering the serious financial risks our economy has 
been facing over the past few months is this an appropriate use 
of NCUA time and resources?

A.1. Efforts to address climate-related financial risk may 
present new opportunities for credit unions. For example, 
efforts to move to a carbon-neutral economy could generate 
demand for new loan products and services, such as loans for 
solar power generation, biodiesel development, residential or 
commercial energy efficiency upgrades, and solar panel 
installation. The NCUA is requesting feedback on opportunities 
because, where appropriate, the agency seeks to support credit 
unions in leveraging new opportunities and to understand if 
there are regulatory or other barriers that should be 
addressed.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                      FROM TODD M. HARPER

Q.1. Restoring stability to our financial system is important 
so that the banks that are safe, sound, and have been following 
the rules can focus on providing capital for small businesses 
to grow and on serving customers in their communities.
    Problems at Silicon Valley Bank had been identified by 
their regulatory supervisors again and again, over years, but 
they never dropped the hammer to get the bank to actually fix 
their problems.
    How are you all going to make sure that folks are following 
the rules on the books today? And that when your supervisors 
identify banks that aren't, that they actually do something 
about it?

A.1. In its examinations, the NCUA aims to be risk focused and 
ready to act expeditiously when needed. Accordingly, the agency 
has a robust supervision program over federally insured credit 
unions. When examiners find credit unions not following laws or 
regulations, our policies require them to develop Examiner's 
Findings or Documents of Resolution (DORs) to address the 
issue. By policy, examiners are required to follow up on DORs 
timely after the anticipated resolution date to ensure the 
credit union has taken corrective action.
    If a credit union is not resolving items timely, the NCUA 
will escalate administrative action in accordance with policy.

Q.2. Are you planning to propose new regulations in response to 
these bank failures? How will you incorporate consideration of 
banks across size and riskiness of business models when 
considering changes?

A.2. The NCUA will continue to review its regulations and 
address new risks as necessary. The NCUA has a history of 
tailoring regulations to the size and complexity of credit 
unions and will continue to do so in future rulemakings, as 
appropriate.
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM TODD M. HARPER

Q.1. Does your agency know the level of uninsured deposits at 
each of your regulated financial institutions currently and 
over time?

A.1. Yes, the NCUA collects quarterly information from each 
federally insured credit union as part of the Call Report 
cycle. As of March 31, 2023, approximately 9 percent of total 
shares and deposits in federally insured credit unions were 
uninsured.

Q.2. Does your agency receive information on uninsured deposit 
levels in real time, or do examiners receive it in periodic 
reports? Do examiners and researchers map it over real time to 
assess changes?

A.2. The NCUA receives information quarterly on each federally 
insured credit union's share and deposit levels. During 
examinations, examiners can also review the most current 
financial statements of the credit union.

Q.3. If uninsured deposit information arrives in periodic Call 
Reports, how often do examiners receive those reports? Is that 
timing adequate?

A.3. At a minimum, examiners receive quarterly updates for 
share and deposit information on all federally insured credit 
unions. However, examiners may receive this information more 
frequently during the examination process.

Q.4. Can your agency require a financial institution use a 
system like IntraFi Network to transfer some large accounts to 
other financial institutions to provide a bank or credit union 
customers with deposit insurance and protect customers' funds?

A.4. The NCUA does not have the regulatory authority to require 
a financial institution to transfer large deposit accounts to 
another financial institution. Additionally, there are field of 
membership limitations that may restrict a credit union from 
transferring a member's funds to another financial institution.

Q.5. Does your agency provide supervisory exam information 
about troubled banks to a Federal Home Loan Bank? How does your 
agency consider rapidly increasing advances to a financial 
institution from a Federal Home Loan Bank? Is a request for a 
great deal of advances in a short period of time seen as an 
indicator of liquidity risk? Do examiners from your agency ever 
request a FHLBank stop providing advances to a certain 
financial institution?

A.5. The NCUA does provide financial and risk assessment 
information to the respective FHLBanks for Federal credit 
unions. The information provided is incorporated into their 
credit underwriting review. Credit unions are subject to a 
statutory limit on the balance of all borrowing transactions. 
Liquidity risk management is additionally a 2023 NCUA 
Supervisory Priority, and examiners recently received 
additional training on the liquidity supervisory framework. The 
NCUA has also established a procedure to provide input on 
FHLBank advances when the credit union has negative tangible 
capital.

Q.6. Should executive bonuses be placed in escrow if MRIs and 
MRIAs are not addressed by a bank within 60 days?

A.6. Greater transparency and understanding of credit union 
executive pay would benefit credit union members and 
regulators. Currently, Federal credit union executives are not 
required to disclose their pay to their members; however, 
members can access the total compensation a credit union pays 
its employees through the credit union's quarterly Call Report.
    Additionally, NCUA regulation 750.0 seeks to limit a 
troubled federally insured credit union's ability to enter 
contracts to pay or make golden parachute and indemnification 
payments. By requiring troubled federally insured credit unions 
to submit a request to enter new contracts or make permissible 
golden parachute or indemnification payments, the NCUA helps 
prevent wrongful or improper payments to executives and inhibit 
unwarranted rewards to institution-affiliated parties that can 
contribute to a federally insured credit union's troubled 
condition.

Q.7. Are the three elements regulators must prove to prohibit 
someone from working in the banking sector--misconduct, effect 
and culpability--adequate for today's banking sector? Does 
1818(e)'s focus on discrete acts of wrongdoing leave 
regulators with a lack of clear authority to assess 
responsibility for general mismanagement as opposed to criminal 
activity?

A.7. The three elements of misconduct, effect, and culpability 
have generally enabled regulators to prohibit bad actors from 
working for a credit union or any federally insured depository 
institution.
    As a point of clarification, federally insured credit 
unions are not regulated by U.S.C. 1818(e). Federally insured 
credit unions, including federally insured, State-chartered 
credit unions, fall under the prohibition requirements of 
U.S.C. 1786(g), which mirror the discrete acts of wrongdoing 
outlined in 1818(e).
    The discrete acts of wrongdoing addressed in 1786(g) 
provide clear and transparent requirements for regulators when 
removing or prohibiting an individual from engaging or 
participating in the operations of a federally insured 
depository institution. Moreover, reducing the focus on 
discrete acts of wrongdoing by adding ambiguous language could 
result in subjective assessments of an individual and 
prohibition orders that may be easily appealed or prevent an 
otherwise permissible individual from working at a credit 
union. The unintended consequences could include negative 
publicity, lawsuits, and harm to the credit union industry.
    Lastly, general mismanagement would commonly fall under 
unsafe and unsound practices of 1786(g)(1)(A)(iii). While not 
specific to prohibitions, the NCUA can conserve a credit union 
under 1786(h) and remove employees and officials from their 
current capacities because of mismanagement if the credit union 
meets at least one of the following mismanagement-related 
criteria:

    The NCUA Board determines that conservatorship is 
        necessary to conserve the assets of an insured credit 
        union and to protect the NCUA's Share Insurance Fund, 
        or to protect the interests of members of an insured 
        credit union.

      This may be considered mismanagement because the 
        NCUA Board may find deficient management that directly 
        and materially negatively affected a credit union. 
        Examples of such mismanagement include poor decision-
        making and deliberate failure to address current and 
        prospective safety-and-soundness issues.

    A credit union willfully violates a finalized 
        cease-and-desist order.

      This activity may be considered mismanagement 
        because credit union officials and management are 
        directly and willfully failing to address a cease-and-
        desist order. In most cases, such orders are issued 
        because of unsafe and unsound practices caused by 
        mismanagement.

      This behavior is also included as a discrete act 
        of wrongdoing in 1786(g).

    A credit union conceals books, papers, records, or 
        assets of the credit union; or refuses to submit books, 
        papers, records, or affairs of the credit union for 
        inspection to any examiner or to any lawful agent of 
        the Board.

      This activity may be considered mismanagement 
        because credit union officials and management are 
        directly and willfully refusing to provide financial 
        records and affairs to the NCUA.

    As previously stated, if a credit union meets at least one 
of the specific criteria listed above, the NCUA can conserve 
the credit union and remove its bad actors due to 
mismanagement. In some cases, employees or officials of a 
conserved credit union are subsequently prohibited from 
engaging or participating in the operations of a federally 
insured depository institution because mismanagement issues 
stem from their direct decisions. There are, however, 
additional conservatorship criteria that may not be 
specifically interpreted as mismanagement, including credit 
union consent or capitalization issues as addressed in 
1786(h).
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                      FROM TODD M. HARPER

Q.1. Bank runs are news-driven events and technology has 
increased the velocity that the news causing some of these runs 
can spread. Once depositor confidence is lost, whether due to 
news or social media chatter, the eventual collapse of the bank 
can become inevitable. This raises concerns that the runs on a 
few poorly managed small banks can potentially trigger runs on 
well-managed banks within their respective communities.
    How should policymakers and regulators prepare for bank 
runs that can be triggered at a moment's notice?

A.1. Stress testing and contingency planning are the key 
elements of NCUA's liquidity risk management framework that can 
help limit risk in a dynamic, social media-driven economy. The 
NCUA emphasized the development of both elements before the 
market challenges that began post-COVID.
    Institutions are recognizing the velocity of change that 
can occur with the touch of a button and are developing better, 
more holistic approaches to identify and mitigate those risks. 
These efforts have contributed to the stability of the credit 
union system and remain our best defense against the current 
market volatility.

Q.2. Are there any levers in place that would placate a wider, 
more systemic bank run?

A.2. There is a high proportion--more than 90 percent--of 
insured deposits in the credit union system, compared to less 
than 60 percent in banks. Consistent, multichannel messaging 
through letters to credit unions, social media, webinars, 
conferences, and examiner engagement helps the NCUA reassure 
credit union members that their funds are safe and well-
managed. In fact, no one has ever lost a penny of insured 
shares at a federally insured credit union.

Q.3. What actions are your agencies exploring to insulate well-
managed banks and depositors from new or even misinformation-
driven bank runs?

A.3. We continue focusing on risk management fundamentals and 
communicating consistently with our examination teams and other 
stakeholders.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VANCE
                      FROM TODD M. HARPER

Q.1. Recent experience has unfortunately shown that liquidity 
strains can develop quickly and unexpectedly in the entire 
financial system and, as a result, can endanger the safety and 
stability of a financial institution.
    What would be the impact on smaller, low-income, and rural-
focused credit unions if your recommended changes to the 
Central Liquidity Facility are not enacted into law by 
Congress?

A.1. The increase in interest rate and liquidity risks in the 
current economic environment underscores the value of the 
NCUA's Central Liquidity Facility (CLF). The CLF's ability to 
respond rapidly to economic events can help contain or avert 
liquidity crises before they escalate. Liquidity risk for some 
credit unions has recently increased. When liquidity events 
occur, the CLF can serve as an important shock absorber for 
member credit unions and the system.
    Under the NCUA's regulations, credit unions with more than 
$250 million in assets are required as part of their 
contingency funding plan to access a Federal emergency 
liquidity source--the CLF, the Federal Reserve's Discount 
Window, or both. Credit unions with less than $250 million in 
assets, while not required to have a membership with a 
contingent Federal liquidity source, must identify external 
sources as part of their contingency funding plan.
    In December 2022, the temporary statutory enhancements that 
assisted the agent membership of corporate credit unions 
expired. As a result, 3,322 credit unions with less than $250 
million in assets lost access to the CLF, and the facility's 
capacity contracted by almost $10 billion.
    Smaller, low-income, and rural-focused credit unions 
operate in an increasingly complex and competitive landscape 
with limited resources. Due to their restricted resources and 
infrequent need for emergency liquidity, most still need a 
backup liquidity facility but do not have one. Because these 
institutions have less capital and fewer funding source 
options, during a systemic liquidity event--when the credit 
union needs funding the most--their market funding source may 
become unavailable, compromising the credit union's existence. 
The CLF, as a Federal contingent backup liquidity source, 
ensures reliable funding for credit unions that struggle to 
meet their emergency liquidity needs through conventional 
market sources.
    Reinstating the statutory enhancements, as unanimously 
recommended by the NCUA Board, is crucial for smaller, low-
income, and rural-focused credit unions and the credit union 
industry. Doing so would provide an affordable option for 
corporate credit unions--credit unions serving other credit 
unions--to subscribe on behalf of smaller institutions, 
granting smaller credit unions access to a Federal emergency 
contingent liquidity source. The changes would also increase 
the flexibility of corporate credit unions with access to CLF 
funding, provide clarity and flexibility for the NCUA Board, 
and expand the CLF's borrowing authority. Collectively these 
measures would strengthen the industry's stability, ensuring 
that credit unions can navigate liquidity challenges more 
effectively.

Q.2. Regarding your request for Congress to grant third-party 
vendor examination authority to the National Credit Union 
Administration:
    What cost estimates has the NCUA prepared in preparation 
for implementing such a statutory change? I would expect these 
costs would encompass both additional staff and associated 
training.
    And have these costs been communicated to the credit union 
industry?

A.2. The NCUA has communicated to stakeholders that it 
anticipates a minimal impact on its budget if granted third-
party vendor authority. Any budget increase resulting from 
vendor examination authority would be modest and pale in 
comparison to the current risk of potential losses. If Congress 
provides the NCUA with third-party vendor examination 
authority, the agency would ensure the reviews were risk-
focused addressing safety and soundness, cybersecurity, 
national security, BSA/AML, and consumer financial protection 
issues. Potential vendors of focus include those that would 
pose the greatest risk to the credit union system.

Q.3. The NCUA has a proposed rule open for public comment that 
would make changes to credit union chartering and field of 
membership standards. This proposal follows on the heels of 5 
other rules throughout the last few years that have relaxed 
credit union membership requirements. Field of membership has 
always been central to the credit union mission of service to 
low- and moderate-income individuals and communities tied 
together by a common bond.
    Given this easing of membership rules, is the difference 
between credit unions and community banks eroding?

A.3. No, the difference between credit unions and community 
banks is not eroding. Each credit union has its own individual 
field of membership. Whether the credit union is chartered as a 
single or multiple common-bond or community-based credit union, 
the field of membership stipulates who can join the credit 
union. This makes growth of a credit union limited to its field 
of membership. Community banks do not operate under these 
requirements. Furthermore, unlike banks, credit unions are not-
for-profit cooperatives owned by their members through a one-
member-one-vote structure.

Q.4. The NCUA finalized a rule in 2022 enabling complex credit 
unions--those with over $500 million in assets--to borrow money 
from hedge funds and private investors. In the wake of that 
development, NCUA Board Member Rodney Hood hosted an event last 
month at the New York Stock Exchange that featured discussions 
on ``using subordinated debt and secondary capital 
strategically.''
    How do these activities align with the credit union model 
of not-for-profit, member-owned cooperatives?

A.4. The NCUA Board finalized regulations that became effective 
in 2022, to permit low-income designated credit unions, complex 
credit unions (credit unions with total assets greater than 
$500 million), and new credit unions to issue subordinated debt 
for purposes of regulatory capital treatment.
    The 2022 final rule expanded the use of subordinated debt 
for credit unions without the low-income designation to enable 
access to additional capital. This rule advanced the statutory 
mission of federally insured credit unions to meet the credit 
and savings needs of their members, especially those of modest 
means. A well-structured regulatory system of subordinated debt 
helps protect the credit union system from losses. It also can 
expand access to safe, fair and affordable financial services 
for underserved communities.
    Clarifying the ability of certain credit unions to issue 
subordinated debt will better protect federally insured credit 
unions, their members, and taxpayers from losses to the Share 
Insurance Fund by creating a buffer against the capital losses 
caused by economic downturns, fraud, and management errors. In 
turn, that capital will strengthen the resilience of the 
system.
    To preserve the cooperative structure of the credit union 
system, the rule appropriately limits outside funding to debt 
rather than equity. The purchasers of the debt lack voting 
rights and ownership in the issuing credit union. Moreover, the 
rule prohibits negative covenants to ensure that the investors 
in subordinated debt cannot interfere in the credit union's 
operation or impose conditions that will affect the safety and 
soundness of the credit union or the NCUA's authority as a 
regulator and insurer.

Q.5. Are you concerned about the impact these outside investors 
may have on rapid credit union growth, especially for the 
largest credit unions, and your ability to continue to ensure 
the safety and soundness of the credit union system?

A.5. The subordinated debt rule requires the NCUA to approve 
all subordinated debt issuances. In approving subordinated 
debt, the NCUA's priority is the safety and soundness of the 
credit union system. The NCUA has rejected subordinated debt 
applications in the past due to safety-and-soundness concerns.

Q.6. Amid the rising rate environment and the credit union 
industry's ``significant growth in complexity over the past 2 
years, with total assets growing by approximately 25 percent'' 
as described by the NCUA, the Agency made several changes to 
the Interest Rate Risk Supervisory Framework last September. 
Given current market conditions, are you concerned that the 
NCUA's updates will make it more difficult to detect and 
respond to potential safety and soundness issues within the 
credit union system?

A.6. No. The updates to the Interest Rate Risk Supervisory 
Framework were a direct response to the increase in interest 
rates during 2022. These updates were intended to help 
examiners address interest rate risk based on the quantitative 
and qualitative levels of interest rate risk at the credit 
union.
    The updates to the supervisory framework make it easier to 
detect and respond to safety-and-soundness issues in a timely 
manner. They allow examiners more flexibility to tailor 
corrective actions to a specific institution to resolve the 
underlying issue.

Q.7. The NCUA recently released a Request of Information on 
climate-related financial risk, posing 38 questions about 
physical risk, transition risk, governance and other topics. 
Regardless of the responses you receive to this RFI, do you 
think it is appropriate for the agency to regulate in this area 
without a clear directive from Congress?

A.7. The NCUA is one of several Federal financial institution 
regulators to issue RFIs over the past 2 years. The NCUA's 
mission is to ``protect the system of cooperative credit and 
its member-owners through effective chartering, supervision, 
regulation, and insurance.'' Consistent with these aims, the 
NCUA has statutory responsibility for a wide variety of 
regulations that protect the credit union system, members, and 
the Share Insurance Fund.
    Climate change is accelerating, and the number--and cost--
of climate-related natural disasters is rising. The physical 
effects of climate change, along with associated transition 
costs, pose significant risks to the U.S. economy and the U.S. 
financial system. Credit unions should consider climate-related 
financial risks and how they could affect their membership and 
institutional performance.
    Economic and financial disruptions and uncertainties 
arising from both the physical and transition risks could 
affect the credit union industry across many dimensions. 
Climate-related physical and transition risks tend to manifest 
as traditional financial risks, including credit, liquidity, 
market, and operational risks. By issuing the RFI, the NCUA 
hopes to inform its understanding of climate-related financial 
risks, how credit unions view those risks, and how it can best 
support the industry in mitigating those risks. In addition, 
the NCUA hopes to gather information on the products and/or 
services credit unions may offer to capitalize on the 
opportunities presented by the transition to clean energy.

Q.8. The implementation and operation of the NCUA's Modern 
Examination and Risk Identification Tool (MERIT) has ballooned 
in recent years--most recently with an 80 percent increase from 
the 2022 to 2023 annual budget. How is the NCUA controlling its 
spending on this program so as to not divert valuable dollars 
away from credit unions working to help their communities?

A.8. Actually, the NCUA delivered the MERIT system at the 
higher end of the originally estimated range. Subsequently, the 
agency decided to add new functionalities to the MERIT system. 
Those changes did modestly increase the costs beyond the 
original estimates. These changes were fully disclosed to the 
public and approved by the NCUA Board.
    The NCUA has a robust program governance and oversight 
process to monitor and control Examination and Supervision 
Solution and Infrastructure Hosting (ESS&IH) program costs. Now 
that MERIT is in the operations and maintenance phase (O&M), 
the NCUA's cost profile for future years has flattened, with 
most increases being driven by support contracts and software 
license escalation. Further, as part of O&M activities, the 
NCUA routinely evaluates and optimizes service delivery to 
reduce costs. MERIT, which replaced the decades old legacy 
examination system, is an enterprise system enabling NCUA staff 
and our State supervisory authority partners to complete our 
mission. The NCUA will continue to make modest investments, as 
represented in the acquisitions line in the ESS&IH budget 
narrative, to achieve its strategic priorities, enable staff 
efficiencies, and make required system upgrades to ensure data 
security.

       RESPONSES TO WRITTEN QUESTIONS FROM MICHAEL J. HSU
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                    FROM ADRIENNE A. HARRIS

Q.1. Under the U.S. dual banking system, it is important for 
all regulators with jurisdiction over a banking organization to 
work together while overseeing the institutions safety and 
soundness and overall stability of the banking system. Please 
describe the New York State Department of Financial Services' 
working relationship with the Federal bank and credit union 
regulators and any suggestions you have to enhance financial 
stability throughout the dual banking system.

A.1. Dating back to the 19th Century, the dual banking system 
promotes competition and efficiency in the financial system, 
allowing for two different regulatory regimes for State and 
national banks to coexist and complement each other.
    DFS shares regulatory oversight of New York chartered 
banks, credit unions and licensed foreign branches with either 
the Federal Reserve Bank of New York (the FRBNY), the Federal 
Deposit Insurance Corporation (FDIC) or the National Credit 
Union Association (NCUA) depending on the type or structure of 
each banking entity. The FRBNY and DFS share regulatory 
oversight of New York-regulated foreign bank branches and banks 
subject to a holding company structure. The FDIC and DFS share 
oversight over all insured New York-chartered banks for which 
the FRBNY is not the primary Federal regulator, while the NCUA 
and DFS share oversight over all insured New York-chartered 
credit unions. Though the nature of DFS's working relationship 
with each Federal regulator may be slightly different, the goal 
is ultimately the same--ensure safe and sound operation of the 
regulated entities.
    With respect to Signature Bank, DFS and the FDIC shared 
responsibility for, and jointly participated in, the 
examination and oversight of the bank. Implementing this shared 
oversight required that DFS and the FDIC work together closely 
to schedule, coordinate, and conduct ongoing monitoring of the 
bank and a continuous examination program. Day-to-day 
supervision of the bank and examination work was generally 
coordinated by the DFS central point of contact and their FDIC 
counterpart--the examiner in charge. Supervisors at each agency 
were in regular contact with each other and participated in the 
supervisory and examination cycle as appropriate.
    At the beginning of each examination cycle, DFS and the 
FDIC conferred and determined the subject areas and scope of 
the target examinations that would be conducted. The number, 
focus, and prioritization of target examinations conducted each 
year varied depending on the assessed risk profile of 
Signature, ongoing events, and outstanding examination 
findings. DFS and the FDIC coordinated the allocation of 
resources to appropriately staff these examinations.
    Each target examination began with a letter from DFS and 
the FDIC outlining the scope of the target examination and the 
information Signature needed to provide. Before the pandemic, 
examinations were conducted onsite at Signature, typically with 
the DFS and FDIC examiners sharing a conference room at the 
bank, reviewing documents, and jointly interviewing bank staff. 
Until recently, as a result of the pandemic, examinations were 
conducted remotely, with information shared through a secure 
online portal, and meetings and interviews conducted by an 
online meeting service. The results of each examination were 
reviewed and analyzed by DFS and the FDIC to finalize the 
examination findings for presentation to the bank.
    At the conclusion of each target examination, DFS and the 
FDIC issued joint Supervisory Letters to Signature summarizing 
the target examination findings. Issues requiring remediation 
were identified as a matter requiring board attention (MRBA), 
or a supervisory recommendation (SR) according to the 
significance of the issue. Signature had to respond to each 
Supervisory Letter within forty-five (45) days of receipt and 
address the open MRBAs and SRs.
    At the conclusion of each annual supervisory cycle, the 
findings from the target examinations were included in a joint 
Report of Examination issued to the bank by DFS and the FDIC. 
These reports summarized the regulators' overall assessment of 
Signature and the regulators' examination findings from the 
target examinations conducted during that examination cycle. 
The reports would assign a rating, from one (strongest 
performance) to five (weakest performance), for each of the 
examination components: capital adequacy, asset quality, 
management, earnings, liquidity, and sensitivity to market risk 
(CAMELS ratings). Based on the component ratings, regulators 
would assign a composite rating representing the regulators' 
overall assessment of the condition of the bank. The findings 
of each Report of Examination were communicated to the bank's 
Board of Directors at a board meeting attended by DFS and the 
FDIC on an annual basis.
    Although the FRBNY does not directly regulate the bank, 
access to FRBNY liquidity was a key component to Signature's 
efforts to raise enough liquidity to open in a safe and sound 
manner on Monday March 13, 2023. DFS has a close working 
relationship with the FRBNY and was in constant contact with 
the FRBNY concerning Signature starting on the afternoon of 
Friday, March 10, and continuing through the end of the 
weekend. This close communication was key to enabling the 
regulators to assess the representations Signature was making 
about its liquidity position and the assets it claimed it would 
be able to pledge to the FRBNY.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                    FROM ADRIENNE A. HARRIS

Q.1. Your testimony before the Senate on May 18, 2023, 
indicates that Signature Bank's liquidity rating was downgraded 
to a 3 in 2019. While you have recognized that examiners were 
too slow to escalate concerns, can you explain why Signature 
Bank was allowed to continue growing rapidly for 3 years 
despite these examiner concerns?

A.1. In the 2019 examination cycle, the FDIC and DFS, who 
jointly supervised Signature Bank (Signature), conducted six 
target reviews of Signature. The target reviews covered the 
following areas: information technology; credit risk 
management; interest rate risk; strategic planning; Bank 
Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of 
Foreign Asset Control ``OFAC'') compliance; and liquidity risk 
management. At the conclusion of the 2019 examination cycle, 
there were seven outstanding matters requiring board attention 
(MRBA): two MRBAs related to liquidity risk management; three 
MRBAs related to the BSA/AML and OFAC program; one MRBA related 
to commercial real estate; and one MRBA related to model risk 
management. Weaknesses in liquidity risk management practices 
led the regulators to downgrade the Bank's CAMELS liquidity 
component rating from ``2'' to ``3''.
    During the subsequent 2020-2022 examination cycles, 
Signature's management had begun addressing regulators' 
concerns surrounding liquidity risk management practices but 
was slow in remediating them. Between 2019 and 2021, as a 
result of Signature launching a number of new business 
initiatives, the bank's assets doubled, and its uninsured 
deposits tripled. This rapid growth in and of itself would not 
have presented a concern if the bank had put in place 
commensurate risk controls. The regulators repeatedly brought 
the lack of adequate risk controls to the attention of 
Signature's management and board of directors but the bank 
failed to promptly remediate regulatory findings, which, 
undoubtedly, contributed to its collapse. \1\
---------------------------------------------------------------------------
     \1\ Superintendent Harris has prioritized hiring since she was 
nominated to lead DFS in September 2021. The State's FY23 budget, 
enacted in 2022, fully funded DFS for the first time in its history, 
allowing the agency to hire staff that had been needed for years. 
Pursuant to Superintendent Harris's strategic staffing plan, DFS 
overhauled its hiring process and onboarded the first new class of 
financial services examiners, critical staff needed to increase 
capacity to examine banking organizations, since 2018. As a result, 
since January 2022, DFS has hired 297 new staff and promoted 263 
existing members of the team.

Q.2. We have heard conflicting statements from Signature Bank's 
executives and the New York Department of Financial Services 
(NYDFS) regarding the solvability of the bank over the weekend 
of March 10, 2023. While you have provided some information 
about Signature Bank's available borrowing capacity and 
expected deposit outflows at the time of failure, can you 
---------------------------------------------------------------------------
provide more detailed information?

A.2. The decision to close Signature Bank on March 12, 2023, 
was based on DFS's assessment that Signature Bank would not be 
able to open in a safe and sound manner on Monday, March 13, 
2023. Signature experienced a runoff of $18.6 billion in 
deposits on Friday, March 10, reducing the bank's deposit base 
by 20 percent in a matter of hours. Signature's liquidity 
position was compromised on Friday and, absent an emergency 
loan from the Federal Reserve Bank of New York that closed a 
cash deficit of nearly $4 billion, Signature would have failed 
that day.
    As of Sunday, March 12, Signature had $4.27 billion of 
certain liquidity available for Monday morning to cover already 
known withdrawals ranging between $7.4 and $7.9 billion. In 
light of market conditions, DFS reasonably expected that 
additional unknown withdrawals could potentially reach or 
exceed Friday levels. Signature's liquidity projections for 
Monday morning, however, were unreliable and changing by the 
hour during the weekend. Signature hoped to have about $20 
billion in Monday liquidity. That number, however, included 
about $6 billion in commercial real estate loans that the FRBNY 
had over the weekend repeatedly indicated would take weeks to 
evaluate and, consequently, would not be available for Monday. 
Other collateral of about $10 billion, the FRBNY indicated it 
might accept but the FRBNY had no information to assess how 
much, if any, of these assets were actually pledgeable and, if 
they were, what haircut would apply.
    As a result, DFS assessed that Signature would be unable to 
secure sufficient liquidity by Monday to cover the anticipated 
withdrawals, as the collateral that Signature hoped to pledge 
to the FRBNY was either not pledgeable or would take weeks to 
assess. In short, Signature's certain borrowing capacity of 
$4.27 billion was far below the $8 billion of known outflows 
anticipated for Monday as well as additional unknown outflows 
that were reasonably anticipated to exceed Friday levels.

Q.3. The FDIC's report on Signature Bank's failure highlights 
the staffing shortages of their regional office and the 
subsequent lengthy delays in examination processes. Did the 
NYDFS have any concerns with these delays and if so, did you 
ever communicate such concerns?

A.3. DFS and the FDIC jointly examined Signature Bank. Both DFS 
and the FDIC identified staffing issues as a cause for delays 
in their examination of Signature Bank. In DFS's Internal 
Review of the Supervision and Closure of Signature Bank report 
(Report), DFS identified several areas of improvement. One such 
area of improvement is DFS's need to improve its examination 
capacity. Superintendent Harris has prioritized hiring since 
she was appointed to lead DFS in September 2021. The State's 
FY23 budget, enacted in 2022, fully funded DFS for the first 
time in its history, allowing the agency to hire staff that had 
been needed for years. Pursuant to Superintendent Harris's 
strategic staffing plan, DFS overhauled its hiring process and 
onboarded the first new class of financial services examiners, 
critical staff needed to increase capacity to examine banking 
organizations, since 2018. As a result, since January 2022, DFS 
has hired 297 new staff and promoted 263 existing members of 
the team. A larger pool of examiners and supervisors will help 
close the timing gap between the end of examinations and the 
issuance of Reports of Examination and Supervisory Letters, and 
avoid over-staffing key examination personnel.
    Another area of improvement identified in the Report is the 
need to streamline and simplify internal processes. While DFS 
and the FDIC conducted timely examinations of Signature, 
finalizing and issuing regulatory findings in the form of 
Supervisory Letters or Reports of Examination did not happen in 
a sufficiently timely manner. This was due to the staffing 
constraints at both agencies as well as a redundant review 
process.
    DFS did not communicate any concerns to the FDIC regarding 
the FDIC's staffing levels.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                    FROM ADRIENNE A. HARRIS

Q.1. Restoring stability to our financial system is important 
so that the banks that are safe, sound, and have been following 
the rules can focus on providing capital for small businesses 
to grow and on serving customers in their communities.
    Problems at Silicon Valley Bank had been identified by 
their regulatory supervisors again and again, over years, but 
they never dropped the hammer to get the bank to actually fix 
their problems.
    How are you all going to make sure that folks are following 
the rules on the books today? And that when your supervisors 
identify banks that aren't, that they actually do something 
about it?

A.1. Immediately after the collapse of Signature Bank, I 
directed the Office of General Counsel to conduct an internal 
review and issue a report. In DFS's Internal Review of the 
Supervision and Closure of Signature Bank report (Report), DFS 
identified several areas of improvement. Among them is the need 
to set clear guidelines that examiners must follow to escalate 
regulatory concerns or instances in which a bank fails to 
remediate findings in a timely fashion. Signature Bank's matter 
requiring board attention on liquidity contingency planning 
remained outstanding from 2020, yet no measurable action was 
taken to require the bank to expedite its efforts in 
remediating regulatory findings or to penalize inadequate or 
incomplete efforts. Under Superintendent Harris, DFS is working 
to establish clear escalation procedures for examination 
findings that remain outstanding and criteria on when further 
action must be taken to ensure compliance with an outstanding 
regulatory finding.

Q.2. Are you planning to propose new regulations in response to 
these bank failures? How will you incorporate consideration of 
banks across size and riskiness of business models when 
considering changes?

A.2. The rapid collapse of Signature Bank underscored the need 
to revisit the assumptions used to model and manage liquidity 
risk. In particular, the speed with which Signature's 
depositors initiated withdrawals far outpaced assumptions many 
institutions use to model and assess liquidity risk.
    The mismatch between recent lived experience and defined 
regulatory expectations is apparent when considering recent 
depositor behavior versus the mandated assumptions of the 
liquidity coverage ratio (LCR). The LCR requirement mandates 
that covered institutions always maintain at least 100 percent 
liquidity compared to the total expected cash outflows over a 
30-day period in a stressed scenario. The LCR is calculated 
under the LCR rule, which dictates specific stress assumptions, 
including the percentage of withdrawals and liquidity flight 
that an institution must model, defined by specific categories 
of bank customers. Under the LCR rule, retail deposits are 
classified as ``stable retail deposits''--defined as fully 
insured deposits that are held in a transactional account or 
that the institution has otherwise determined are not likely to 
run during stress, based on the customer's other relationships 
with the institution--and ``other retail deposits''--capturing 
the rest of all retail deposits (including those not fully 
insured). Over a 30-day stress period, the LCR rule requires 
covered institutions to assume a 3 percent outflow rate for 
stable retail deposits and a 10 percent outflow rate for other 
retail deposits. The rule also prescribes outflow rates for 
subcategories of ``unsecured wholesale funding''. The LCR rule 
requires subject institutions to assume a 5 percent outflow 
rate for fully insured operational deposits not held in an 
escrow account and a 25 percent outflow rate for other 
operational deposits (meaning those that are held in escrow 
accounts or those that are not fully insured).
    The observed behavior of Signature Bank's depositors 
beginning on March 10 did not align with these assumptions, in 
many instances exceeding them. Indeed, Signature's customers 
withdrew their deposits despite existing longstanding 
relationships and despite the fact that some customers also 
held operating accounts at the bank. Although under current 
U.S. rules the LCR requirement applies only to banks with total 
assets of $250 billion or greater, the fact remains that the 
LCR rule's dictated assumptions have not kept pace with 
customer behavior or technological advancements in media and 
mobile banking in the years since its finalization. In light of 
the experience with Signature Bank, regulators should consider 
whether the assumptions used by regulated banks to classify 
their deposits (including which types of deposits may be 
considered ``stable'' and the appropriate conservative assumed 
outflow rates) adequately capture the risk such deposits may 
represent.
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
          SENATOR CORTEZ MASTO FROM ADRIENNE A. HARRIS

Q.1. Does your agency know the level of uninsured deposits at 
each of your regulated financial institutions currently and 
over time?

A.1. The level of uninsured deposits is one of the matrices 
that DFS receives and reviews as part of its regulatory 
oversight of financial institutions. In light of Signature 
Bank's failure, DFS has implemented heightened daily liquidity 
monitoring for some of its supervised institutions. One of the 
daily reporting components is the level of uninsured deposits 
at supervised institutions.

Q.2. Does your agency receive information on uninsured deposit 
levels in real time, or do examiners receive it in periodic 
reports? Do examiners and researchers map it over real time to 
assess changes?

A.2. As part of its supervisory oversight, DFS receives 
periodic reports from its supervised institutions that vary 
depending on institutions' size and complexity. The examiners 
and other assigned staff review and assess the condition of the 
supervised financial institutions on an ongoing basis. DFS 
typically requests reports from the regulated entities on a 
quarterly, monthly, and, in some instances, daily basis. In the 
normal course of supervisory oversight, DFS does not require 
reporting of uninsured deposits in real time.
    In the case of Signature Bank, DFS implemented heightened 
liquidity monitoring in January of 2023. The heightened 
liquidity monitoring required Signature Bank to provide DFS 
with detailed liquidity information, including uninsured 
deposit levels, on a daily basis.
    Following Signature Bank's collapse, DFS implemented 
enhanced supervision of banks with higher risk profiles. DFS 
has been monitoring the liquidity of these institutions on a 
daily basis, which entails frequent engagements with these 
institutions, as well as close coordination with Federal 
counterparts.

Q.3. If uninsured deposit information arrives in periodic Call 
Reports, how often do examiners receive those reports? Is that 
timing adequate?

A.3. A national bank, State member bank, insured State 
nonmember bank, and savings association is required to file a 
consolidated Call Report normally as of the close of business 
on the last calendar day of each calendar quarter. The specific 
requirements for a bank depend upon the size of the bank, 
whether it has any ``foreign'' offices, and the capital 
standards applicable to the bank. The amount of detail required 
to be reported varies between the three versions of the Call 
Report forms, with the report form for banks with domestic and 
foreign offices (FFIEC 031) having more detail than the report 
form for banks with domestic offices only (FFIEC 041). The 
report form for banks with domestic offices only and total 
assets less than $5 billion (FFIEC 051) has the least amount of 
detail of the three reports. When bank's total assets exceed $1 
billion, they are required to report the estimated amount of 
uninsured deposits in Schedule RC-O, Memorandum item 2. The 
reporting of this uninsured deposit information is mandated by 
Section 7(a)(9) of the Federal Deposit Insurance Act.
    Quarterly Call Report information is publicly available on 
the FDIC website and DFS examiners review Call Reports on a 
regular basis as part of their supervisory oversight of 
regulated financial institutions.
    It is important to note that Call Reports are just one 
piece of information that regulators rely upon to receive 
updates on a bank's uninsured deposits. Uninsured deposits are 
reviewed as part of the examination process, and DFS can and 
does request reports from the regulated entities on a periodic 
basis as conditions may warrant. For Signature, regulators were 
receiving frequent updates on the levels of uninsured deposits 
at the bank since January 2023.

Q.4. Can your agency require a financial institution use a 
system like IntraFi Network to transfer some large accounts to 
other financial institutions to provide a bank or credit union 
customers with deposit insurance and protect customers' funds?

A.4. DFS's legislative mandate is to: (i) ensure the safe and 
sound conduct of the businesses under its supervision; (ii) 
protect the public interest; (iii) prevent unsound destructive 
competition; (iv) maintain public confidence in the banking and 
insurance systems; (v) protect the interests of depositors, 
creditors and shareholders; and, (vi) promote the reduction and 
elimination of fraud, criminal abuse and unethical conduct by, 
and with respect to, banking, insurance and other financial 
services institutions and their customers.
    Under this legislative mandate, DFS has broad powers to 
regulate activities of financial institutions to ensure they 
operate in safe and sound manner. Financial markets have 
created a number of tools and products, including IntraFi and 
similar networks, that allow depositors to hedge their risks. 
DFS' focus in this respect is to ensure that such tools and 
products are properly licensed (if required) and do not pose a 
threat either to the institution's safety and soundness or to 
the wider financial system.

Q.5. Does your agency provide supervisory exam information 
about troubled banks to a Federal Home Loan Bank? How does your 
agency consider rapidly increasing advances to a financial 
institution from a Federal Home Loan Bank? Is a request for a 
great deal of advances in a short period of time seen as an 
indicator of liquidity risk? Do examiners from your agency ever 
request a FHLBank stop providing advances to a certain 
financial institution?

A.5. DFS and the FHLB do not jointly supervise financial 
institutions and do not share supervisory examination 
information as a matter of course. There are situations where 
the agencies may share supervisory information when necessary 
to fulfill their regulatory mandates. For example, in the case 
of Signature Bank, DFS and the FHLB shared information in order 
to ascertain Signature Bank's financial condition and the level 
of liquidity available to Signature Bank after it experienced a 
run of $18.6 billion of deposits on Friday, March 10th. DFS and 
the FHLB maintain information sharing agreements to facilitate 
the sharing of information when appropriate.
    With respect to collateral held at the FHLB, DFS is not 
involved in the financial institution's process of posting 
collateral with the FHLB or obtaining advances from the FHLB. 
DFS receives information from its regulated entities regarding 
the level of collateral the institution has at the FHLB as part 
of DFS's supervisory oversight of the institution.
    Following the collapse of Signature Bank, DFS instituted 
enhanced supervision of banks with higher risk profiles. DFS 
has been monitoring the liquidity of these institutions on a 
daily basis, which entails frequent engagements with these 
institutions, as well as close coordination with Federal 
counterparts. We continue to work with the FHLB and the FRBNY 
to facilitate the process for accessing liquidity, including 
access to the Federal Reserve's Bank Term Funding Program.

Q.6. Should executive bonuses be placed in escrow if MRIs and 
MRIAs are not addressed by a bank within 60 days?

A.6. The failures of SVB and Signature Bank highlighted the 
need to assess whether the existing authority to claw-back 
executive compensation is adequate in light of the risks these 
executives were willing to take and the lack of diligence they 
have shown in remediating regulatory findings. I look forward 
to working with the New York State legislature and my Federal 
counterparts in developing appropriate tools to explore 
potential policy action and legislative recommendations to 
ensure DFS has additional necessary authority to hold 
executives accountable for critical management failures.

Q.7. Are the three elements regulators must prove to prohibit 
someone from working in the banking sector--misconduct, effect 
and culpability--adequate for today's banking sector? Does 
1818(e)'s focus on discrete acts of wrongdoing leave 
regulators with a lack of clear authority to assess 
responsibility for general mismanagement as opposed to criminal 
activity?

A.7. DFS defers to its Federal counterparts on the adequacy of 
12 U.S.C. 1818(e) to facilitate a comprehensive regulatory 
framework. However, it should be noted that the removal 
authority codified in that section is similar to DFS's 
authority under New York law. DFS is working with the State 
legislature to review and enhance DFS's removal authority. 
Otherwise, DFS does not have the authority to seek civil 
monetary penalties against individuals for violations of the 
Banking Law or regulations. However, DFS has the ability to 
seek penalties against individuals for fraud under Section 408 
of the Financial Services Law. I look forward to working with 
the New York State legislature to explore potential policy 
action and legislative recommendations to ensure DFS has 
additional necessary authority to hold executives accountable 
for critical management failures. \1\
---------------------------------------------------------------------------
     \1\ On May 9, 2023, DFS updated its character and fitness 
requirements through the issuance of a Proposed Guidance on Assessment 
of the Character and Fitness of Directors, Senior Officers, and 
Managers. In the Proposed Guidance, DFS stated that it expects 
regulated institutions to demonstrate robust assessment of the 
character and fitness of key personnel at the time they are onboarded 
and on a regular basis thereafter as part of the regulated 
institutions' control and risk management framework. The Proposed 
Guidance is available at: Industry Letter--May 9, 2023: Proposed 
Guidance on Assessment of the Character and Fitness of Directors, 
Senior Officers, and Managers, Department of Financial Services 
(ny.gov).
---------------------------------------------------------------------------
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                    FROM ADRIENNE A. HARRIS

Q.1. Bank runs are news-driven events and technology has 
increased the velocity that the news causing some of these runs 
can spread. Once depositor confidence is lost, whether due to 
news or social media chatter, the eventual collapse of the bank 
can become inevitable. This raises concerns that the runs on a 
few poorly managed small banks can potentially trigger runs on 
well-managed banks within their respective communities.
    How should policymakers and regulators prepare for bank 
runs that can be triggered at a moment's notice?

A.1. Policymakers and regulators need to assess if the 
regulatory tools currently at their disposal are adequate to 
manage the existing and emerging threats to the financial 
system. The rapid collapse of Signature Bank underscored the 
need to revisit the assumptions used to model and manage 
liquidity risk. In particular, the speed with which Signature's 
depositors initiated withdrawals far outpaced assumptions many 
institutions use to model and assess liquidity risk.
    The mismatch between recent lived experience and defined 
regulatory expectations is apparent when considering recent 
depositor behavior versus the mandated assumptions of the 
liquidity coverage ratio (LCR). The LCR requirement mandates 
that covered institutions always maintain at least 100 percent 
liquidity compared to the total expected cash outflows over a 
30-day period in a stressed scenario. The LCR is calculated 
under the LCR rule, which dictates specific stress assumptions, 
including the percentage of withdrawals and liquidity flight 
that an institution must model, defined by specific categories 
of bank customers. Under the LCR rule, retail deposits are 
classified as ``stable retail deposits''--defined as fully 
insured deposits that are held in a transactional account or 
that the institution has otherwise determined are not likely to 
run during stress, based on the customer's other relationships 
with the institution--and ``other retail deposits''--capturing 
the rest of all retail deposits (including those not fully 
insured). Over a 30-day stress period, the LCR rule requires 
covered institutions to assume a three percent outflow rate for 
stable retail deposits and a 10 percent outflow rate for other 
retail deposits. The rule also prescribes outflow rates for 
subcategories of ``unsecured wholesale funding''. The LCR rule 
requires subject institutions to assume a 5 percent outflow 
rate for fully insured operational deposits not held in an 
escrow account and a 25 percent outflow rate for other 
operational deposits (meaning those that are held in escrow 
accounts or those that are not fully insured).
    The observed behavior of Signature Bank's depositors 
beginning on March 10 did not align with these assumptions, in 
many instances exceeding them. Indeed, Signature's customers 
withdrew their deposits despite existing longstanding 
relationships and despite the fact that some customers also 
held operating accounts at the bank. Although under current 
U.S. rules the LCR requirement applies only to banks with total 
assets of $250 billion or greater, the fact remains that the 
LCR rule's dictated assumptions have not kept pace with 
customer behavior or technological advancements in media and 
mobile banking in the years since its finalization. In light of 
the experience with Signature Bank, regulators should consider 
whether the assumptions used by regulated banks to classify 
their deposits (including which types of deposits may be 
considered ``stable'' and the appropriate conservative assumed 
outflow rates) adequately capture the risk such deposits may 
represent.

Q.2. Are there any levers in place that would placate a wider, 
more systemic bank run?

A.2. The U.S. financial system is resilient and strong. The 
recent banking turmoil has shown that even with the recent bank 
failures, the financial system continues to function well and 
is well positioned to withstand crisis.
    The regulators must remain vigilant and continue to monitor 
and assess financial conditions of their supervised 
institutions by utilizing all the available tools. In light of 
recent market events, DFS has been closely monitoring market 
conditions and institutions with greater concentrations of 
uninsured deposits. For certain institutions, DFS has 
implemented daily liquidity monitoring which entails daily 
reporting of the institution's liquidity position and periodic 
calls to discuss any emerging issues or trends.
    DFS is also collaborating closely with other State and 
Federal regulators to protect consumers, ensure the health of 
the entities we regulate, and preserve the stability of the 
global financial system. In particular, DFS is closely working 
with the FDIC to monitor institutions with concentrations of 
uninsured deposits in an effort to identify any emergent issues 
and ensure that regulators are responding to those issues 
quickly to mitigate their impact on any particular banking 
institution or the broader financial system.
    I am committed to working with the New York State 
legislature and my Federal counterparts to explore potential 
policy actions and legislative recommendations.

Q.3. What actions are your agencies exploring to insulate well-
managed banks and depositors from new or even misinformation-
driven bank runs?

A.3. The recent stresses experienced by a few banking 
institutions is a reminder to all regulators of the need to 
expect the unexpected, not become complacent, and ensure that 
we update our supervisory processes in a way that would enable 
regulators to identify risks and vulnerabilities to the 
financial system in real time, enhance our coordination with 
fellow regulators, and act quickly to address identified risks 
and vulnerabilities.
    To better position DFS and modernize its supervisory 
capabilities, DFS is currently implementing a number of reforms 
to its supervision of banking organizations. In particular, DFS 
identified the following areas for improvement to help it 
better respond to crises:

    Update policies and procedures. Signature's 
        collapse underscores the speed at which the modern 
        financial system moves. Inefficiencies led to delays in 
        issuing examination findings to the Bank. DFS's 
        policies and procedures are being updated to insure 
        that DFS addresses risks at banking organizations in 
        real-time.

    Rebuilding examination capacity. Internal staff 
        constraints limited DFS's ability to staff examinations 
        adequately. While my administration has prioritized 
        hiring since I was appointed to lead DFS in September 
        2021--hiring over 200 people in 2022--DFS still has 
        more work to do to rebuild its examination capacity. A 
        larger pool of examiners and supervisors would help to 
        close the timing gap between the end of examinations 
        and the issuance of Reports of Examination and 
        Supervisory Letters.

    Operational stress testing. Faced with the 
        pressures created by the run on Friday, March 10, 
        Signature Bank struggled to provide timely and accurate 
        information to the Regulators on the key issues of 
        liquidity and outgoing wire requests. DFS is working to 
        pilot a program that will work with banks to conduct 
        table-top exercises demonstrating their operational 
        readiness to collect and produce accurate financial 
        data at a rapid pace and in a stress scenario.

    Escalating regulatory issues. While regulators used 
        available tools to identify risks for Signature Bank, 
        the bank failed to address key concerns fully and in a 
        timely manner at the same time that it was rapidly 
        expanding its business operations. DFS' is setting 
        clearer guidelines for when examiners need to escalate 
        regulatory concerns or instances in which a bank fails 
        to remediate findings in a timely fashion.

    Liquidity risk modeling. The rapid collapse of 
        Signature Bank underscores the need to revisit the 
        assumptions used to model and manage liquidity risk. In 
        particular, both the types of Signature Bank's 
        depositors that ran and the speed at which they 
        initiated withdrawals far outpaced assumptions many 
        institutions use to model and assess liquidity risk. As 
        a broader issue, the assumptions about bank customer 
        behavior codified in the liquidity coverage ratio 
        regulation may need to be reconsidered.
                                ------                                

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                   FROM CLOTHILDE V. HEWLETT

Q.1. Under the U.S. dual banking system, it is important for 
all regulators with jurisdiction over a banking organization to 
work together while overseeing the bank's safety and soundness 
and overall stability of the banking system. Please describe 
the California Department of Financial Protection & 
Innovation's working relationship with the Federal bank and 
credit union regulators and any suggestions you have to enhance 
financial stability throughout the dual banking system.

A.1. The DFPI works closely with its Federal partners to 
supervise its State-chartered banks and credit unions. As you 
know, for banks, the primary Federal regulator is either the 
Federal Reserve or the Federal Deposit Insurance Corporation 
(FDIC). For credit unions, the primary Federal regulator is the 
National Credit Union Administration (NCUA).
    The DFPI performs examinations independently and with 
Federal regulatory agencies. An examination conducted in 
conjunction with a Federal regulatory agency involves each 
agency sharing in the completion of examination functions. 
These functions include scoping, prepping, exam management and 
execution, vetting, and report writing.
    As discussed in the DFPI's May 8 Review of DFPI's Oversight 
and Regulation of Silicon Valley Bank (May Report), California 
State-chartered banks with total assets of less than $10 
billion and a composite CAMELS rating of 1 (Strong) or 2 
(Satisfactory) are examined independently on an alternating 
basis by their State and primary Federal regulator. This is 
referred to as an Alternating Examination Program. If the DFPI 
examines a bank in this category independently one year, the 
primary Federal regulator will examine the bank independently 
the next year. The DFPI and Federal regulator share their 
examination findings and reports with each other. Under the 
Alternating Examination Program, when it is the DFPI's turn to 
examine a bank independently, the DFPI will issue an 
independent report and share it with the Federal regulator. The 
Federal regulator will review and accept the report and not 
issue its own report for that examination cycle. (See May 
Report, pp. 14-15.)
    Banks with a composite CAMELS rating of 3 (Less than 
Satisfactory), 4 (Deficient), or 5 (Critically Deficient) are 
generally examined jointly by Federal and State regulators each 
year and are subject to a visitation at 6-month intervals in 
addition to the annual examination. Such banks are also likely 
to be under orders requiring them to submit quarterly progress 
reports on their remediation efforts. (See May Report, pp. 14-
15.)
    In California, banks with total assets of $10 billion or 
more are supervised under the Department's Large Bank 
Supervision Program in coordination with Federal regulatory 
agencies. Under the DFPI's Large Bank Supervision Program, an 
examination team led by a Dedicated Examiner-in-Charge, Asset 
Manager, and Operations Manager is typically assigned to each 
large bank and a unique supervisory plan is prepared to address 
the risk profile of the individual bank. (See May Report, pp. 
15-16.)
    Currently, the supervisory plan is prepared by the primary 
Federal regulator with input from the Department, and the 
Department then coordinates with the primary Federal regulator 
to execute the supervisory plan. (See May Report, pp. 15-16, 
56.)
    Going forward, the Department will continue to develop 
large bank supervisory plans in coordination with Federal 
regulators for all banks with assets of more than $10 billion, 
and it will increase focus on timelines for corrective actions 
and allocating banking staff examination hours based on the 
risks identified in these supervisory plans. (See May Report, 
pp. 3, 15-16, 56.)
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                   FROM CLOTHILDE V. HEWLETT

Q.1. In the California Department of Financial Protection and 
Innovation (CDFPI) report on the failure of Silicon Valley Bank 
(SVB), it states that the CDFPI did not participate in 38 
percent of SVB's examinations.
    Do you believe that there is sufficient collaboration 
between your agency and the Federal regulators?

A.1. The DFPI has a highly collaborative relationship with 
Federal regulators. However, as discussed in the DFPI's May 8 
Review of DFPI's Oversight and Regulation of Silicon Valley 
Bank (May Report), the DFPI is engaged with its Federal 
regulatory partners to discuss where regulators can make 
improvements to achieve timely remediation of deficiencies by 
supervised institutions. (See May Report, pages 2, 53, 55-56.)
    Going forward, the DFPI will continue completion of large 
bank supervisory plans for all banks with over $10 billion in 
total assets in coordination with Federal regulators. (See May 
Report, pp. 3, 15-16, 53, 56.) These supervisory plans will be 
used to identify risks and prioritize which areas to reallocate 
existing banking staff examination hours and personnel. 
Allocations will be based on bank size, risk, and complexity as 
determined in the supervisory plan. This step will enhance the 
robust discussions during the DFPI's collaborations with the 
primary Federal regulator during the exam cycle planning stage. 
Such plans will allow the DFPI to allocate resources in a way 
that both equips it to be a strong partner to its Federal 
counterparts and allows it to take independent action where 
appropriate, thus maximizing the benefits of the dual 
regulation system. (See May Report, p. 56.)
    To best effectuate this plan, the DFPI will review its 
internal staffing processes to ensure that additional staff is 
assigned in a timely manner for banks with assets above $50 
billion commensurate with accelerated institution growth or 
increased risk profile. (See Id.) The DFPI will make this 
change by reallocating existing resources and will continue to 
evaluate future resource needs through the State budget 
process. (See Id.)

Q.2. Do you have any plans to have an external review of your 
agency's management of California financial institutions and 
the failure of SVB?

A.2. The DFPI provided an internal review of the DFPI's 
supervision and regulation of SVB on May 8, 2023. The DFPI is 
committed to working with this committee and collaborating with 
other regulators on next steps, and the DFPI is open to an 
external review.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                   FROM CLOTHILDE V. HEWLETT

Q.1. Restoring stability to our financial system is important 
so that the banks that are safe, sound, and have been following 
the rules can focus on providing capital for small businesses 
to grow and on serving customers in their communities.
    Problems at Silicon Valley Bank had been identified by 
their regulatory supervisors again and again, over years, but 
they never dropped the hammer to get the bank to actually fix 
their problems.
    How are you all going to make sure that folks are following 
the rules on the books today? And that when your supervisors 
identify banks that aren't, that they actually do something 
about it?

A.1. The DFPI found in its May 8 Review of DFPI's Oversight and 
Regulation of Silicon Valley Bank (May Report) that Silicon 
Valley Bank was slow to remediate regulator-identified 
deficiencies, and regulators did not take adequate steps to 
ensure SVB resolved problems as fast as possible.
    The DFPI will engage with its Federal regulatory partners 
to discuss the speed and effectiveness of the current 
regulatory framework and to identify where regulators can make 
improvements to achieve timely remediation of deficiencies by 
supervised institutions. (See May Report, pp. 2, 53, 55-56.)
    The DFPI will also add additional levels of supervisory 
review to elevate issues identified in examinations and to 
expedite action as appropriate. (See May Report, pp. 3, 53, 
57.)

Q.2. As I have expressed in the Banking Committee, I am 
concerned that the community banks that don't have risky 
portfolios will end up paying the price for these irresponsible 
bank executives.
    Regulators need to address that lack of action, and make 
sure it doesn't happen again.
    But I'm still concerned about the impact on smaller, 
community banks out there that are going to get the screws put 
to them because some of you overreact or focus on the wrong 
folks.
    Are you planning to propose new regulations in response to 
these bank failures? How will you incorporate consideration of 
banks across size and riskiness of business models when 
considering changes?

A.2. At this time, the DFPI has not proposed new regulations in 
response to the recent bank failures. The DFPI will undertake 
the supervisory enhancements set forth in the DFPI's May Report 
using its authority under existing statutes and regulations.
    As set forth, in its May Report, the DFPI will take the 
following steps: (1) coordinate with Federal regulators to 
develop stronger and more effective systems to require banks to 
promptly remediate deficiencies; (2) review supervisory plans 
and staffing processes for large banks with assets above $10 
billion, with focus on banks with assets above $50 billion; (3) 
heightened management of uninsured deposits for large banks; 
(4) add an additional level of supervisory review for exam 
reports prior to issuance in order to elevate issues identified 
in the exam and expedite action as needed; (5) implement 
changes to the DFPI's Early Warning System Module; and (6) 
address existing and emerging risks from technological changes, 
including social media and real-time deposit withdrawals 
through the exam process. (See May Report, pp. 2-3, 53-54, 55-
58.)
    The DFPI shares Senator Tester's concerns regarding 
community banks, and agrees it is important to tailor 
supervision so that enhanced supervision of larger banks does 
not inappropriately burden smaller community banks. DFPI plans 
to implement enhanced supervision efficiently by using DFPI's 
supervisory plans to identify risks and prioritize which areas 
to reallocate existing banking staff examination hours and 
personnel. Allocations will be based on bank size, risk, and 
complexity as determined in the supervisory plan. (See May 
Report, p. 56.)
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
         SENATOR CORTEZ MASTO FROM CLOTHILDE V. HEWLETT

Q.1. Does your agency know the level of uninsured deposits at 
each of your regulated financial institutions currently and 
over time?

A.1. The DFPI knows the level of uninsured deposits for State-
chartered institutions that have total assets over $1 billion, 
as these institutions are required to report the level of 
uninsured deposits on their quarterly Call Reports.

Q.2. Does your agency receive information on uninsured deposit 
levels in real time, or do examiners receive it in periodic 
reports? Do examiners and researchers map it over real time to 
assess changes?

A.2. The DPFI does not ordinarily receive real time information 
on the uninsured deposit levels of State-chartered 
institutions. The DFPI receives uninsured deposit levels for 
banks with over $1 billion in total assets through the filing 
of quarterly Call Reports. Examiners evaluate the level and 
trend of all aspects of liquidity and funding sources including 
uninsured deposits.

Q.3. If uninsured deposit information arrives in periodic Call 
Reports, how often do examiners receive those reports? Is that 
timing adequate?

A.3. The DFPI receives quarterly Call Reports with uninsured 
deposit information and reviews each quarterly report. As 
stated in the DFPI's May 8 Review of DFPI's Oversight and 
Regulation of Silicon Valley Bank (May Report) the DFPI will be 
reevaluating its offsite monitoring processes and will consider 
changes to the metrics the DFPI monitors, including but not 
limited to uninsured deposit levels. (See May Report, pp. 54-
58.)

Q.4. Can your agency require a financial institution use a 
system like IntraFi Network to transfer some large accounts to 
other financial institutions to provide a bank or credit union 
customers with deposit insurance and protect customers' funds?

A.4. Many of the DFPI's licensees do use such networks to 
insure larger deposits. However, the DFPI does not require 
State-charted institutions to use such networks, nor is there 
any law or regulation requiring them to do so. It might be 
possible for the DFPI to require the use of a system like 
IntraFi as part of a consent order if the condition of the 
institution warranted it. However, there is usually a cost to 
the depositor, and the depositor must agree to participate in 
the program.

Q.5. Does your agency provide supervisory exam information 
about troubled banks to a Federal Home Loan Bank? How does your 
agency consider rapidly increasing advances to a financial 
institution from a Federal Home Loan Bank? Is a request for a 
great deal of advances in a short period of time seen as an 
indicator of liquidity risk? Do examiners from your agency ever 
request a FHLBank stop providing advances to a certain 
financial institution?

A.5. The DFPI does have an information sharing agreement with 
the FHLB to share confidential exam information regarding 
troubled institutions, and the DFPI provides such information 
quarterly. The level and trend of an institution's use of FHLB 
advances, as well as any other funding source, are evaluated 
during the examination review process for liquidity. A 
significant change in reliance on any funding source could be 
considered a red flag and thus subject to regulatory scrutiny. 
The DFPI has not requested the FHLB to stop funding advances to 
certain financial institutions.

Q.6. Should executive bonuses be placed in escrow if MRIs [sic] 
and MRIAs are not addressed by a bank within 60 days?

A.6. The DFPI believes it is important that State-charted 
financial institutions are monitored properly and that 
executives are held accountable. At this juncture, the DFPI 
does not have a position on whether executive bonuses should be 
placed in escrow if MRAs and MRIAs are not addressed by a bank 
within 60 days. The DFPI believes that while State-chartered 
financial institutions should take significant steps towards 
addressing MRAs and MRIAs in the first 60 days, MRAs and MRIAs 
are used to identify risks of various sources and complexities 
that may require different timelines to achieve full 
remediation.

Q.7. Are the three elements regulators must prove to prohibit 
someone from working in the banking sector--misconduct, effect 
and culpability--adequate for today's banking sector? Does 
1818(e)'s focus on discrete acts of wrongdoing leave 
regulators with a lack of clear authority to assess 
responsibility for general mismanagement as opposed to criminal 
activity?

A.7. As the California State financial regulator, The DFPI 
administers provisions similar to 12 U.S.C. section 1818, 
subdivision (e) through California Financial Code sections 585 
through 589. These sections provide the DFPI with the authority 
to remove a subject person (similar to an ``institution-
affiliated party'') from a subject institution or holding 
company, and to bar that person from working at any State-
chartered financial institution, including an affiliate, 
subsidiary, or holding company. California law does include 
authority to assess responsibility for general mismanagement of 
a financial institution, including responsibility for engaging 
or participating in any unsafe or unsound act with respect to 
the business of the subject institution. Enforcement actions 
are not dependent on finding criminal activity on the part of 
officers and directors.
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                   FROM CLOTHILDE V. HEWLETT

Q.1. Bank runs are news-driven events and technology has 
increased the velocity that the news causing some of these runs 
can spread. Once depositor confidence is lost, whether due to 
news or social media chatter, the eventual collapse of the bank 
can become inevitable. This raises concerns that the runs on a 
few poorly managed small banks can potentially trigger runs on 
well-managed banks within their respective communities.
    How should policymakers and regulators prepare for bank 
runs that can be triggered at a moment's notice?

A.1. The DFPI shares Senator Warnock's concern regarding how 
technology has increased the velocity of bank runs. As the DFPI 
concluded in its May 8 Review of DFPI's Oversight and 
Regulation of Silicon Valley Bank (May Report), ``While 
underlying factors inside the bank, including the high level of 
uninsured deposits largely concentrated in one industry, made 
SVB susceptible to a bank run, both social media and digital 
banking technology played a role in increasing the 
unprecedented volume and accelerating speed of the deposit 
outflows experienced by SVB.'' (May Report, p. 46.)
    As the DFPI discussed in its May Report, the DFPI plans to 
require banks to consider their susceptibility to real-time 
deposit withdrawals and reputational risk posed by viral social 
media posts or from short sellers in publicly traded scenarios. 
(See May Report, pp. 3, 54, 58.)
    DFPI examiners will discuss with bank management what kind 
of social media monitoring a bank is conducting and how the 
bank intends to confront reputational and public relations 
concerns in the digital age. (See May Report, p. 58.)
    Banks must consider how they evaluate and quantify their 
reputational risks and whether it is appropriate to hold more 
liquidity or capital to mitigate potential risk. This analysis 
will be included in the bank's risk assessment and will be 
considered in the evaluation of the management component. (See 
Id.)
    Expectations around this assessment should be commensurate 
with the size and complexity of the bank. The DFPI will also 
conduct additional training to ensure its examiners remain 
aware of and informed about these risks. (See Id.)

Q.2. Are there any levers in place that would placate a wider, 
more systemic bank run?

A.2. The DFPI supports the efforts of its Federal partners such 
as the FDIC and the Federal Reserve to explore changes to 
promote financial stability and reduce the risk of future bank 
runs, and is willing to work in a coordinated manner with our 
Federal partners. As the DFPI discussed in its May Report, 
DFPI-chartered banks must consider their susceptibility to 
real-time deposit withdrawals and reputational risk posed by 
viral social media posts or from short sellers in publicly 
traded scenarios. (See May Report, pp. 3, 54, 58.)

Q.3. What actions are your agencies exploring to insulate well-
managed banks and depositors from new or even misinformation-
driven bank runs?

A.3. As discussed in response to Question 1 above, through the 
supervisory process, the DFPI will require banks to consider 
how to quantify and best manage existing and emerging risks 
posed by technology-enabled activities such as social media and 
real-time deposit withdrawals. Banks will be required to 
consider how to confront the reputational risk posed by viral 
social media posts or from short sellers in publicly traded 
scenarios. (See May Report, pp. 3, 54, 58.)
    The DFPI will continue to engage with policymakers and 
thought leaders to explore strategies to confront these 
challenges.
              Additional Material Supplied for the Record
                       LETTER SUBMITTED BY NAFCU
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                       LETTER SUBMITTED BY CDFPI
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

``EXECUTIVE PAY AT SILICON VALLEY BANK SOARED AFTER BIG BET ON RISKIER 
                    ASSETS'', FINANCIAL TIMES, LTD.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

  ``SILICON VALLEY BANK EXECS ENJOYED GENEROUS COMPENSATION IN RECENT 
YEARS, WITH CEO AND CFO PACKAGES UP 30 PERCENT FROM 2018'', MARKETWATCH
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
```