U.S. GOVERNMENT PUBLISHING OFFICE

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S. HRG. 118–444 

STRENGTHENING ACCOUNTABILITY AT THE 

FEDERAL RESERVE: LESSONS AND OPPORTUNITIES FOR REFORM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED EIGHTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING LESSONS AND OPPORTUNITIES FOR FEDERAL RESERVE 

REFORM 

MAY 17, 2023 

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

( 

Available at: https://www.govinfo.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

SHERROD BROWN, Ohio, Chair 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

TINA SMITH, Minnesota 

KYRSTEN SINEMA, Arizona 

RAPHAEL G.WARNOCK, Georgia 

JOHN FETTERMAN, Pennsylvania 

TIM SCOTT, South Carolina 

MIKE CRAPO, Idaho 

MIKE ROUNDS, South Dakota 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

BILL HAGERTY, Tennessee 

CYNTHIA M. LUMMIS, Wyoming 

J.D. VANCE, Ohio 

KATIE BOYD BRITT, Alabama 

KEVIN CRAMER, North Dakota 

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 

SUBCOMMITTEE ON ECONOMIC POLICY

ELIZABETH WARREN, Massachusetts, Chair 

JOHN KENNEDY, Louisiana, Ranking Member 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

CHRIS VAN HOLLEN, Maryland 

TINA SMITH, Minnesota 

JOHN FETTERMAN, Pennsylvania 

MIKE ROUNDS, South Dakota 

THOM TILLIS, North Carolina 

CYNTHIA M. LUMMIS, Wyoming 

STEVE DAINES, Montana 

GABRIELLE ELUL, Subcommittee Staff Director 

JENNIFER NEWMAN, Republican Subcommittee Staff Director 

(II)
C O N T E N T S 

WEDNESDAY, MAY 17, 2023 

Page 

Opening statement of Chair Warren ...................................................................... 1 

Prepared statement .......................................................................................... 31 

WITNESSES 

Mark Bialek, Inspector General, Board of Governors of the Federal Reserve 

System and the Consumer Financial Protection Bureau .................................. 3 

Prepared statement .......................................................................................... 32 

Responses to written questions of: 

Senator Rounds ......................................................................................... 86 

Peter Conti-Brown, Class of 1965 Associate Professor of Financial Regulation, 

Associate Professor of Legal Studies and Business Ethics, The Wharton 

School of the University of Pennsylvania .......................................................... 17 

Prepared statement .......................................................................................... 38 

Responses to written questions of: 

Senator Kennedy ....................................................................................... 86 

Paul H. Kupiec, Senior Fellow, American Enterprise Institute .......................... 19 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Senator Kennedy ....................................................................................... 87 

Mayra Rodrı ́guez Valladares, Managing Principal, MRV Associates .................. 21 

Prepared statement .......................................................................................... 59 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by Dennis M. Kelleher, President and CEO of Better 

Markets, Inc. ........................................................................................................ 90 

(III)

(1) 

STRENGTHENING ACCOUNTABILITY AT THE 

FEDERAL RESERVE: LESSONS AND OPPORTUNITIES FOR REFORM 

WEDNESDAY, MAY 17, 2023 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

SUBCOMMITTEE ON ECONOMIC POLICY, 

Washington, DC. 

The Subcommittee met at 2:30 p.m., in room 538, Dirksen Senate 

Office Building, Hon. Elizabeth Warren, Chair of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIR ELIZABETH WARREN 

Chair WARREN. Welcome to the hearing of the Senate Banking, 

Housing, and Urban Affairs Subcommittee on Economic Policy. 

The rapid collapse of three banks—Silicon Valley Bank, Signature Bank, and First Republic Bank—was a shock. These three 

bank failures together put more assets at risk than the 25 bank 

failures in the 2008 crash. 

Silicon Valley Bank’s failure was another symptom in what has 

become a predictable string of failures in the governance of the 

Federal Reserve. SVB’s collapse and the other bank failures it triggered forced the FDIC, the Treasury Department, and other regulators to rush to the rescue to avoid implosion of our banking system. So far, the FDIC Insurance Fund has suffered billions of dollars of losses, and, as a result of the bailouts, America’s biggest toobig-to-fail bank just got $200 billion bigger. 

The failure of those banks was a first-order management disaster. Same old story: the executives took too much risk, got too 

greedy, and blew up their banks. Those executives need to be held 

accountable, and I am working on bipartisan legislation to claw 

back money when executives take big bonuses for blowing up their 

banks. 

But look deeper. The implosion of all three banks is rooted in the 

failure of those banks’ regulators and supervisors, most notably, 

the Federal Reserve. The Fed’s own report on the SVB failure identified problems high and low, finding that as SVB got bigger and 

bigger, the Fed’s Board of Governors, under the direct leadership 

of Jerome Powell, weakened banking regulations. This is exactly 

the kind of deregulatory shift I warned about in 2018, when I opposed Powell’s nomination as Fed Chair and again in 2021, when 

I said that he was a dangerous man to keep at the Fed. 
2 

Notably, the Fed’s report also laid blame at the feet of Congress 

for passing legislation to weaken bank rules, an agenda that Chair 

Powell eagerly endorsed. 

The Fed’s report also found that bank examiners at the San 

Francisco Fed, which was SVB’s regulator on the ground, followed 

orders from the Fed and backed off, allowing SVB’s executives to 

pile on more and more risk. Now the San Francisco Fed and the 

Board of Governors are pointing fingers at each other, playing a 

pathetic game of ‘‘not it’’ while they each try to deny accountability. 

The Fed is independent within the Government and needs to 

maintain that independence when it comes to doing its primary job 

of setting interest rates. Independence should not be conflated, 

however, with a total lack of accountability when the Fed and its 

leadership make serious mistakes. Unfortunately, the Fed has 

faced little accountability. In recent years, a growing list of scandals has tarnished the Fed’s reputation and its credibility. 

In 2021, high-level Fed officials were embroiled in a scandal involving stock and other financial trades made even as the Fed took 

extraordinary action to right the economy during the COVID pandemic. The Fed responded with a sham investigation by the Fed’s 

own inspector general, an official hired and fired by the Fed itself. 

This investigation failed to look into key aspects of the scandal. 

Even when the Fed IG found that there was improper trading in 

Chair Powell’s accounts, it imposed no consequences. 

And when Congress tried to get information from the Fed Board 

and from the regional Reserve Banks on the scope of this scandal 

and the response, we got the cold shoulder. The Fed simply refused 

to turn over key documents and information to Congress and 

stopped any outside investigation in its tracks. 

That is not all. Reports have surfaced about Fed leadership giving secret speeches and sensitive information to bankers and bankers’ wealthy clients. We learned that—unbelievably—the President 

of SVB sat on the Board of the San Francisco Fed up until the day 

the bank failed. 

The culture of corruption at the Fed has already undermined the 

Fed’s credibility with the American public, and the hearing today 

will discuss proposals that would make the Fed more transparent 

and accountable in order to help restore some of that credibility. 

I have got an idea, a bipartisan idea that I am introducing with 

Senator Rick Scott today: get the big bankers off the Federal Reserve boards of directors. 

And there is more. Senator Scott and I also introduced a bill, 

which was included in a separate bill with Senator Tillis, to give 

the Fed a true, Senate-confirmed independent inspector general to 

serve as an agency watchdog. 

Mark Bialek, the current Fed IG, is here today. Mr. Bialek, I appreciate your joining us, because I know you have a busy schedule. 

And I want you to know that my concern about your current role 

is not personal. My concern is institutional. You were chosen by 

then-Fed Chairman Ben Bernanke in 2011, and you serve today at 

the discretion of Chair Powell and the board. In other words, you 

are supposed to be the watchdog of exactly the people who hired 

you and who have the power to fire you. That dynamic tends to create watchdogs that do not bark. 
3 

At best, you are in an impossible, compromised position when it 

comes to investigating wrongdoing at the Fed. To restore public 

confidence in the Fed, we need a strong, Senate-confirmed inspector general to conduct rigorous, independent oversight. 

I appreciate your joining us today, and I look forward to discussing these and other matters. 

So we are now ready for your opening statement, Mr. Bialek. 

STATEMENT OF MARK BIALEK, INSPECTOR GENERAL, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND 

THE CONSUMER FINANCIAL PROTECTION BUREAU 

Mr. BIALEK. Thank you and good afternoon, Chair Warren, Senator Scott, Members of the Subcommittee. I am Mark Bialek, the 

Inspector General of the Federal Reserve Board and the Consumer 

Financial Protection Bureau. I very much appreciate the opportunity to be here today to discuss oversight and accountability for 

the board. 

In response to the disclosure of questionable trades by board and 

Federal Reserve bank officials, our office did initiate separate investigations of these officials as well as an evaluation of the board’s 

new trading rules that were put into place. We expanded our investigation of board officials to include Chair Powell’s trading activities, based on public reporting. 

As soon as it was closed last summer, we released our investigative findings regarding the trades of board officials, including Chair 

Powell. However, we did not release the details of our investigative 

steps and techniques because we must protect the integrity of our 

other ongoing and closely related ethnics investigations of senior 

Federal Reserve bank officials. 

I understand there is criticism about the independence and thoroughness of our ethics investigation of senior board officials, given 

the limited information that we disclosed. But I want to emphasize 

that we independently and thoroughly investigated this matter. We 

pursued the facts wherever and to whomever they led. We did not 

just take people’s word for what was told to us about the activities. 

Rather, we thoroughly reviewed relevant records, including over 3 

million emails, financial disclosure reports, trading data, brokerage 

statements, for all of the relevant trading activities. We also consulted with OGE, the Office of Government Ethics, which is the 

Federal Government expert on Government ethics. 

All of this factored into our findings and our recommendations 

that we released, and I stand by our work. Once we conclude our 

investigation of Federal Reserve bank officials I am confident that 

we will be in a position to provide a detailed explanation behind 

the determination of our investigative results. 

To reform Federal Reserve oversight, legislation has been proposed to convert our office, as you mentioned, to a presidentially 

appointed and Senate-confirmed position. This is ultimately, of 

course, a matter for Congress to decide. I just want to emphasize 

that under our current structure we have the same authorities as 

other IGs to audit and investigate without interference from our 

agency head. We have unfettered access to all agency records and 

documents, subpoena authority, law enforcement powers such as 

executing search and arrest warrants, and the ability to hire our 
4 

own staff and control our own resources. We have the same reporting mechanisms at our disposal if attempts are made to resist or 

object to our oversight activities or to significantly delay our access 

to information. 

In conclusion, we exercise our independence most directly in how 

we perform our work. Determinations on audits and evaluations 

and investigations we conduct are made by us alone. No board 

Chair has resisted or objected to our oversight work since I have 

been the IG. If that were to happen, I would not hesitate to report 

that to Congress. 

The breadth and impact of our work is solely attributable to the 

OIG staff, who dedicate themselves to doing the hard work of developing independent findings and recommendations to ensure that 

the board is held accountable and operates effectively. I am so very 

proud and thankful for the work they do every day. 

Congress is a key stakeholder for us, and of course we always 

welcome your feedback on risk areas that you see facing the board 

or the CFPB. 

This concludes my statement, and I would be pleased to respond 

to any of your questions. 

Chair WARREN. Thank you. Senator Lummis. 

Senator LUMMIS. Thank you, Madam Chair. This year we have 

seen the collapse of America’s 14th-largest bank, First Republic, 

and the 16th-largest bank, Silicon Valley Bank. These collapses 

have been due to failure by bank executives to manage the risks 

of their institutions. We have also seen regulators fail to effectively 

supervise each institution and fail to escalate concerns until they 

are resolved. 

I am proud to cosponsor the Financial Regulators Transparency 

Act with Chair Warren and Senators Rounds and Tillis on this 

Subcommittee. It will be bring much-needed reforms to strengthen 

accountability of the Federal Reserve. For example, regional Federal Reserve banks would be subject of the Freedom of Information 

Act, an essential tool for Government accountability, and I think 

this is tremendously important to the public as well as to Members 

of Congress. It has been a true source of frustration for us that our 

letters requesting information go unaddressed and unanswered. 

Mr. Bialek, the Fed’s OIG is required to complete a review of the 

agency’s supervision of a failed institution when there is a material 

projected loss to the Deposit Insurance Fund. So when can we expect a report on recent bank failures? 

Mr. BIALEK. Thank you for the question, Senator. We opened up 

a review of SVB. Of the three banks that you mentioned, that is 

the only one that is supervised and regulated by the Fed. The other 

two are supervised and regulated by the FDIC. So as it relates to 

SVB, once we heard about the condition it was in and the likely 

failure at the time, back in mid-March, we opened up a review, anticipating that there would be a failure declared, which it was last 

Friday, and the amount, and that turns into the Material Loss Review then that you mentioned. 

But because we got a jump-start on it in March, we are now projecting and promising to complete this review by September of this 

year. We are doing a deep dive into all of the issues that have been 

bandied about, in the media and elsewhere in hearings, about the 
5 

issues, the likeliest root causes of the failure, the supervisory actions or inactions that also led to this condition that we find ourselves in. 

So we are in the midst of that review right now. 

Senator LUMMIS. Thank you. You have already answered my 

next couple of questions, so I appreciate it very much. 

There are 51 open recommendations that the OIG has made to 

the Board of Governors. A dozen have been open for more than 5 

years, and one stretches back to 2016, meaning the Fed has had 

years to address concerns your office has identified and has not 

taken action. 

So I doubt the Federal supervision staff would be happy about 

a member institution that has an unaddressed MRA or MRIA from 

2016. Has the Fed board committed to closing all open issues? 

Mr. BIALEK. Well, let’s make sure we are talking about the same 

thing. In terms of our open recommendations, if you were referring 

to the IG’s open recommendations, that is something that we have 

ongoing discussions with the responsible officials at the Fed to assure ourselves that they are taking action in a timely way to address those types of recommendations. 

Many of them, and I think the oldest of the ones you are referring to, Senator, they are interagency rules, and so they have to 

get the consent, the agreement of other agencies in order to implement, but have informed us that they are going about that process 

and are themselves ready to commit. 

If you are talking about recommendations of the supervisors 

about banks, that is a different issue. 

Senator LUMMIS. I am also interested in the open issues that are 

nonpublic. So could any of those nonpublic open issues have contributed to the Fed’s failures in supervising SVB? 

Mr. BIALEK. I do not believe so. What I believe is that our nonpublic open recommendations deal typically with IT security, sensitive access IT, cybersecurity related matters, and that is why 

they are not public, not kind of supervisory recommendations that 

relate to SVB. 

Senator LUMMIS. In 2021, your office found that the Fed had not 

established an effective enterprise risk management governance 

structure and that a majority of members of the Senior Officer 

Committee disagreed that there were clear lines of responsibility 

and authority for risk management within the Fed. And I will have 

you answer this question later because we have got a number of 

people that want to ask questions, and I need to go vote. 

The question is, where is the Fed on implementing its own effective risk management program? You can choose to answer now, or 

I can follow up with you later. 

Mr. BIALEK. I would be happy to follow up with you later. 

Senator LUMMIS. Perfect. Thank you very much. Madam Chairman, I yield back. Thank you so much. 

Chair WARREN. Thank you, Senator Lummis. Senator Scott. 

Senator SCOTT. Thank you, and thank you for the opportunity to 

be here, and Mr. Bialek, thank you for being here. 

What year did you start at the Fed? 

Mr. BIALEK. In 2011. 
6 

Senator SCOTT. All right. Between ’08, ’09, and ’10, how many 

bank failures were there in the country? Do you know? 

Mr. BIALEK. Between—— 

Senator SCOTT. Between 2008, 2009—— 

Mr. BIALEK. Oh, before I got there? I cannot give you an exact 

number, sir. 

Senator SCOTT. Once you got there, would you agree that if there 

is a bank failure that the Federal Reserve probably has some responsibility? 

Mr. BIALEK. If it is a bank that they supervise or regulate? Sure. 

Senator SCOTT. So in 2008, 2009, 2010, there were banks that 

the Federal Reserve was responsible for that failed, right? 

Mr. BIALEK. Yes. 

Senator SCOTT. So since you have been there, have you done any 

review of why those banks failed and any failures of the Federal 

Reserve? 

Mr. BIALEK. My predecessor would have done those at the time. 

Senator SCOTT. But you have not done any since you got there. 

Mr. BIALEK. We have done, but I think there was one MLR a 

bunch of years ago, but nothing significant and nothing recent. 

Senator SCOTT. How many banks that the Federal Reserve was 

responsible for have failed since you have been there? 

Mr. BIALEK. I am sorry. How many—— 

Senator SCOTT. How many banks have failed since you have been 

there? 

Mr. BIALEK. Less than a handful, I think. 

Senator SCOTT. OK. So let’s say 6. Do you think that is the right 

number? 

Mr. BIALEK. That would be a guess. I really want to look into it 

and get you an exact number. I do not want to mislead the Committee. 

Senator SCOTT. So let’s say it is 6. How many reports have you 

done that anybody was fired because they failed to do their job? 

Mr. BIALEK. I cannot answer that question. 

Senator SCOTT. Does that mean none? 

Mr. BIALEK. I cannot answer. I do not know. 

Senator SCOTT. Do you know of any? 

Mr. BIALEK. I am not aware of any, no. 

Senator SCOTT. OK. So as far as you know, of bank failures, of 

any reports that you have been done, no one has been fired. 

Mr. BIALEK. None that I have heard of. 

Senator SCOTT. OK. So with regard to the stock disclosure, that 

there was an accusation of insider trading, you have done some reports, but you have not released that publicly yet, right, all of it? 

Mr. BIALEK. Correct. 

Senator SCOTT. Has anyone been fired? 

Mr. BIALEK. There are two matters that we have closed out. 

There are three matters that are still open, ongoing investigations. 

Senator SCOTT. Was anybody fired? 

Mr. BIALEK. Not that I am aware of. I do not know. I would not 

necessarily know. 

Senator SCOTT. OK. So why would you not know? 

Mr. BIALEK. Well, we provide our work and issue our reports, 

and—— 
7 

Senator SCOTT. You do not follow up? 

Mr. BIALEK. ——the two reports that we issue, or the one report 

that we issued on the two investigations that we closed out did not 

have findings of wrongdoing, so I would not expect there to be the 

kinds of actions that you are referring to. 

Senator SCOTT. OK. All right. I have been up here 4 years. For 

the first time since I have been up here, with that unsolicited, a 

Federal employee wrote me a letter, Senator Warren and me a letter, saying he just liked our idea of having a presidential-appointed 

inspector general. All right. So first off, that surprised me. So first, 

did you tell Chairman Powell that you were doing this? 

Mr. BIALEK. No, I did not. 

Senator SCOTT. Did he say anything to you after you did it? 

Mr. BIALEK. No, he did not. 

Senator SCOTT. Did you talk to anybody at the Federal Reserve, 

or you just did it completely on your own? 

Mr. BIALEK. I did. 

Senator SCOTT. OK. So you believe that you can adequately do 

your job when you report to the same people you are supposed to 

review. 

Mr. BIALEK. Senator, as you may know, the concept of DFEIG, 

Designated Federal Entity IG, of which I am one—there are about 

30—almost half of the IG community are IGs appointed by their 

agency heads. The others are the PAS, presidential appointees, 

subject to Senate confirmation. There are differences of view within 

the oversight community about whether the mere appointment authority of a DFEIG provides some question about their independence because the person—— 

Senator SCOTT. I mean, if Chairman Powell can fire you, you are 

going to go—let me ask you a question. Have you done a review 

of any member of the Federal Reserve board and ever said anybody 

on the Federal Reserve board, anybody, has ever done anything 

wrong? 

Mr. BIALEK. We have investigations going on all the time where 

we find wrongdoing. And if I can, Senator, we lined up deciding to 

do our investigations completely on our own, without any input 

from anybody. Nobody has attempted to try to prevent us from 

doing any of our investigations. And the fact that the IG here, 

along with all of the other DFEIGs, can be removed by their agency 

head is a part of the fabric of the community. Here, at the Federal 

Reserve, there is an additional protection, if you will, if you believe 

this a protection, that it is not the Federal Reserve board Chair 

who can remove the IG. It has got to be based on a vote of twothirds, a super-majority, of the entire board. 

Senator SCOTT. Can I ask you a question? Since you have been 

there, how many times has the Chairman of the Federal Reserve 

proposed something at a board meeting and it did not happen? 

Mr. BIALEK. I cannot answer that. 

Senator SCOTT. Yeah, probably not. Can I ask one more question? 

Chair WARREN. Sure. Of course. 

Senator SCOTT. So you suggested in there that you make $350,000 a year, and you suggested if we went back to the pay 

scale for the president-appointed inspectors general we would not 
8 

get competent people. That is what you said in your letter. So does 

that mean that the inspectors general that we have that are presidentially appointed, you do not think we are getting the competent 

people to do the job? 

Mr. BIALEK. What I was referring to, Senator, in that letter was 

simply that the future, the eventual IG, should this position be converted into a PASIG, would be making significantly less than the 

current arrangement is, and that puts them at a certain comparison, vis-a-vis the rest of the Federal Reserve board executive leadership, which the statute, the IG Act, set up as the appropriate pay 

scale for DFEIGs. 

Senator SCOTT. So if we get this legislation passed, and the pay 

scale goes down to a little over $200,000, will you quit? 

Mr. BIALEK. I honestly have not made that choice or decision. I 

have not thought about it. 

Senator SCOTT. OK. But just let me finish. So think about it. 

There are 23,000 people, I think, that work at the Federal Reserve. 

There is not a report that you have done, since 2011, that you 

know of any person that has been fired. There is nobody at the 

Federal Reserve on the board that has ever done anything wrong. 

We do not have any good information on what happened on the 

stock trades. And you think that we should be happy that we do 

not have an independent, presidentially appointed inspector general. I mean, this does not make any sense, and this has got a balance sheet of $8.6 trillion, and in the last 12 months the Federal 

Reserve has lost $500 billion. 

I mean, name another agency that has that big a balance sheet 

in the Federal Government? 

Mr. BIALEK. If I can clarify something, Senator. You were asking 

about what happens as a result of our audits and evaluations and 

bank failures. That is what I said I could not cite for you numbers 

of folks who have been fired. I did also say we conduct investigations all the time, and there have been people fired as a result of 

our investigations. That is a separate workload for us. 

Senator SCOTT. Can you get me a report? I have not found one 

person, if you go back to the 2008 financial crisis, and you go 

through what has happened this year, I have never heard of one 

person, one person at the Federal Reserve, that lost their job. 

Clearly these banks did the wrong thing, but somebody at the Federal Reserve that was responsible for these banks, for supervision, 

clearly did it wrong. And guess who pays for it? The average person in America pays for all this. 

These bailouts are ridiculous, and we have been doing it for decades, and it should stop. 

Thank you. 

Chair WARREN. Thank you, Senator Scott. 

So I recognize myself now for the first round of questions, and 

I want to say thank you for being here, Mr. Bialek. I appreciate 

you being here. 

The Fed touches the lives of nearly every family in America, from 

influencing whether or not they can afford to buy a home, keep a 

job, afford the interest rate on their credit cards, and know that the 

money in their checking accounts is safe. 
9 

The Office of the Inspector General is essential to making sure 

that the Federal Reserve does its job with integrity. So the mission 

of the IG is to provide independent oversight of the activities of the 

Federal Reserve Chair and the board, including by, quote, ‘‘conducting audits, investigations, and other reviews.’’ 

So let’s just set it up on the record here. We have talked some 

about it. Mr. Bialek, who appointed you as Fed IG? 

Mr. BIALEK. Former Chairman Bernanke. 

Chair WARREN. OK. And who has the power to fire you? 

Mr. BIALEK. A two-thirds vote of the present Board of Governors. 

Chair WARREN. So it is the Board of Governors and the Fed 

Chair, right, together? 

Mr. BIALEK. He is part of the board. 

Chair WARREN. OK. So your job is to conduct independent oversight of the Federal Reserve board, exactly the board that has the 

power to hire and fire you. 

Mr. BIALEK. As is the case with all DFEIGs. 

Chair WARREN. Well, but that is yours. 

You know, I noticed earlier that you said no one has ever tried 

to interfere with any of your investigations, but has there ever 

been a single day that you woke up not remembering who has the 

power to fire you? 

Mr. BIALEK. I do not think about that. 

Chair WARREN. Yeah, I am sure you do not. 

You know, the inspectors general at nearly all of the Cabinetlevel agencies have a very different IG structure. Those IGs are 

nominated by the President and confirmed by the Senate, precisely 

so that they retain independence from the agency that they are obligated to oversee. They are not hired and fired by the head of the 

agency and a board within the agency. And that is why, 20 years 

ago, the Government Accountability Office specifically recommended that Congress make the Fed IG a Senate-confirmed position. 

Now I think it is long past time that Congress finally acts, and 

I have bipartisan legislation with Senator Scott to do that. This 

language is also included in a bill that I lead with Senator Tillis 

and Senator Lummis. 

But Mr. Bialek, you stated in a letter that you sent to Senator 

Scott and me a few weeks ago that you oppose this legislation, and 

in it you raised concerns that Senator Scott just highlighted as 

well, that if the IG’s Office becomes a Senate-confirmed position 

there will be, and I quote, ‘‘difficulty in attracting quality candidates for the position,’’ because, among other things, the salary 

would have to follow the executive pay scale for all those other 

Cabinet-level IGs, which would be about $200,000. 

So just so we get it on the record, how much is your salary, Mr. 

Bialek? 

Mr. BIALEK. It is an average of the current division directors and 

other executives in the agency—— 

Chair WARREN. I just need a dollar figure. 

Mr. BIALEK. ——their salary and bonus, and that comes out to $377,800-and-some-odd dollars. 

Chair WARREN. OK. So about $378,000 annually. You realize 

that makes you the highest paid employee at the Fed, and, in fact, 
10 

one of the highest paid officials in the entire Federal Government. 

And I understand why you would not want to give that up. You 

know, this is a pretty cushy gig. You get paid a lot of money for 

it. But I do not believe that your self-interest should outweigh the 

importance of good governance and independent governance at the 

Fed. 

There has been one scandal after another at the Fed for the last 

2 years, and these are a great example of why the Fed needs an 

independent watchdog to keep an eye on the agency. We need to 

fix the Fed inspector general to make sure that the office is truly 

independent and can do its job. 

Senator Kennedy. 

Senator KENNEDY. Thank you, Madam Chair. General, welcome. 

Help me. I tried to listen carefully to my colleagues, but I am 

still a little bit confused. You have been IG since 2011, and you do 

a lot of internal investigations. In other words, did some particular 

employee at the Fed not do their job. Is that correct? 

Mr. BIALEK. Yes. 

Senator KENNEDY. About how many of those do you think you 

have done? 

Mr. BIALEK. Well, in terms of investigations of potential misconduct or wrongdoing we have typically had a running average of 

about 60 or 70 of those. Obviously, the pandemic—— 

Senator KENNEDY. Is that total—60 or 70 a year? 

Mr. BIALEK. No. At any point in time. 

Senator KENNEDY. OK. 

Mr. BIALEK. Many of them are closed. New ones come in through 

our hotline, which we open up. But that is typically a rough gauge 

for how many investigations we have pending. 

Senator KENNEDY. So since you have been there, in 2011—again, 

I am talking internal investigations—would 500 sound right? 

Mr. BIALEK. I would have to look into it. I do not want to give 

you a number that is inaccurate. 

Senator KENNEDY. Oh no. I am not going to hold you to it. Is it 

more? Do you think it is more than 500? 

Mr. BIALEK. I would like to look into it and get you an exact 

number. 

Senator KENNEDY. OK. And what percentage of the cases, just 

ballpark, do you find wrongdoing? 

Mr. BIALEK. Again, it would be a wild guess, and I am not comfortable giving one to you, but we can certainly look into that and 

develop those numbers for you. 

Senator KENNEDY. Frankly, I would have thought you would 

have that before you came today. Do you think it is more than 

half? 

Mr. BIALEK. No, I would not think so. 

Senator KENNEDY. More than a quarter? 

Mr. BIALEK. That is where I am uncomfortable—— 

Senator KENNEDY. Well, does it happen frequently that you find 

wrongdoing, or infrequently? 

Mr. BIALEK. It is not infrequent. 

Senator KENNEDY. It is not infrequent? 

Mr. BIALEK. Mm-hmm. 
11 

Senator KENNEDY. OK. Fine. And when you find wrongdoing, are 

the people who committed the wrongdoing, according to your report, fired? 

Mr. BIALEK. Sometimes. 

Senator KENNEDY. OK. What percentage are fired? 

Mr. BIALEK. Again, sir, I would like to get you a specific number, 

if that is what you would like. 

Senator KENNEDY. Yeah. I think if you could get us that number, 

and perhaps we can do this again. Because I think people have the 

right to know that. I mean, I do not want to pick on the Federal 

Reserve. I just want to treat them like everybody else. And my 

sense is, and I think your numbers can prove or disprove this, but 

my sense is that it is easier to divorce your spouse than get fired 

at the Federal Reserve. And if that is the case, we are entitled to 

know that. That is a lot of money over there. And that is not a criticism of anybody. 

Tell me again about your salary. It is the average of what? 

Mr. BIALEK. It is the average of both the salary and the bonus 

that is attributed to the other individuals who are similarly situated in terms of the organizational structure, which for me is the 

division director level. So there are 12 other individuals, and it is 

the average of their salary plus bonus. 

Senator KENNEDY. OK. So there are about 13 of you, and your 

salary is set on the average of the 13. 

Mr. BIALEK. That is the case for all DFEIGs. That is in the IG 

Act as the formula to be used. 

Senator KENNEDY. I am just asking. Are the others set that way 

too? 

Mr. BIALEK. The other—— 

Senator KENNEDY. The 12 other ones whose salaries are used to 

get your salary. 

Mr. BIALEK. I am not aware of how those are established. 

Senator KENNEDY. OK. And do you get a bonus? 

Mr. BIALEK. No, I do not. 

Senator KENNEDY. OK. Do the others get a bonus? 

Mr. BIALEK. Yes. That is part of that average that I mentioned. 

Senator KENNEDY. OK. Do all 12 of the others get a bonus? 

Mr. BIALEK. I do not know the answer to that. 

Senator KENNEDY. Do they get a bonus when they say inflation 

is transitory and it is not? Do they still get their bonus? 

Mr. BIALEK. I do not have the answer to that. 

Senator KENNEDY. OK. How do we get that information? 

Mr. BIALEK. Request it from the Federal Reserve folks. 

Senator KENNEDY. How about we call the IG? Can you get it for 

us? 

Mr. BIALEK. IGs should not be in the position of getting information to turn over if we are not otherwise engaged in an audit or 

evaluation or investigation. 

Senator KENNEDY. If I could have 30 more seconds. 

Chair WARREN. Of course you can. 

Senator KENNEDY. I know you are in the process of looking at the 

bank failures, and I do not want you to—I am not trying to put you 

on the spot because you do not know yet. But, you know, I find two 
12 

things ironic. Maybe ‘‘irony’’ is the wrong word to use. But as a result of these basic—well, strike that. 

It seems that ever since the Great Recession we have been very 

concerned, as we should be, about banks that are too big to fail. 

Big is dangerous. I am not against big. I am against dumb. But if 

you have an institution that is really, really big, and it does something dumb, it hurts a lot of people. Nobody ever goes to jail, but 

that is a separate story. 

But it looks to me like, as a result of these recent failures, that 

our big banks are getting bigger, and I find that ironic. Again, that 

may be the wrong word. I do not know if you are going to look at 

that in your studies. 

Mr. BIALEK. Well, Senator, that strikes me as being a straightahead policy issue where the Federal Reserve board decides what 

rules of engagement for the supervision of banks of different sizes, 

tailoring. All of those are supervisory, policy-based decisions—— 

Senator KENNEDY. I know, but—— 

Mr. BIALEK. ——and the IGs are prohibited from getting involved 

in overseeing policy. 

Senator KENNEDY. Senator Warren and I may disagree on this. 

We disagree a lot, but we still like each other. But see, if I asked 

Mr. Barr that question, I think the answer I am going to get is, 

look, the problem with the bank failures is that the management 

did dumb things, and they were incompetent, and yeah, some of my 

regulators were not as proactive as they should have been, but it 

is Trump’s fault. Trump ate my homework. And I do not think that 

is a candid assessment of the situation. 

The other thing that I find curious—and I am going to ask Mr. 

Barr about this—traditionally, when banks get in trouble, you do 

not go out and shout it, you know, ‘‘We are in trouble.’’ They call 

their regulators and say, ‘‘We have got a problem here.’’ Or the regulators spot it and they go in. And to prevent a bank run or panic, 

they handle it quietly. And the regulators will call around with 

other banks that are healthier and say, ‘‘Can we effect a marriage 

here?’’ And that does not seem to be what is happening. And as a 

result, the healthy banks that would normally come in and help, 

for a price, a fair price, and help the failed bank, the healthy 

banks, they are pretty smart. They are waiting. They are going, 

‘‘No, we do not want to come in too early. Let’s let them go under, 

and then we will come in and we will get a great deal, and the taxpayers will have to guarantee all our potential losses.’’ 

Can you look into that? Because if I asked Mr. Barr, God bless 

him, he is just going to say, ‘‘It is the fault of the bank presidents 

and Trump ate my homework.’’ So I am looking for somebody who 

can help us answer those. 

Mr. BIALEK. To the extent that you are asking, Senator about the 

process of once a bank fails what does the Fed, what does the FDIC 

do, in terms of trying to get another bank to come in and take over 

or buy its operations, that would be kind of post-failure, so that 

would not be part of our current review, Material Loss Reviews. 

But we can consider looking into that kind of post-failure issues 

like that or discussions that may have been had with the other financial regulators. 
13 

Senator KENNEDY. I am taking too long, but here is what I am 

getting to, and this is not a criticism of JPMorgan or Mr. Dimon. 

I have great respect for both of them. But you know the deal they 

made is a good deal. I am not suggesting that they should not have 

made a good deal for their shareholders. But the truth is the deal 

was so good, if we still had White Pages, you could open up the 

White Pages, put your hand over your eyes, and pick a name and 

say, ‘‘We are giving you this deal,’’ and it would be successful because the taxpayers have to guarantee 80 percent of the losses. 

And somebody needs to look at that. 

Mr. BIALEK. Senator, I would be happy to come up and talk to 

you further about that, have my team come up and discuss it with 

you, and see if there—— 

Senator KENNEDY. But I want to talk about it in front of the 

American people. 

Mr. BIALEK. OK. Well, we can start by having a conversation in 

your office, if you would like. It is up to you. 

Senator KENNEDY. OK. Thank you, sir. 

Chair WARREN. Thank you, Senator Kennedy. 

Senator Kennedy, I want to follow up on something you did. I 

have another round of questions I want to do. But we are talking 

about this compensation issue, and the reason we are talking about 

compensation is just basic conflicts of interest. It is very hard to 

oversee somebody who can fire you. It is very hard to point out that 

this is the person who engaged in wrongdoing if that is something 

who can turn around and fire you. 

But I want to raise a second point that came out in the question 

about how your compensation is calculated. I believe you said your 

compensation is the average of the other people whom you investigate, and it is their salaries plus their bonuses. So if your investigation finds they did really bad and stupid things that caused 

them not to get bonuses, what happens to your compensation? 

Mr. BIALEK. If there is a reduction in one of those individual’s 

bonuses—— 

Chair WARREN. So you make less money—— 

Mr. BIALEK. That is correct. 

Chair WARREN. ——if you find wrongdoing in the people you 

oversee. Do you think that creates a conflict of interest? 

Mr. BIALEK. I do not, honestly, because I have been in the IG 

community for over 42 years. I am not in this business to do anything but make sure that we properly, the 130 folks who work in 

the Office of Inspector General, properly oversee the work, the efficiencies of the Fed. And if we find improvements that need to be 

made it is our job to point them out. It does not matter to me one 

bit—— 

Chair WARREN. Mr. Bialek, it is easy for you to say, ‘‘It does not 

matter to me one bit how much I get paid.’’ But you have to understand there are a lot of people around the country who look at a 

$378,000 salary, that is one of the highest salaries in the Fed and 

one of the highest salaries in the Federal Government, and says if 

your salary goes up if you give everybody a gold star, and it goes 

down if you find a problem, and not see that as a structural conflict 

of interest—it does not have to be personal, it does not have to be 

to say that you are a bad person. It just says that we should not 
14 

have both of those occurring gin the same place. The person who 

is responsible for handing out the gold stars on whatever happened 

or handing out the ‘‘you did a bad job,’’ should not have a direct 

financial stake in how that comes out. 

Mr. BIALEK. I understand your point, Senator. My only other 

comment would be that provision of the IG Act that sets up those 

two different pay systems for IGs, the PASIG and the DEFIGs, 

that was put into place in 1988 by Congress. There have been 

amendments to the IG Act since then, and that issue has not been 

changed. But that is up to Congress—— 

Chair WARREN. Let me stop you there. 

Mr. BIALEK. ——to decide. 

Chair WARREN. Twenty years ago the GAO came to Congress, 

long before I was here, long before Senator Kennedy was here, and 

said, ‘‘Change it because it is a mistake.’’ They said, ‘‘Change it so 

that you have an independent IG at the Fed,’’ and I think this is 

the reason why. 

So if I can, what I want to do is I want to talk about the ethics 

scandal while we still have you here. And that is in September of 

2021, reports revealed a shocking ethics scandal at the Fed. Fed 

leadership at both the Reserve banks and the Board of Governors 

had made stock and other financial trades at the same time that 

the Fed was taking extraordinary action to stabilize the economy 

during the COVID–19 pandemic. 

For example, former Fed Vice Chair Richard Clarida cashed out 

somewhere between $1 and $5 million from a bond fund and put 

the money into stock funds exactly 1 day before Chair Powell publicly announced possible policy action that would significantly affect 

the value of those bonds and stocks. 

Now make no mistake. This is the most severe ethics scandal in 

the Fed’s 110-year history, yet other than a few officials taking an 

early retirement we have seen no accountability, not from Chair 

Powell and not from the Fed’s inspector general. That is you, Mr. 

Bialek. 

So Mr. Bialek, you conducted an investigation of Fed officials’ 

stock trades at Fed Chair Powell’s request. Here we are, a year and 

a half later, and I believe we are still waiting for the results of your 

investigation into the Reserve bank presidents. But last year you 

did release a 4-page report about your investigation of key Fed 

board members, and in that investigation you found that former 

Vice Chair Clarita failed to report several trades in 2019 and 2020. 

Am I right so far? 

Mr. BIALEK. Yes. 

Chair WARREN. OK. So you also found that trades involving 

Chair Powell’s family trust were made during a blackout period for 

the Federal Open Market Committee, the Fed’s monetary policymaking body, trades that should not have been made at those 

times under the Fed’s rules. Correct? 

Mr. BIALEK. Yes. 

Chair WARREN. OK. So the rules say no trading during the blackout period, but Powell’s trust did exactly that. The rules say Fed 

Governors must disclose all trades in a timely fashion. Mr. Clarita 

clearly did not. And yet your investigation—and I am going to 
15 

quote you here—quote, ‘‘did not find evidence’’ that your boss, 

Chair Powell, and Mr. Clarita, ‘‘violated the Fed’s rules.’’ 

That finding just makes no sense to me. The actions of the Chair 

of the Federal Reserve and a Governor of the Federal Reserve were 

unambiguously inconsistent with the Fed’s rules. You just said so, 

but you recommended no disciplinary action, no corrective action. 

Now in addition to your conclusion, that flies directly in the face 

of the facts, I also have concerns about what you left out of your 

investigation. According to his financial disclosures, Chair Powell 

sold between $1 and $5 million worth of stock at the start of October 2020, reportedly one of his largest trades ever, just as the stock 

market was beginning to tank. This is suspicious timing, but you 

did not look into this trade as part of your investigation. Why not? 

Mr. BIALEK. If I can elaborate a bit more on this series of questions or issues that you have raised, Senator. 

Chair WARREN. OK. Can you just answer this question, though, 

first, so I do not get confused here? Why did you not investigate 

this trade? It is not in your report. 

Mr. BIALEK. We investigated all trades made by both former Vice 

Chair Clarita and Chair Powell. We looked at each and every one 

of those trades. We reviewed the source documentation for those 

trades. We got into a level of—— 

Chair WARREN. So you are telling me these trades did not occur? 

Mr. BIALEK. No. I am going to tell you that as it relates to Vice 

Chair Clarita, those four trades that were made that were not initially included on his 2019 and 2020 financial disclosure reports 

were left out. The resolution of that—we have to audit and investigate against criteria. The criteria is, yes, they should have been 

included, and they were not. The solution—— 

Chair WARREN. Then how could you say there was no evidence 

that anyone violated the rules? It clearly violated the rules. 

Mr. BIALEK. The Office of Government Ethics, this is their form, 

the Government Ethics program, throughout the Executive branch, 

is monitored by and set up by the Office of Government Ethics. 

Their approach is if someone leaves something out of a report, assuming, as is the case here, that the trades were not prohibited 

trades and they were not made during official blackout periods, 

that the resolution is to include those on the subsequent report, to 

make it a complete report for the next year. 

What Vice Chair Clarita did is he went ahead and amended 

those forms from 2019 and 2020. So he did more than what the Office of Government Ethics would have advised him to do. 

Chair WARREN. So when I asked you the questions, ‘‘Did they 

violate the rules?’’ you say, ‘‘Yes, they violate the rules.’’ But it 

turns out if you fix it later you do not count that as violating the 

rules. 

Mr. BIALEK. That, according to the Office of Government Ethics—— 

Senator WARREN. And what was the—— 

Mr. BIALEK. ——that is the case. And if I can on Chair Powell’s 

charitable family trust that you mentioned, that is a matter where 

the financial advisors who handled that family trust, that charitable family trust, for them, was notified of the blackout dates for 

the FOMC blackout period. They were asked to make, as they are 
16 

every year, toward the end of the year, to sell some assets so that 

the family trust can carry out its requirement to make charitable 

donations at that time of year. They admitted that it was their 

oversight that they did the transaction a day or two after the 

blackout period began. The request was made before that. And it 

was their error, their mistake, that allowed that to happen. 

There has to be kind of an intent—— 

Chair WARREN. Well, we can get—— 

Mr. BIALEK. ——missed report. 

Chair WARREN. ——look, we can get into the intent questions. 

You know, particularly when you are telling me about Clarita, for 

example, corrected this later, yeah, he corrected it after you opened 

an investigation, which is just not exactly the moment that gives 

us all confidence. 

But I still did not hear the answer to the question that I asked you here. Chair Powell sold between $1 and $5 million worth of 

stock at the beginning of October 2020, one of his largest trades 

ever, suspicious timing, but you did not look into the trade as part 

of your investigation. I just want to understand why. 

Mr. BIALEK. We did look into that trade. The trade was not prohibited nor was it made during the blackout period. 

If I can add, I acknowledge that our investigative report lacks 

the kind of detailed analysis that would kind of close these perceived gaps that you are alluding to, Senator, but it was intention, 

while we pursue these other closely related and ongoing ethics investigations of the Federal Reserve bank officials. 

I absolutely agree that the allegations of improper trading and 

ethics violations are disturbing, and they are alarming. I agree 

with you wholeheartedly. But we have to conduct a thorough, independent—— 

Chair WARREN. You have had—— 

Mr. BIALEK. ——investigation. 

Chair WARREN. ——a year-and-a-half. 

Mr. BIALEK. And we cannot—— 

Chair WARREN. You did not call out the trades that we can see. 

Let us just put it this way. This is not strong oversight. In fact, 

it is not even competent oversight. It looks like, to anyone in the 

public, that you gave your boss a free pass, and that is just not 

going to cut it here. And even today, a year and a half later, the 

Fed continues to stonewall Congress, stonewall the public, on the 

underlying information about these trades. This is not acceptable, 

and this is why we are pushing for an independent IG. 

I understand we are going to have to go vote. Is that right? All 

right. We are being called to vote. If I can, I am going to excuse 

this panel and I am going to ask the next panel to come up. We 

will vote and we will be back as fast as our feet will carry us. Fair 

enough? 

Senator KENNEDY. Fair enough. 

Chair WARREN. Thank you. We are in recess. 

[Recess.] 

Chair WARREN. This hearing is called back to order. 

Now I will introduce our witnesses. First, I will introduce Dr. 

Peter Conti-Brown, the Class of 1965 Associate Professor of Financial Regulation, and Codirector of the Wharton Initiative of Finan-
17 

cial Policy and Regulation at the Wharton School of the University 

of Pennsylvania. Dr. Conti-Brown is one of the foremost experts on 

the history of the Fed and of financial regulation. Thank you for 

being here with us, Dr. Conti-Brown. 

Next, we have Dr. Paul Kupiec, an economist and Senior Fellow 

at the American Enterprise Institute. Dr. Kupiec has decades of experience working on financial regulatory issues, including while 

working at the Fed and at the FDIC. Thank you for being here, Dr. 

Kupiec. 

And finally we have Ms. Mayra Rodrı ́guez Valladares, Managing 

Director of MRV Associates. Ms. Rodrı ́guez Valladares has 30 years 

of experience consulting and training professionals at banks and financial regulatory agencies in over 30 countries, helping to implement financial regulations on the ground. Thank you, Ms. 

Rodrı ́guez Valladares. 

I appreciate all of our witnesses being here today, and if I can, 

I would recognize Dr. Peter Conti-Brown for an opening statement. 

You are recognized for 5 minutes. 

STATEMENT OF PETER CONTI-BROWN, CLASS OF 1965 ASSOCIATE PROFESSOR OF FINANCIAL REGULATION, ASSOCIATE 

PROFESSOR OF LEGAL STUDIES AND BUSINESS ETHICS, 

THE WHARTON SCHOOL OF THE UNIVERSITY OF PENNSYLVANIA 

Mr. CONTI-BROWN. Thank you, Chair Warren, Ranking Member 

Kennedy, Members of the Subcommittee. It is a privilege to testify 

before you today. 

Over the past 2 months, three of the roughly 20 banks with as- sets between $100 billion and $250 billion have failed. Of the remaining 17, we do not know how many would have failed but for 

the extraordinary intervention of the Government related to the 

other three. Since March 12, 2023, we have been in a roiling banking crisis, a fact acknowledged by the very interventions that the 

Fed, Treasury, and FDIC have made to prevent this crisis from spiraling into a financial cataclysm. 

It is said that failure is an orphan where victory has many parents, but I would say this failure has many parents indeed. The 

primary responsibility relies, of course, with the bankers that mismanaged these risks so catastrophically. But failures of so much of 

this market segment also invite important questions. 

The extraordinary powers used over the last 2 months were designed, or redesigned, after the 2008 financial crisis, especially 

after Congress’ passage of the 2010 Dodd-Frank Act. At the time 

it was the hope of Congress, the President, and the American people that such unusual and extraordinary Government interventions 

would be rare, rare because individual bank failures would be preventable through robust regulation and supervision, and rare because even if unprevented, an individual bank’s failure would not 

a systemic crisis make. 

March 12th was a referendum on those hopes, and those hopes 

were dashed. The questions we must ask ourselves, among many 

others, then, are these. First, what did we fail to do in the years 

leading up to March 2023? Second, what changes does this crisis 

invite us to ponder that can strengthen us against future crises? 
18 

And last, what changes must we make to restore the confidence of 

the American people in our Government’s ability to ensure that our 

financial system stays robust, resilient, and just for all members of 

our society, and not only the wealthiest among us? 

In my written testimony today I address each of these questions 

in depth. In this opening statement I will merely state my conclusions. More specifically, I have three. 

First, the actions taken by Congress through the passage of the 

Economic Growth, Regulatory Relief, and Consumer Protection Act 

of 2018, and through additional regulatory pullback of supervisory 

discretion thereafter created a climate where grumpy banks could 

ignore supervisory warnings to get their house in order with impunity. We are still learning more of these details, most of which remain bound and gagged behind walls of confidential supervisory information. But so far we can surmise that the bankers either 

roughed up the refs or ran out the clock, forcing the rest of us to 

lose a game that we might have won. 

The law passed in 2018 is a key part of this story, despite the 

fact that the law itself did not contain a binding mandate for these 

supervisors and regulators to exit the field. Bank supervision, and 

its relationship to Congress, simply does not work that way. It depends, instead, on instructions from legislators and regulators to 

guide the practice of this hyper-secret, highly discretionary, and extremely potent form of Government oversight. 

When you hear, then, that the failure of these banks was a failure of banker risk management and then, in turn, a failure of bank 

supervision, you hear truths but only partial truths. In our democratic system, bank supervisors, toiling in secrecy though they may 

be, must still answer to the people through regulators appointed by 

Presidents and legislators elected by the people themselves. In 

2018 and beyond, the answer from Congress and regulators could 

not have been clearer—supervisors were to pull back. 

My second conclusion is that we must reform the way information is collected from, and accountability provided over the Federal 

Reserve system. Our Nation’s central bank has a rich history of superb public service, including in the present day, but the individual 

and collective expertise within the Fed does not render these public 

servants superhuman. When the Fed faces a scandal or a crisis, as 

it has done many times in its recent history, we simply cannot depend upon it to understand it itself and report to the rest of us its 

new, enlightened sensibilities. 

Fed Chair Jerome Powell and Vice Chair for Supervision Michael 

Barr have emphasized that they welcome independent review of 

the Fed’s actions, but I would go further. Such independent review 

should not be merely welcome. It must be vital. To that end I support rendering the inspector general of the Federal Reserve system, 

currently answerable only to the Fed itself, to a presidential appointment subject to Senate confirmation. The Federal Reserve 

must not seem and must not be supervised by itself. 

Finally, and most briefly as my time is expiring, the Federal Reserve system as designed in 1913 needs an overhaul. At the time, 

subject to the politics of the day, that barely made sense for the 

Woodrow Wilson administration, it was deemed expedient to create 

not 1 but 12 central banks with private bankers governing their 
19 

central bankers. It is past time for us to remove private bankers 

from this public role, or at least consider alterations to their presence. The appearance and fact of conflict of interest is something 

that we, the people, should not abide. 

I look forward to your questions. 

Chair WARREN. Thank you, Dr. Conti-Brown. 

Dr. Kupiec. 

STATEMENT OF PAUL H. KUPIEC, SENIOR FELLOW, AMERICAN 

ENTERPRISE INSTITUTE 

Mr. KUPIEC. Chair Warren, Ranking Member Kennedy, and Subcommittee Members, thank you for the opportunity to testify today. 

The precarious nature of SVB’s financial condition was obvious 

from regulatory call report information. As I demonstrate in detail 

in my written testimony, there was no need to know anything 

about SVB’s internal liquidity stress test, the results of a Federal 

Reserve board or internal bank stress test, or the results of any 

other complex model-derived regulation to see that, by early March 

2023, SVB was likely insolvent on a mark-to-market basis and in 

danger of experiencing a serious depositor run should its uninsured 

depositors recognize the bank’s true condition. 

SVB was essentially run like a money market mutual fund without the safety benefit of SEC regulations that would have restricted the duration of its investments. SVB funded itself by attracting large, uninsured deposits during a period when short-term 

interest rates on these accounts were close to zero. 97.5 percent of 

SVB’s deposits were uninsured, and most of these were in money 

market deposit accounts. SVB invested its deposits in longer-maturity securities and loans to earn yield. Most of SVB’s securities had 

a Federal Government guarantee, and hence, low or zero regulatory 

capital risk weights. 

Examiners did not criticize these investments. Examiners actually gave SVB a good CAMELS liquidity rating because it owned 

these long-term securities. It should have been obviously to bank 

examiners that SVB’s business model was unsustainable in a climate of rising short-term interest rates, but there are no examiner 

findings to this effect. 

SVB failed even though it satisfied all the complex rules in place 

that determine its required regulatory capital. The passage of S. 

2155 had nothing to do with the failure of SVB. S. 2155’s tailoring 

requirements applied a Dodd-Frank enhanced regulation for large 

bank holding companies. In SVB’s case, the risks were obvious, and 

they were in SVB bank, not in SVB’s holding company. 

Federal banking regulators have ample power under prompt, corrective action legislation to remedy any serious safety and soundness issue examiners identify in a bank like SVB. Timely and proper exercise of the Fed’s prompt, corrective action powers could have 

been used to de-risk SVB. But they were not. Virtually all of the 

corrective supervisory recommendations made to SVB concerned 

processes associated with SVB’s model-based, large bank regulations and other bank procedures required to measure and monitor 

SVB’s risks. None of the corrective actions spoke to the actual liquidity risk associated with SVB’s funding mix, the financial rami-
20 

fications of its interest rate risk profile, or the bank’s true capital 

adequacy risk. 

The failure of Federal Reserve examination team to appreciate 

the impact of rising short-term interest rates on the market value 

of SVB’s held-to-maturity securities is shocking, given that this 

data is reported in SVB’s quarterly regulatory recall reports, and 

the Federal Reserve itself experienced a huge, $1 trillion, unrealized market value loss on its own held-to-maturity portfolio. 

Meanwhile, senior Federal Reserve board and U.S. Treasury officials were declaring the banking system to be safe and well capitalized, even as FDIC analysts and academics pointed to massive unrecognized banking system losses. Assessments made by the Federal Reserve board and FSOC’s official Financial Stability Reports 

were less than prescient, as they ignored the role monetary policy 

played in generating the risks that destabilized the banking system. 

The FDIC also played a role. SVB is an example of a situation 

for which the FDIC’s backup exam authority was designed. No report suggests that the FDIC pushed back on the Fed’s lack of zeal 

in enforcing prompt corrective actions, even though the FDIC’s 

early warning models should have flagged SVB as a failure risk. 

It is highly unlikely that the FDIC’s large bank deposit insurance 

premium assessment charged SVB anywhere near an appropriate 

deposit insurance premium. The system does not appear to emphasize the risks that caused SVB to fail. Proper deposit insurance 

pricing could have changed the way SVB invested its deposits. 

In the little time I have remaining I want to go through some 

possibilities that might help stem such incidents in the future. 

Adopting the GAO recommendation to revisit prompt corrective 

action rules to add explicit nonregulatory capital triggers that 

would mandate remedial examiner actions. Regulatory capital requirements do not account for interest rate risk. Bank supervisors 

are, however, regularly appraised of the unrealized losses on banks 

held-to-maturity securities and should recognize those losses when 

assessing an institution’s capital adequacy. 

Large bank and holding company regulations have become exceedingly complex with a heavy reliance on economic modeling and 

hypothetical simulation exercises. The SVB supervisory experience 

suggests that overemphasis on models and processes may cause examiners to lose focus on important fundamental bank risks. 

The power of the Federal Reserve board, FDIC, and Secretary of 

the Treasury to declare a systemic risk exemption and release the 

FDIC from its least cost resolution mandate is not constrained by 

any checks and balances in legislation. There should be an accountability structure in place to guide the choice of policy taken once 

a systemic risk exception is declared. 

Since the Dodd-Frank Act, systemic risk has become the reason 

for expanding Federal Reserve regulatory powers. However, the 

term ‘‘systemic risk’’ is never defined in the Dodd-Frank Act. This 

legal ambiguity has made the FSOC a political tool rather than an 

independent voice on actual risks that threaten financial stability. 

The FDIC’s risk-based deposit insurance premium rules for large 

banks need to be revisited, and recent events demonstrate the need 

to improve Federal Reserve oversight and accountability. A Senate- 
21 

confirmed IG may help, district Federal Reserve banks should be 

subject to FOIA laws, and Congress should allocate additional resources to its committees dedicated to Federal Reserve oversight. 

Thank you very much. 

Chair WARREN. Thank you, Dr. Kupiec. 

STATEMENT OF MAYRA RODRI ́GUEZ VALLADARES, MANAGING 

PRINCIPAL, MRV ASSOCIATES 

Ms. RODRI ́GUEZ VALLADARES. Thank you. Chair Warren, Ranking 

Member Kennedy, and distinguished Members of the Subcommittee 

on Economic Policy, thank you for the opportunity to appear before 

you. I am Mayra Rodrı ́guez Valladares, managing principal of MRV 

Associates. My testimony today is based on my professional experience of three decades consulting and training professionals at 

banks and financial regulatory agencies in over 30 countries on a 

wide range of risks that can threaten financial institutions’ safety 

and soundness. 

Laws about banks are incredibly important. They lead bank regulators to define the type of rules they write, promote supervisory 

culture at the top, and design examination processes. The Economic Growth, Regulatory Relief, and Consumer Protection Act 

greatly influenced former Vice Chair of the Federal Reserve Randal 

Quarles to propose the Tailoring Rules. He said, ‘‘The Congress 

wants to see action and has, to a certain degree, specified some of 

the steps we need to take,’’ end quote. He also stated that ‘‘In conjunction with changing regulations, we also need to consider how 

those regulations would be reflected in supervisory programs, guidance, and regulatory reporting.’’ Prompt corrective action is not 

enough when you have that type of supervisory culture. 

Throughout 2017 and 2018, almost 400 financial institutions lobbied heavily in favor of EGRRCPA. Former Silicon Valley Bank 

CEO Greg Becker and many bank lobbyists and politicians were 

also in favor of EGRRCPA and argued that regional banks did not 

pose risks to the financial system. Barely 5 years later, those words 

did not age well. 

I do not have schadenfreude when I remember that in August 

2018, I wrote, ‘‘Taxpayers should not be fooled into thinking that 

banks that are in the asset range of $100 to $250 billion are not 

systemically important because regional and foreign bank organizations of that size are incredibly interconnected to other financial institutions and to thousands of companies in the U.S., due to loans 

that they extend and the financial derivatives that they arrange for 

companies of every size. If any of those banks were to run into 

problems for being insufficiently capitalized, or if they were to become illiquid, taxpayers would suffer the consequences.’’ 

After conducting the Financial Sector Assessment Process of the 

United States in 2020, independent analysts and consultants hired 

by the International Monetary Fund were critical about the shortcomings of S. 2155, EGRRCPA, as well as of the Federal Reserve’s 

tailoring approach. The IMF recommended that U.S. regulators introduce rules on concentration risk management and include more 

quantitative standards on interest rate risk in the banking book, 

as well as making specific capital and liquidity recommendations 
22 

for large banks that were not internationally active, in other words, 

our regional banks. 

After analyzing all the CAMELS examination reports—capital, 

asset quality, management, earnings, and liquidity standards and 

sensitivity to market risk—and the supervisory letters released by 

the Federal Reserve, I know that Silicon Valley Bank’s CEO Greg 

Becker, his colleagues, and board, willingly ignored the numerous 

interest rate, liquidity, Bank Secrecy Act, anti-money laundering 

compliance failures, data problems, information technology weaknesses, and incredibly ineffective internal audit and credit risk 

management processes, some of those going back all the way to 

2016. All the aforementioned were identified by California and Federal Reserve Bank of San Francisco examiners. Additionally, SVB 

did not disclose important interest rate risk measurements such as 

economic value of equity in its annual report or Basel III Pillar 3 

risk disclosures, leaving the market in the dark. 

The problem, however, is that there is still so much that we do 

not know about SVB’s failure because an independent postmortem 

has not been completed. Who, at regulatory agencies, ignored examiners’ findings year after year, and why? 

I respectfully recommend the following legislative and supervisory process changes that I detail more in my written statement. 

One, order an independent investigation of the Silicon Valley Bank 

failure. Two, appoint an independent inspector general for the Federal Reserve based on a Senate confirmation. Three, revise Title IV 

of 2155 to reinstate Dodd-Frank’s designation of systemically important banks. Four, remove heads of banks from Federal Reserve 

district boards. Five, reform remuneration for CEOs and key bank 

professionals. Six, require transparency from banks about their assets and liabilities and interest rate and liquidity risk management 

more often than just once a quarter. Seven, utilize all of the Federal Reserve’s existing powers to escalate identified risks in banks 

and impose enforcement actions on noncompliant banks. Eight, require improvements in the monitoring of banks’ interest rate risk 

models. Nine, reinstate the liquidity standard for all large bank organizations. And ten, provide strong protections for onsite examiners and offsite supervisors so that they can actually move things 

up the chain. 

Thank you very much, and I look forward to your questions. 

Chair WARREN. Thank you very much. I really appreciate it, Ms. 

Rodrı ́guez Valladares. I appreciate all of your testimonies. This is 

really important and thoughtful. 

If we can, I would like to dive deeper into some of the findings 

in the Fed’s postmortem of the Silicon Valley Bank’s collapse. The 

report made clear that the Fed failed at every step along the way, 

from the Board of Governors at the very top to the San Francisco 

Fed Bank examiners on the ground, who were unwilling or unable 

to force SVB to fix its problems before the bank blew up. 

So let’s start at the top with the Board of Governors. This is the 

body where bank rules are written and then communicated down 

to the Reserve banks to enforce. 

One of the four causes of SVB’s failure, that the Fed report identifies, is the 2018 law that Republicans, with the help from some 

Democrats, passed. This law severely weakened the guardrails that 
23 

Congress put in place after the 2008 financial crisis, to ensure that 

greedy banks never again crash the economy. That was certainly 

the intent. 

Dr. Conti-Brown, you are an expert on financial regulation and 

the Fed. According to the Fed’s Vice Chair Barr’s report, how did 

the passage of that law—let’s just call it 2155; that is what we call 

it around here—how did the passage of 2155, this bill that Congress voted on, lead to SVB’s failure? 

Mr. CONTI-BROWN. Thank you, Senator Warren. The provision in 

2155 that refers to changing the asset classes is only about five 

pages long. It is very short. And it does not contain a mandate— 

Fed, thou shalt not supervise these banks. 

Chair WARREN. Right. 

Mr. CONTI-BROWN. What it does is create a system that was in 

place under Dodd-Frank, that for a bank to grow above $50 billion, 

or above $100 billion, they knew that there would be significant 

regulatory and supervisory costs. Those costs went away because 

what Congress did is say anything below $250 billion is wiped 

clean. If you want to put it back, you have got to go through a process. That is what they said to the Fed. 

And so for Silicon Valley Bank, which was hovering right below 

$50 billion at the time, that was just a massive neon light saying 

‘‘grow, grow, grow.’’ So that was one way. And then when they 

grew so fast, so far, on both liabilities and on assets, they could not 

diversify, and so that led to flighty deposits that rendered them 

sensitive on the funding side, and it led to under-diversified assets, 

which led to their collapse in this interest rate environment. 

The other thing that it did is send a very pointed direction, and 

as a historian of bank supervision I am currently writing a 600- 

page history of bank supervision, that I am nearly completing, I 

can tell you this is exactly the way Congress works. It writes laws 

and it says this is the way we want you to use the tools, even when 

it does not say ‘‘thou shalt’’ or ‘‘thou shalt not.’’ And that is exactly 

the way that Title IV of the law is written. It is to say pull back 

on this regulation and give a green light for massive and 

undiversified growth. 

Chair WARREN. So the Fed report says that Congress told the 

Fed to deregulate, and that is what you are saying. This is the 

message that was delivered. The Fed heard that message loud and 

clear, and then it used that message to open up and start to deregulate even further, throughout the Fed system here. And the result, according to the report, is that S. 2155 and the Fed’s tailoring 

that it took in response, quote—this is from the Barr report—‘‘impeded effective supervision by reducing standards, increasing complexity, and promoting a less-assertive supervisory approach.’’ And 

I think that is consistent with your testimony. Is that right, Dr. 

Conti-Brown? 

Mr. CONTI-BROWN. Yeah, it is. 

Chair WARREN. OK. So let me then just come over. Ms. 

Rodrı ́guez Valladares, you have decades of experience working as 

a bank examiner and training bank examiners. You are the one 

down on the ground with these folks who are making the calls with 

the banks every day. Do you agree with Vice Chair Barr’s conclusion that S. 2155 promoted a less-assertive supervisory approach? 
24 

Ms. RODRI ́GUEZ VALLADARES. Yes, very much so. And former Vice 

Chair Randal Quarles made it very clear before the American 

Bankers Association in the quote that I read that he really saw 

that Congress wanted these specific steps, and all of that is part 

of starting at the top, that tone, and filters all the way down to the 

different kinds of supervisors and examiners. And the tailoring 

rules meant that Silicon Valley Bank, for example, did not have to 

do a lot of incredibly important things, like really measure from a 

market perspective interest rate risks and the banking book, for example. It did not have to do stressed liquidity coverage ratios. 

And so because it did not have to do them it did not have to report them to the regulators or to the market, and that is incredibly 

important because if the regulators miss it, but it then comes out 

in an annual report or a Pillar 3, then the market can discipline 

the bank, and all of that, unfortunately, was missing precisely because of those tailoring rules. 

Chair WARREN. So the loosening ends up having multiplier effects, that once you loosen a little bit you lose other discipline in 

the system. Is that a fair way to describe what you just said? 

Ms. RODRI ́GUEZ VALLADARES. Absolutely. And not only that but 

then all of the appointees at the Fed, at the FDIC, and the OCC 

as well, obviously, that was a totally different tone. When I used 

to go to banks right after Dodd-Frank was signed, I would see the 

bankers with all of the different compliance, all the rules earmarked. They took them seriously. So did the bank examiners. And 

that, after 2018, really disappeared. The tone changed. 

Chair WARREN. OK. So the tone changed. 

And here is another piece of it I want to look at. You know, not 

only did the Fed use the political cover that Congress gave it and 

moved in the direction of weakening the rules for big banks even 

further, the Fed itself was lobbying for the bill to weaken regulations the whole time. Fed Chair Powell testified in favor of it, and 

according to press reports, the Fed’s general counsel may actually 

have even drafted it. 

Now the Members of Congress who voted for S. 2155, and the 

banking industry that lobbied for it, now argue that the Fed had 

the discretion to continue to apply stronger rules to banks, like 

SVB. They just chose not to. And I agree—the Fed should have 

used its authority to apply stronger rules to banks with more than 

$100 billion in assets. And that is why I called on Fed Vice Chair 

Barr to use that authority immediately, now, and I am glad that 

he has committed to do that. 

But you do not get to write a law that shoves the Fed in a strictly deregulatory direction and then turn around and say, ‘‘Gee, we 

wish they had not deregulated.’’ 

Dr. Conti-Brown, do you think that the big banks and the people 

calling on the Fed to deregulate would have supported the Fed’s 

decision—take yourself back to 2018—would they have supported 

the Fed’s decision to use its discretion to strengthen rules for the 

banks with more than $100 billion in assets, if they had decided 

to do that once 2155 had been passed? 

Mr. CONTI-BROWN. It is inconceivable that they would have supported a move such as that. And I would go further still. In the 

20th century, in the 110 years the Fed has been in existence, un-
25 

like, say, the SEC or the EPA, regulated entities under the Fed 

rarely, if ever sue it. 

Chair WARREN. Yep. 

Mr. CONTI-BROWN. And that is for a lot of complex reasons. Bank 

supervision is related to it. This is a counterfactual, but I would 

bet my eye teeth that we would have seen some very significant 

litigation. And the reason I think that is because Title IV is written 

in a way consistent with D.C. Circuit legal doctrine, to invite litigation. And the reason is because it contains like a seven-part test 

that if you want to tread into the $100 and $250 billion range, you 

are entitled to do so, but you have to consider all of the following. 

And we have seen, after the financial crisis with the SEC, similar 

kinds of language struck down by the courts. 

And so I think that the banks subject in this counterfactual to 

that kind of a regulation would have not called their bank examiners for a conversion. They would have called their lawyers to 

launch litigation. 

Chair WARREN. Wow. That is a really powerful point about this. 

You know, S. 2155 weakened the rules and the supervision for 

these banks like SVB and opened the deregulatory door for the Fed 

to drive a truck through, which, under Chair Powell, it immediately did. The change in the law and the tailoring the Fed pursued in response to that change, quote, ‘‘combined to create a weaker regulatory framework for a firm like SVB,’’ and that is according 

to the Fed’s own report. 

So look, I am very glad that Vice Chair Barr has committed to 

using his existing authority to strengthen those rules for big banks, 

but Congress needs to close that door for good. And that is why I 

have introduced a bill to repeal Title IV of S. 2155, which would 

undo the Fed’s deregulation of the biggest banks and ensure that 

we apply tougher rules to banks like SVB that have the power to 

threaten our banking system. 

Now ordinarily at this moment I would turn this over to my Republican counterpart for questions, but since he is not here, I am 

going to go to my next round of questions on this. 

I want to focus on the other part of the Federal Reserve system, 

and that is the regional banks. Unlike the Board of Governors here 

in Washington, which is a public body with Governors nominated 

by the President and confirmed by the Senate, the 12 Reserve 

banks are private corporations overseen by private citizens, including a lot of bankers. Even so, these private Reserve banks are permitted to play a crucially important role in public policy, including 

voting on interest rates and supervising banks. 

In the case of Silicon Valley Bank, the San Francisco Fed was 

the regulator on the ground responsible for ensuring that SVB was 

managing its risks, but the San Francisco Fed clearly failed to do 

so. By the time SVB had collapsed, it had 31 unresolved supervisory issues, triple the number of warnings that similar banks 

had, which was already too big. It is great that the San Francisco 

Fed sent those warnings, but what is the point of sending warnings 

if there is no follow-up. Do you think no one is paying attention? 

Why did the San Francisco Fed not force SVB to address the problems that the San Francisco Fed had already identified, not that 
26 

they needed to figure out some other stuff, the stuff they clearly 

knew. 

So Dr. Conti-Brown, I know that you have written a lot about the 

Reserve banks, so let me just ask you for a little background here, 

and let’s get this on the record. Who are these private citizens who 

oversee the 12 Reserve banks? 

Mr. CONTI-BROWN. Well, they hold an extremely important public trust, but they are not public officials. There are nine of them, 

total, for each Reserve bank, but there are Reserve bank branches 

that hints at some other boards that serve in a similar kind of role. 

For the Reserve banks, these nine are divided into three classes, 

Classes A, B, and C. Class A are the bankers themselves. They are 

folks like Greg Becker, who was the President of SVB, who 1 

minute would be sitting in the boardroom at SVB and then he 

would look at his watch and run over to the San Francisco Fed, ‘‘I 

have got another board meeting to go to.’’ 

The next three are nonbankers, or at least not currently bankers, 

but they are also appointed by the bankers, supervised by the Fed. 

And Class C are to represent the public. They are appointed by the 

Board of Governors. Historically, all nine of them were either recent bankers, current bankers, or distant bankers. Class C in the 

last 15 years or so has been better diversified. 

Chair WARREN. So let me just get this straight. Two-thirds of the 

people that oversee each of the Reserve banks, and hand-pick the 

leadership, are elected by the very same banks that are regulated 

by the Reserve bank, and three of those people actually work at the 

bank, right? That is how this works. 

Mr. CONTI-BROWN. That is right. 

Chair WARREN. Because people would not believe this, you realize. 

Mr. CONTI-BROWN. No. People think you are sending up 

quackers’ conspiracy theories when you tell this. It is written in the 

Federal Reserve Act. 

And one change that was made by Congress in 2010, is that the 

Class A directors—these are the bankers who are currently working as bankers—can no longer vote on the appointment of the Reserve bank president, but we do not know what they can say about 

it. And I have talked to some people who say, ‘‘Oh no, it is a very 

strict wall of separation,’’ and others say, ‘‘They are constantly participating in these same kinds of discussions.’’ As with nearly everything about Reserve bank governance, the public has no idea. 

Chair WARREN. Right. OK. So this chummy little group is making a lot of policy here, and nobody else gets to see it. 

And you mentioned that one of the directors at the San Francisco 

Fed was Greg Becker, who at that very moment was also CEO of 

SVB. In fact, Mr. Becker—I just want to draw the line—was a director overseeing the regulator that was supposed to oversee Mr. 

Becker’s bank. And this is exactly at the time that SVB received 

54 supervisory warnings from the San Francisco Fed’s bank examiners, and the bank examiners—surprise, surprise—made no follow-up to force SVB to change any of its practices. 

So Ms. Rodrı ́guez Valladares, does the fact that the CEO of SVB 

was on the board overseeing the San Francisco Fed, SVB’s regulator, raise questions for you about whether or not his presence on 
27 

the board could have affected the strength of the San Francisco 

Fed’s supervision? 

Ms. RODRI ́GUEZ VALLADARES. Absolutely. He never should have 

been there, and it is something that is of great concern. He himself, 

yesterday, when he testified, mentioned that he frequently met 

with the president of the San Francisco Fed, at least once a month, 

sometimes more frequently. And it is very, very difficult for examiners or anybody else at any of the district Feds to say anything 

that is going to be critical of one of the board members. That kind 

of mechanism does not exist. And it is unfortunate that there still 

has not been a complete independent investigation of the SVB failure, because there are a lot of documents that were missing. 

Normally what happens is you examine a bank, and you write 

about your findings, and you submit your notes, you submit all of 

your documentation to what is called an EIC, the Examiner in 

Charge, and then he or she will review it, and then there are various other layers of middle management at the district Feds that 

will look at those reports. 

So we, the public, have not seen, wait a minute, those risks were 

identified at SVB year after year, but what kind of middle management or anybody else got involved in the writing of the report. 

Also, in a little footnote in the CAMELS examination reports, it 

says that the person who wrote the report was chosen by the Board 

of Governors. And so what then is exactly the relationship of the 

Board of Governors and the San Francisco Fed in this specific examination? So those details are very important. 

Chair WARREN. So it sounds like to me that this is clearly a case 

of the fox guarding the henhouse all the way through the system 

here. 

I want to note this is not the first time. It is not like we pulled 

back the curtain and are shocked to discover this happening in 

2023. Back in 2008, JPMorgan’s CEO, Jamie Dimon, was sitting on 

the New York Fed board, at exactly the same time that his bank 

was borrowing emergency funds from the Fed, and who was the 

chairman of the New York Fed board at the time? It was the 

former head of Goldman Sachs, who was serving on the Goldman 

Sachs board at the same time, even as Goldman Sachs was borrowing billions of dollars from the Fed. And, of course, all this happened at the same time that the Fed banks were recommending to 

Congress to do a huge bailout for the giant banks. So this has obviously been going on for a long time. 

Now after 2008, Congress took steps to address these gross conflicts of interest at the Reserve bank boards, but clearly we have 

still got a long way to go on this. And this is why Senator Rick 

Scott and I introduced a bipartisan bill today that would prohibit 

big bankers from serving as Reserve bank directors. It would also 

subject directors to ethics and financial conflict of interest rules. It 

would foreclose any opportunity for directors to interfere with the 

supervisory process. 

You know, Dr. Kupiek, I am afraid you are not going to get in 

on this, so if I can I will just turn to you and ask you, do you think 

if some of the legislation like the kind that Senator Scott and I 

have proposed—I do not know if you have had a chance to see it 
28 

in any detail—but would it help some with these conflicts of interest? 

Mr. KUPIEC. I have not read the legislation but I would—— 

Chair WARREN. I am sorry. I did not mean to cold-call you on 

that. 

Mr. KUPIEC. No, no. Well, I looked a little bit at the IG, which 

I think is a good idea, but I would point out that the other two 

banks that failed are not part of the Federal Reserve system, and 

signature bank had Barney Frank on its board of directors, and 

Alfonse D’Amato, a former 

Senator, as head of the Banking Committee on its board of directors too. So there is a lot of blame to go around. That is not to say 

that Mr. Becker gets off the hook, but there are prominent, connected people on boards of directors, on lots of boards of directors. 

Chair WARREN. So we have got a lot of conflicts, I think is what 

you are saying. Is that a fair statement? We have got a lot of conflicts here. 

Mr. KUPIEC. Yeah. 

Chair WARREN. Well, let me ask you, Dr. Conti-Brown. Would 

these reforms that Senator Scott and I have proposed help address 

conflicts of interest in the Reserve banks, and maybe strengthen a 

little public confidence in the supervisory powers of these banks? 

Mr. CONTI-BROWN. My only reaction is to take the ‘‘maybe’’ out 

of that sentence. I think that it is almost circular to say that this 

would help with the conflicts. 

And I just want to be clear. This is a moderate position. I would 

go much further. I would fire bankers from these boards entirely. 

And I recognize that there are politics here and there are interests 

involved. And so I think that the proposal from you and Senator 

Scott, which I have reviewed, does not go as far as I would like, 

but it does help to manage these questions, and makes it so that 

when you tell someone who is interested in the well-being of our 

country and its financial system about these strange curiosities, 

the Federal Reserve banks, it would help so much to be able to tell 

them that those with the largest banks do not participate in that 

governance. 

Chair WARREN. Right. And would you like to add something to 

this, Ms. Rodrı ́guez Valladares? 

Ms. RODRI ́GUEZ VALLADARES. Yes. I have actually looked at both 

pieces of bipartisan legislation and I am impressed with them. I 

agree with Dr. Conti-Brown that I think it would be a very good 

idea not to have any bankers on the boards. The skill sets that 

they bring can be found elsewhere, and frankly, there is a danger 

of having too many bankers on the boards. You really need cognitive diversity. They would be much better served if they somebody, let’s say, from an independent broker-dealer that has nothing 

to do with the Fed, for example. They could have people there from 

the American Red Cross or such organizations that are experts at 

dealing with chaos and unexpected problems. You frankly would 

need a scientist. 

So there are a lot of different skill sets. There is a lot of value 

in cognitive diversity that is very, very important. And like these 

gentlemen, I concur with them that an inspector general who 

would be appointed by the President and confirmed by the Senate 
29 

would be a much, much better situation. It is very, very difficult 

to go tell the people with whom you are working, and you see on 

a day-to-day basis that they are doing a bad job. 

And the minute that you hear the word ‘‘bonus’’ anywhere, it immediately means that your own salary depends on their performance, and so you cannot call out wrongdoing in an independent 

way, and you are not accountable to legislators. 

Chair WARREN. I appreciate that. If you all will bear with me 

there is one more issue I want to make sure that we get covered, 

and that is ensuring that the Fed and the Reserve banks are more 

responsive to requests from Congress and from the public about information. 

Right now, despite their massively important role in shaping our 

economy, Federal Reserve banks are exempt from the foundational 

transparency law, the Freedom of Information Act, or FOIA. 

So you all have relevant expertise, and I just want to go down 

the line, if I can, on this. Do you agree that subjecting the Federal 

Reserve banks to FOIA, just like the Fed board, would help 

strengthen the accountability of the Fed? Dr. Conti-Brown? 

Mr. CONTI-BROWN. Unequivocally, yes. 

Chair WARREN. Dr. Kupiec. 

Mr. KUPIEC. I testified yes. 

Chair WARREN. Yes. I heard you but I want to get it on the 

record. And Ms. Rodrı ́guez Valladares. 

Ms. RODRI ́GUEZ VALLADARES. Because right now banks only report relevant risk measures once a quarter, by the time that we all 

get that information it is old. So yes, I definitely would support the 

FOIA. 

Chair WARREN. Good. And in the first panel, the Fed IG, who 

was chosen by the Fed Chair, who answers to the Fed board, and 

who can only be removed by the Fed board, argued against making 

the Fed IG a Senate-confirmed position. I think you all have answered this at different points, but I just want to make sure I get 

this on the record. 

Do you agree with the inspector general that the Fed does not 

need a Senate-confirmed IG? Dr. Conti-Brown. 

Mr. CONTI-BROWN. I disagree with him on this. 

Chair WARREN. Yeah. Dr. Kupiec. 

Mr. KUPIEC. I do not think he made a strong case. 

Chair WARREN. OK. And Ms. Rodrı ́guez Valladares. 

Ms. RODRI ́GUEZ VALLADARES. Right. I disagree with him as well. 

He did not provide any evidence as to why particularly the role 

should be under the Fed. 

Chair WARREN. Yeah. So the failure of Silicon Valley Bank and 

its crisis triggered an opportunity for Congress to finally bring 

greater accountability to the Fed, and we can do that from top to 

bottom. This hearing has discussed multiple bipartisan bills that 

would strengthen oversight and transparency, eliminate conflicts of 

interest, and make the Fed work better for the American people. 

It is time to end the Fed’s culture of corruption. 

Thank you very much. I want to thank you all for participating. 

I appreciate your well-prepared opening statements. We will make 

them part of the record. 
30 

Questions for the record are due 1 week from today, Wednesday, 

May 24th. For our witnesses, you will have 45 days to respond to 

any questions. 

Thank you again, and with that this hearing is adjourned. 

[Whereupon, at 4:28 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
31 

PREPARED STATEMENT OF CHAIR ELIZABETH WARREN 

Welcome to a hearing of the Senate Banking, Housing, and Urban Affairs Subcommittee on Economic Policy. 

The rapid collapse of three banks-Silicon Valley Bank, Signature Bank, and First 

Republic Bank—was a shock. These three bank failures together put more assets 

at risk than the 25 bank failures in the 2008 crash. 

Silicon Valley Bank’s failure was another symptom in what has become a predictable string of failures in the governance of the Federal Reserve. SVB’s collapse and 

the other bank failures it triggered forced the FDIC, the Treasury Department, and 

other regulators to rush to the rescue to avoid implosion of our banking system. So 

far, the FDIC Insurance Fund has suffered billions of dollars of losses, and, as a 

result of the bailouts, America’s biggest too-big-to-fail bank got even bigger. 

The failure of those banks was a first-order management disaster. Same old story: 

their executives took too much risk, got too greedy, and blew up their banks. Those 

executives need to be held accountable—and I’m working on bipartisan legislation 

to claw back money when executives take big bonuses for blowing up their banks. 

But look deeper. The implosion of all three banks are rooted in the failure of those 

banks’ regulators and supervisors—most notably, the Federal Reserve. 

The Fed’s own report on the SVB failure identified problems high and low, finding 

that as SVB got bigger and bigger, the Fed’s Board of Governors, under the direct 

leadership of Jerome Powell, weakened banking regulations. This is exactly the kind 

of deregulatory shift I warned about in 2018 when I opposed Powell’s nomination 

as Fed Chair and again in 2021 when I said that he was a dangerous man to keep 

at the Fed. 

Notably, the Fed’s report also laid blame at the feet of Congress for passing legislation to weaken bank rules—an agenda that Chair Powell eagerly embraced. 

The Fed’s report also found that bank examiners at the San Francisco Fed, which 

was SVB’s regulator on the ground, followed orders from the Fed and backed off, 

allowing SVB’s executives to pile on more and more risk. Now the San Francisco 

Fed and the Board of Governors are pointing fingers at each other, playing a pathetic game of ‘‘not it’’ while they each try to duck any accountability. 

The Fed is independent within the Government and needs to maintain that independence when it comes to doing its primary job of setting interest rates. Independence should not be conflated with a total lack of accountability when the Fed and 

its leadership make serious mistakes. Unfortunately, the Fed has faced little accountability. In recent years, a growing list of scandals has tarnished the Fed’s reputation and its credibility. 

In 2021, high-level Fed officials were embroiled in a scandal involving stock and 

other financial trades made even as the Fed took extraordinary action to right the 

economy during the COVID pandemic. The Fed responded with a sham investigation by the Fed’s own Inspector General—an official hired and fired by the Fed 

itself. This investigation failed to look into key aspects of the scandal. Even when 

the Fed IG found that there was improper trading in Chair Powell’s accounts, it imposed no consequences. 

And when Congress tried to get information from the Fed Board and from the regional Reserve Banks on the scope of this scandal and the response, we got the cold 

shoulder. The Fed simply refused to turn over key documents and information to 

Congress and stopped any outside investigation in its tracks. 

That’s not all. Reports have surfaced about Fed leadership giving secret speeches 

and sensitive information to bankers and bankers’ wealthy clients. We learned 

that—unbelievably—the President of SVB sat on the Board of the San Francisco 

Fed up until the day the bank failed. 

The culture of corruption at the Fed has already undermined the Fed’s credibility 

with the American public. 

The hearing today will discuss proposals that would make the Fed more transparent and accountable to help restore some of that credibility. I’ve got an idea— 

a bipartisan idea that I’m introducing with Sen. Rick Scott today: get the big bankers off the Reserve Banks boards of directors. 

And there’s more. Senator Scott and I also introduced a bill, which was included 

in a separate bill with Sen. Tillis, to give the Fed a true, Senate-confirmed independent Inspector General to serve as an agency watchdog. 

Mark Bialek, the current Fed IG, is here today. Mr. Bialek, I appreciate your joining us, because I know you have a busy schedule. And I want you to know that my 

concern about your current role is not personal. My concern is institutional. You 

were chosen by then-Fed Chairman Ben Bernanke in 2011, and you serve today at 

the discretion of Chair Powell and the Board. In other words, you are supposed to 
32 

be the watchdog of exactly the people who hired you and who have the power to 

fire you. That dynamic tends to create watchdogs that don’t bark. 

At best, you are in an impossible, compromised position when it comes to investigating wrongdoing at the Fed. To restore confidence in the Fed, we need a strong, 

Senate-confirmed Inspector General to conduct rigorous, independent oversight. 

I appreciate your joining us, and I look forward to discussing these and other matters today. 

PREPARED STATEMENT OF MARK BIALEK 

INSPECTOR GENERAL, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND

THE CONSUMER FINANCIAL PROTECTION BUREAU

MAY 17, 2023 

Introduction 

Chair Warren, Ranking Member Kennedy, and Members of the Subcommittee: I 

am pleased to be here today to discuss oversight and accountability at the Federal 

Reserve. 

Independent, objective oversight is critical for ensuring that Government agencies 

work efficiently; effectively; and in accordance with the laws, rules, and regulations 

that govern them. Such work is also vital for maintaining public trust in Government institutions. 

As the Office of Inspector General for the Board of Governors of the Federal Reserve System and the Consumer Financial Protection Bureau, we conduct audits, 

evaluations, and other reviews to assess the economy, efficiency, and effectiveness 

of the agencies’ programs and operations. We also investigate wrongdoing—including actions that hinder the agencies’ ability to supervise financial institutions within 

their jurisdictions—committed by agency employees, contractors, or any other person or entity. 

From 2018 to 2022, we issued 108 audit and evaluation reports. Of these reports, 

61 focused on the Board and included 175 recommendations, and 47 focused on the 

CFPB and included 122 recommendations. During the same period, we closed 170 

investigations, resulting in 116 convictions and $4.4 billion in financial actions (for 

example, fines, restitution, forfeiture, and civil judgments). Our COVID–19 pandemic response-related investigations have so far resulted in 141 investigations, 62 

convictions, and nearly $66 million in financial actions. 

Consistent with the Subcommittee’s interest in Federal Reserve oversight and accountability, my testimony has five parts: First, I will explain our overall approach 

to oversight; second, I will summarize significant, enduring challenges in Board programs and operations; third, I will detail our work on the Board’s supervision of financial institutions; fourth; I will describe our approach to the Board’s ethics matters; and fifth, I will address proposed legislation that would reform Federal Reserve 

oversight. 

Approach to Oversight 

Statutory Mandates 

Our statutory mandates are our highest priority. These mandates play a large 

part in our information technology (IT) audit and evaluation planning in particular: 

Approximately 75 percent of our IT audit and evaluation work is legislatively mandated. We also have statutory mandates related to our non-IT audit work that require reviews when a State member bank failure occurs, reviews of the Board’s supervision of covered financial companies placed into receivership, and independent 

audits of the Board’s and the Federal Financial Institutions Examination Council’s 

financial statements. In addition, we are mandated to conduct risk assessments and 

audits of the Board’s and the CFPB’s purchase card and travel card programs as 

well as reviews to determine the CFPB’s compliance with the Payment Integrity Information Act. 

With our remaining resources, we independently exercise our discretion by focusing on those programs and operations in which potential deficiencies pose the highest risk to the Board and the CFPB in achieving their strategic goals, objectives, 

and priorities; meeting budgetary and financial commitments; and complying with 

applicable laws, regulations, and guidance. 

Biennial and Dynamic Planning 

In addition to these mandates, our discretionary project selections are based on 

two types of risk-based planning activities: our biennial planning process and dynamic planning. 
33 

We begin our biennial planning process by defining the agencies’ major management challenges. Unlike other OIGs, we are not required by statute to identify these 

major management challenges but choose to do so as a best practice and to help 

focus the Board’s and the CFPB’s attention on the areas that will affect their ability 

to achieve their strategic goals and objectives. We have conducted this activity on 

a discretionary basis to help inform our planning and project selection decisions. 

This process helps to ensure that we (1) have defined the topics that can hamper 

the agencies’ ability to achieve their strategic goals and objectives, (2) are performing work that has a clear connection to those strategic goals and objectives, and 

(3) are engaged in risk-based oversight. We also assess inputs such as stakeholder 

outreach, hotline complaints, risks, and ideas identified during prior projects. 

Then, we prioritize projects that we plan to initiate over the remainder of the 

planning period’s time horizon. The project selections we make are based on considerations such as (1) the connection to agency mission or strategic objectives, (2) the 

dollar amount associated with the relevant program activity, (3) the operational risk 

associated with the activity, (4) the reputational risk associated with the program 

or activity, and (5) stakeholder request or interest in the audit or evaluation. 

There is also a dynamic aspect to our planning, as we strive to conduct timely 

and relevant work. We engage in dynamic planning activities in response to developments at or affecting the agencies, input from congressional and other stakeholders, and hotline complaints. Such issues may cause us to reconsider our planned 

activities and pivot to initiate a project that we had not initially contemplated in 

the plan. Recent examples include our pandemic response oversight work, which required us to realign our audit, evaluation, and investigative resources to oversee the 

Board’s lending facility efforts, and our ethics program evaluation for the Board, 

which is explained in greater detail in my statement. Our IT audits and evaluations 

can be informed by reviews of newly issued Federal policies and guidance, engagement with other OIGs and the U.S. Government Accountability Office, and audit 

and fraud risk assessments. 

Major Management Challenges for the Board 

Our oversight of the Board covers every facet of its programs and operations. 

From 2018 to 2022, we issued 61 reports on the Board, which included 175 recommendations to improve the economy, efficiency, and effectiveness of its programs 

and operations. Nearly three-quarters, or 129, of these recommendations have been 

closed. 

From this body of work, as well as our knowledge of the Board’s programs and 

operations and our outreach with agency management, key themes emerge that 

point to significant and enduring challenges that, if not addressed, are likely to 

hamper the Board’s accomplishment of its mission. We are close to issuing our 

major management challenges for the Board for 2023. As noted, the issuance of 

management challenges reports is not mandated for us. These challenges are complex, and addressing them will require multiyear efforts. We will continue to focus 

on these areas, make recommendations, and ensure that the Board acts on those 

recommendations. 

I would like to highlight four of the Board’s eight challenges for you, which have 

carried over from our 2021 list of Board challenges: 

1. Strengthening organizational governance and enterprise risk management 

(ERM) 

2. Remaining adaptable while supervising financial institutions 

3. Enhancing oversight of cybersecurity at supervised financial institutions and 

service providers 

4. Ensuring an effective information security program 

Other challenges that we have identified for the Board are evolving with financial 

sector innovations; managing hybrid work and workforce planning, updating the 

human capital system, and advancing diversity initiatives; monitoring COVID–19 

pandemic emergency lending facilities and underlying loan portfolios; and ensuring 

that physical infrastructure effectively meets mission needs. 

Organizational Governance and ERM 

The Board has complex, decentralized governance structures for guiding the operations of the Federal Reserve System; challenges exist in determining the appropriate balance between centralizing or decentralizing certain functions and responsibilities. Further, because of its decentralized structure, the Board has a consensusdriven culture that makes it difficult to establish an enterprisewide approach for 

managing risks and administering certain business functions. The Board has made 

some progress toward enhancing its organizational governance and establishing an 
34 

ERM program but should continue to focus on governance challenges at both the 

System and Board levels. The Board may have to address cultural challenges when 

introducing new governance structures, as these efforts require considerable coordination and effective change management. In circumstances where enhanced governance results in revised business processes, the Board will need to ensure that effective controls are in place and are actively monitored. 

Adaptability in Financial Institution Supervision 

Promoting the safety and soundness of individual financial institutions and financial stability more broadly is a core mission of the Board. The Board should assess 

the effectiveness of its supervisory tools and approaches in light of developments in 

the banking sector, such as the failure of Silicon Valley Bank. In addition, the Board 

should ensure that the System’s examination workforce is sufficiently trained to address changing conditions by reinforcing existing, or creating new, supervisory rules 

and guidance. Maintaining strong cooperative relationships with other agencies to 

coordinate supervisory activities; leveraging the work of other supervisors, as appropriate; and collaborating, as necessary, on any updates to banking regulation and 

policy will also be important for the Board. 

Oversight of Cybersecurity at Supervised Financial Institutions 

Cyberthreats to financial institutions supervised by the Board continue to increase in both number and sophistication. Cyberattacks can create substantial operational risk, disrupt critical services, and ultimately affect financial stability. As a 

result, cybersecurity remains an area of significant focus for supervised financial institutions and Federal financial regulators. The Board should continue to ensure 

that its supervisory approaches for financial institutions and service providers 

evolve with changing cybersecurity risks, ensure that it has effective and efficient 

approaches to assess the threat an incident poses, and ensure that banking organizations or any service providers involved take appropriate action to minimize any 

disruption to the organizations’ or providers’ operations or to the U.S. banking system. 

Ensuring an Effective Information Security Program 

Information security continues to be a key risk area for the Board. While the 

Board maintains an effective information security program and is taking multiple 

steps to strengthen and mature its program, the agency faces challenges in three 

key areas: 

1. Full implementation of a zero trust architecture (ZTA). A ZTA is a set of system design principles and a coordinated cybersecurity and system management 

strategy based on an acknowledgment that threats exist both inside and outside traditional network boundaries. The Board’s complex short- and long-term 

challenges in successfully implementing its ZTA are compounded by the decentralized nature of some IT services, which results in an incomplete view of the 

risks affecting the Board’s security posture. Successful implementation of a 

ZTA will require close partnerships and coordination between Board business 

lines and divisions and the overall System. 

2. Optimal integration of ERM and cybersecurity risk management. Board governance structures and reporting relationships between various disciplines 

need to be refined, and as the Board’s ERM program matures, IT governance 

and risk management processes will need to be aligned. 

3. Enhanced IT supply chain risk management practices. The Board will need to 

strengthen processes to ensure that it has effective insight into and knowledge 

of the cybersecurity environment of third-party and cloud computing providers. 

Effective IT supply chain risk management will require close coordination and 

integration across Board divisions and disciplines, such as procurement, ERM, 

and data management. 

Our Work Pertaining to Bank Supervision 

A core mission of the Board is to promote the safety and soundness of individual 

financial institutions and to monitor their effect on the financial system as a whole. 

As part of our independent oversight authority, we have conducted numerous engagements to assess and identify opportunities to enhance the Board’s supervisory 

programs and operations. Our projects assess whether these programs operate consistently with applicable laws, regulations, and other standards, including supervisory guidance, examination manuals, or management’s expectations documented 

in policies and procedures. 

During the 2008 financial crisis, our office performed numerous reviews of failed 

State member banks because of our statutory mandates on this topic, and we identi-
35 

1Office of Inspector General, ‘‘Summary Analysis of Failed Bank Reviews’’, September 30, 

2011. 2Frequently, these prior reviews cited concentrations in commercial real estate or construction, land, and land development loans. 3Section 38(k) of the Federal Deposit Insurance Act, as amended, requires that we complete 

a review of the agency’s supervision of a failed institution and issue a report within 6 months 

of notification from the Federal Deposit Insurance Corporation OIG that the projected loss to 

the Deposit Insurance Fund is material. Section 38(k) defines a material loss to the Deposit Insurance Fund as an estimated loss in excess of $50 million. 

fied common factors and themes related to the cause of the failures and the Board’s 

supervision of the institutions. We reported those common themes in a compilation 

report. 1 Some of the themes included (1) bank management pursuing robust growth 

objectives and making strategic choices that proved to be poor decisions; (2) rapid 

loan portfolio growth exceeding the bank’s risk management capabilities or internal 

controls; (3) asset concentrations tied to particular types of loans, 2 which increased 

the bank’s vulnerability to changes in the marketplace and compounded the risks 

inherent in individual loans; and (4) bank management failing to have sufficient 

capital to cushion losses. Additionally, our prior reports revealed certain practices 

that contributed to specific failures, such as risky funding strategies and incentive 

compensation programs that inappropriately encouraged risk taking. With respect 

to the supervision of the failed State member banks, many of our prior reports noted 

that examiners identified key safety and soundness risks but did not take sufficient 

supervisory action in a timely manner to compel the board of directors and management to mitigate those risks. 

More recently, our office independently decided to initiate reviews pertaining to 

the supervision of certain banking organizations. On March 14, 2023, we initiated 

an engagement addressing the failure of Silicon Valley Bank, a State member bank 

located in Santa Clara, California, and supervised by the Federal Reserve Bank of 

San Francisco (FRB San Francisco). We received notice from the Federal Deposit 

Insurance Corporation on the estimated loss to the Deposit Insurance Fund last 

week, thus triggering our statutory requirement to review Silicon Valley Bank’s failure and supervision by November. 3 Nevertheless, we plan to issue our report in 

September 2023. 

Also on March 14, 2023, we initiated an independent review assessing the supervision of Silvergate Bank, a State member bank located in La Jolla, California, and 

supervised by FRB San Francisco. Silvergate Bank is an open institution and has 

voluntarily begun the process of liquidation. 

For both reviews, we will seek to evaluate the Board’s and FRB San Francisco’s 

supervision of the institutions and will make recommendations, as appropriate. We 

anticipate having both reviews completed in September. We also continue to monitor 

banking conditions to assess whether other situations may trigger statutory requirements or warrant our office initiating reviews. 

In addition to our reviews of the Board’s and FRB San Francisco’s supervision of 

certain banking organizations, we also use our law enforcement authorities to investigate bank fraud committed by bank officials who falsified financial records, lied 

to or misled examiners, or obstructed examinations in a manner that may have hindered the Board’s ability to carry out its supervisory operations. 

Recent high-profile bank fraud investigations include the following: 

• Former Bank Executives and Others Guilty in First NBC Bank Fraud. In April 

2017, the $5 billion First NBC Bank failed. Based in New Orleans, the bank 

was a subsidiary of First NBC Bank Holding Company, a Board-supervised 

bank holding company. In a long-running scheme that led to First NBC Bank’s 

collapse, several executives conspired with borrowers to defraud the bank. The 

executives extended loans to borrowers who were unable to repay them, then 

extended new loans to the borrowers to cover their existing loans. The executives enriched themselves through fees earned on the loans while concealing 

their actions—and the true financial condition of the bank—from the board of 

directors and outside auditors and examiners. By the time the bank collapsed, 

these bogus loans totaled hundreds of millions of dollars. The bank’s failure cost 

the Deposit Insurance Fund nearly $1 billion. Former First NBC President and 

Chief Executive Officer Ashton J. Ryan, Jr., was found guilty of all 46 counts 

against him, including bank fraud, conspiracy to commit bank fraud, and making false entries in bank records. Former Executive Vice President Robert B. 

Calloway, former Chief Credit Officer William J. Burnell, and former General 

Counsel Gregory St. Angelo all pleaded guilty to conspiracy to commit bank 

fraud. In addition, several business owners and borrowers pleaded guilty to conspiracy to commit bank fraud. Each faces prison terms ranging from 5 to 30 
36 

4Office of Inspector General, OIG Closing of 22-0028-I Board Trading Activity, July 11, 2022. 

5Office of Inspector General, ‘‘The Board Can Further Enhance the Design and Effectiveness 

of the FOMC’s Investment and Trading Rules’’, OIG Report 2023-SR-B-006, April 26, 2023. 

years and fines up to $1 million or the greater of twice their gains or twice the 

losses to the victims. Others have been convicted for various roles in defrauding 

First NBC Bank, including a former assistant district attorney for St. Bernard 

Parish. 

• Wells Fargo Agrees to Pay a $3 Billion Civil Monetary Penalty Resolving Criminal and Civil Investigations Into False Sales Practices. Wells Fargo and Co. and 

its subsidiary, Wells Fargo Bank, N.A., agreed to pay $3 billion to resolve three 

matters stemming from a years-long practice of pressuring employees to meet 

unrealistic sales goals, which led thousands of employees to provide millions of 

accounts or products to customers under false pretenses or without consent, 

often by creating false records or misusing customers’ identities. As part of 

these agreements, Wells Fargo admitted that it collected millions of dollars in 

fees and interest the company was not entitled to, harmed the credit ratings 

of certain customers, and unlawfully misused customers’ sensitive personal information. 

Our Recent Work on Board Ethics Matters 

In the wake of widespread reporting on personal investment and trading incidents 

involving Board and Federal Reserve Bank officials, we have been evaluating and 

investigating ethics matters at the Board and the Reserve Banks. 

In October 2021, the Board requested that we ‘‘conduct an independent review of 

whether the 2020 trading activities of Rob Kaplan, President of the Dallas Federal 

Reserve Bank; Eric Rosengren, President of the Boston Federal Reserve Bank; and 

Rich Clarida, Vice Chair of the Board of Governors of the Federal Reserve System 

violated the law or Federal Reserve policies, whether the trading activities warrant 

further investigation by other authorities, and any other related matters that you 

deem appropriate.’’ 

In response, we initiated separate investigations of Board and Reserve Bank officials. Given the public reporting on Chair Jerome Powell’s December 2019 financial 

transactions, we independently decided to expand our investigation of former Vice 

Chair Clarida’s trading activities to also cover the chair’s trading activities. 

Our investigation of senior Reserve Bank officials is ongoing, so I cannot disclose 

any details at this time, but we concluded our investigation into the trading activities of the senior Board officials and publicly released our results. 4 Although we determined that former Vice Chair Richard Clarida’s and Chair Powell’s trading activities did not violate applicable laws, rules, regulations, or policies, we reported 

that 

• Former Vice Chair Clarida omitted several trades on his 2019 and 2020 financial disclosure forms but later notified the Board’s ethics official of the omissions and filed an amended form, which we verified as accurate 

• On behalf of a Powell family trust, a trust financial advisor executed five trades 

in December 2019 to facilitate charitable donations during a Federal Open Market Committee (FOMC) trading blackout period 

Separately, we initiated an evaluation to assess the design and effectiveness of 

the FOMC’s personal investment and trading rules, as well as the Board’s and the 

Reserve Banks’ approach to monitoring personal investment and trading activities 

for possible conflicts of interest. Following the personal investment and trading incidents subject to our above-referenced investigations and the subsequent media coverage of those incidents in 2021, the FOMC adopted the Investment and Trading 

Policy in February 2022 to support public confidence in the impartiality and integrity of the FOMC’s work. The policy prohibits covered individuals from purchasing 

individual securities, restricts active trading, and revises certain public reporting 

and disclosure requirements, among other things. 

We determined that the new FOMC personal trading and investment policy 

should be enhanced. 5 Specifically, the Board should determine which requirements 

that apply to senior FOMC officials should also be extended to additional staff based 

on the risk presented by their access to confidential FOMC information, ethics programs should be strengthened to make reviews of financial disclosure reports more 

uniform and to enforce consequences for policy violations, and the information individuals provide in their financial disclosure reports should be verified for completeness and accuracy. We made six recommendations to address these issues, which 
37 

6Office of Inspector General, ‘‘Inspector General Letter on S. 915, a Bill Regarding Presidential Appointment and Senate Confirmation of the Inspector General for the Board and the 

CFPB’’, April 26, 2023. 

the Board concurred with. We will monitor the Board’s progress in addressing our 

recommendations. 

Proposals To Reform Federal Reserve Oversight 

Legislation has been proposed that would require presidential appointment and 

Senate confirmation (PAS) of the inspector general (IG) for the Board and the 

CFPB. 6 The argument is that a PAS IG for the Board and the CFPB would be a 

more independent IG. I want to provide you with information about our authorities 

and operations as a designated Federal entity (DFE) IG. 

Our office is as independent as any OIG, whether headed by a DFE IG or PAS 

IG. Further, compared with PAS IGs, we have the same authorities, are subject to 

the same congressional oversight, and are subject to the same IG removal provisions. 

• We have the same authorities to audit and investigate without interference 

from our agency heads. We have unfettered access to all agency records and 

documents; subpoena authority to require the production of records from nonfederal entities; law enforcement powers, such as executing arrest and search 

warrants; and the ability to hire our own staff and control our own resources. 

We also have the same reporting mechanisms at our disposal if attempts are 

made to resist or object to our oversight activities or to significantly delay our 

access to information. 

• We are subject to the same congressional oversight to ensure we are held accountable. DFE IGs are mandated to keep Congress fully and currently informed about issues of fraud, waste, or abuse within our agencies through various reporting mechanisms. We also provide congressional testimonies, briefings, and responses to correspondence and inquiries regarding our work. 

• All IGs are subject to removal, whether by the president in the case of PAS IGs 

or an agency head in the case of DFE IGs. Under the Inspector General Act 

of 1978, the president or an agency head must notify Congress in writing of the 

reasons why an IG will be removed at least 30 days beforehand. This safeguard 

is intended to prevent IGs from being removed for political reasons or simply 

because they are effectively identifying fraud, waste, or abuse. In our case, 

there is an added barrier to removal under the Inspector General Act of 1978. 

If a DFE agency is led by a board or a commission, removal of the DFE IG requires the written concurrence of two-thirds of the members of the board or 

commission. In the case of my office, removal would require the approval of four 

of the seven Board governors, not just the chair. 

In addition, over 1,200 Federal Government positions require Senate confirmation. The number and length of IG vacancies over the years have raised questions 

about the effect such vacancies have on the ability of OIGs to carry out their statutory duties and responsibilities. A 2018 study conducted by the U.S. Government Accountability Office found that over a 10-year period, PAS IGs had more and longer 

IG vacancies than did DFE IGs. As of April 2023, there were 13 IG vacancies, 7 

of which are PAS IG positions. 

I believe our current DFE IG structure is best suited to provide independent and 

objective oversight of the Board and the CFPB. I welcome the opportunity to further 

discuss this proposal, as well as the proposal to expand our jurisdiction to include 

the Reserve Banks, with Members of the Subcommittee. 

Closing 

In conclusion, we have been providing independent, objective oversight of the 

Board and the CFPB to ensure that they work efficiently, effectively, and in accordance with the laws, rules, and regulations that govern them. We will continue to 

actively engage with internal and external stakeholders to identify existing and 

emerging risks facing the Board and the CFPB so that we can allocate our resources 

to those areas that provide the highest value-added oversight. 

Thank you, Chair Warren, Ranking Member Kennedy, and Members of the Subcommittee. This concludes my prepared statement. I would be pleased to respond 

to your questions. 
38 

1See Titles VII (Derivatives and Swaps) and X (Consumer Financial Protection Bureau) of 

the Dodd-Frank Act, Pub. L. 111-203, 124 Stat. 1367 (2010). 2See 18 USC §1906. For more, see Peter Conti-Brown, ‘‘The Curse of Confidential Supervisory 

Information’’, Brookings Institution Report, Friday, December 20, 2019. 

PREPARED STATEMENT OF PETER CONTI-BROWN 

CLASS OF 1965 ASSOCIATE PROFESSOR OF FINANCIAL REGULATION, ASSOCIATE PROFESSOR OF LEGAL STUDIES AND BUSINESS ETHICS, THE WHARTON SCHOOL OF THE

UNIVERSITY OF PENNSYLVANIA

MAY 17, 2023 

Over the past 2 months, three of the roughly 20 banks with assets between $100 

billion and $250 billion have failed. Of the remaining 17, we do not know how many 

would have failed but for the extraordinary interventions of the Government related 

to the other three. Since March 12, 2023, we have been in a roiling banking crisis, 

a fact acknowledged by the very interventions that the Fed, Treasury, and FDIC 

have made to prevent this crisis from spiraling into a financial cataclysm. 

Responsibility for the failure of these banks relies primarily with the bankers that 

mismanaged them. But the failures of so much of this market segment also invites 

important questions. The extraordinary powers used over the last 2 months were 

designed or redesigned after the 2008 financial crisis, especially through Congress’ 

passage of the 2010 Dodd-Frank Act. At the time, it was the hope of Congress, the 

U.S. President, and the American people that such unusual and extraordinary Government interventions would be rare: rare because individual bank failures would 

be preventable through robust regulation and supervision and rare because even if 

unprevented an individual bank’s failure would not a systemic crisis make. 

March 12 was the realization that those efforts did not work. The questions we 

must ask ourselves, among many others, are these: (1) what did we fail to do in 

the years leading up to March 2023; (2) what changes does this crisis invite us to 

ponder that can strengthen us against future crises; and (3) what changes must we 

make to restore the confidence of the American people in our Government’s ability 

to ensure that our financial system stays robust, resilient, and fair for all members 

of our society and not just the wealthiest among us. 

More specifically, I will focus on the consequences of a change in supervisory culture, regulatory framework, and legislative context since 2017; the need for a better 

information-gathering system than currently exists within the Federal Reserve System, especially with respect to an independent, Senate-confirmed Inspector General 

for the System; and removing the stain of special interest from the Fed’s governance 

structure, a stain placed by compromise during a different time that has long outlasted any useful purposes. 

The Consequences of Legislative, Regulatory, and Supervisory Changes 

Since 2017 

The Dodd-Frank Context for Regulation and Supervision 

Dodd-Frank made several vital changes to our financial system as relevant to 

banking crises. In many cases, it was responsive to the idiosyncrasies of 2008, including by overhauling the way that derivatives are traded and creating a new financial regulatory body focused on financial products that consumers may not need 

or may not understand. 1 In other ways, it sought to create a system that would 

make the financial system more resilient to financial crises of all kinds, no matter 

the specific cause. 

Among these changes is a kind of theory of financial risk espoused in Dodd-Frank. 

That theory is one of supervisory discretion. As in other areas of legislation, Congress deemed financial risk too idiosyncratic, too ephemeral and changeable to be 

managed exclusively by legislative fiat. Instead, Congress created a system that 

gave the important decision-making authority to bank supervisors, on the ground. 

These supervisors would be able to monitor financial stress as it occurred, in real 

time, with the ability and authority to intervene aggressively when financial risks 

changed from the necessary and tolerable to the unnecessary and intolerable. Supervisors would work mostly in secret—indeed, Congress criminalized the supervisors’ 

disclosure of this ‘‘confidential supervisory information’’ so that the exchange of information between banks and Government could be candid, free-flowing, and productive. 2 Regulators like the Federal Reserve, FDIC, and Comptroller of the Currency would oversee these supervisors, but the real work of accomplishing congres-
39 

3This discussion draws from my work with Sean Vanatta, including in the article ‘‘Risk, Discretion, and Bank Supervision’’, available here, and our longer history of bank supervision, ‘‘The 

Banker’s Thumb: A History of Bank Supervision in America’’ (under contract, Princeton University Press). 4 Enhanced Prudential Standards are found in the Dodd-Frank Act, §165, supra note 1. 5See Section 165 of Dodd-Frank, supra note 1. 

6Pub. L. 115-174 (May 18, 2018). 

7 Id. Title IV. 

sional priorities for managing financial risk would belong to these quiet bureaucrats 

toiling in obscurity with the full weight of governmental authority behind them. 3

The theory of this focus on bank supervision was not new to Dodd-Frank. It is 

a theory older than our Federal banking laws. What Dodd-Frank did was expand 

the reach of supervision. Supervisors would be able to take idiosyncratic risks and 

look at the entire system. They would be able to use new tools to gather more information to identify risks with greater lead times. 

The cost of such supervision is not small, either for the Government or for the 

banks themselves. Reflecting a long-standing enthusiasm for protecting smaller 

banking institutions from the full brunt of these costs, Dodd-Frank drew a line— 

banks with assets below $50 billion would not be subject to the enhanced prudential 

standards that would give supervisors even more tools to spot systemic and idiosyncratic concerns before they became cataclysmic. Those banks above that threshold 

would, on the other hand, be subject to precisely these tools. 

The tools came in a few varieties, some regulatory, most supervisory. 4 On the reg- ulatory side, among many other requirements, banks above the $50 billion threshold 

had to present clear plans for how they would fail in an orderly way, without triggering the more dramatic interventions that we have seen this year. They would be 

subject to higher liquidity standards to ensure that they could manage large withdrawals. 5 They would be subject to higher capital requirements, meaning that they 

would have to rely on the equity markets to fund themselves more extensively than 

the flighty funding they would find in credit markets, including from depositors. 

And they would be subject to annual ‘‘stress tests’’ to see how the banks’ balance 

sheets would withstand deteriorating economic conditions. 

These legislative and regulatory changes were not the most important consequence of the 2008 financial crisis. The more important change was in the change 

to bank supervision, the management of the public-private relationship that 

undergirds our financial system. Even without these regulatory changes, the supervisory apparatus expanded and reformed after 2008 meant that there would be forward-leaning systems in place to catch idiosyncratic risks not anticipated by either 

legislative or regulatory changes. 

Changes in 2018: The Consequences of the Economic Growth, Regulatory Relief, and 

Consumer Protection Act of 2018 

In 2018, after many months of debate, President Trump signed the Economic 

Growth, Regulatory Relief, and Consumer Protection Act. 6 In an era of omnibus 

bills, often hundreds or thousands of pages long, one of the most impressive feats 

of the EGRRACPA (or S. 2155, as it is more commonly known), is its length: the 

entire bill is just 75 pages long. The part that is relevant to the present banking 

crisis, Title IV of that act, is just 5 pages long. In those 5 pages, entitled ‘‘Tailoring 

Regulations for Certain Bank Holding Companies’’, Congress changed the $50 billion threshold to $250 billion. For those largest banks—of which there are currently 

thirteen—nothing would change on a regulatory and legislative level. For banks 

with assets of $100 billion to $250 billion, Congress instructed the Fed to make specific determinations about the appropriateness of all enhanced supervisory standards before proceeding. The Act did not require a specific conclusion on these questions, but at a stroke Congress did require that all preexisting regulations be evaluated all over again. 7

Over the last 2 months, three of the twenty banks within that band of $100 billion to $250 billion have failed. (In the somewhat absurd vernacular of banking, we call 

these banks ‘‘regional banks.’’). We do not know how many of the remaining seventeen would have failed but for the emergency declarations and concomitant liquidity 

support that the Federal Government’s extraordinary actions facilitated thereafter. 

Thus, while the focus is often on Silicon Valley Bank, the fact is that we have 

had an intolerable failure of a market segment—when 15 percent of banks fail within the very class that Congress deregulated in 2018, we have enough smoke to inquire about the presence of fire. 

One fundamental question for Congress in whether to revisit the ‘‘regulatory relief’’ provided by S. 2155 is to inquire into the counterfactual: if the threshold for 

enhanced prudential supervision had stayed at $50 billion, rather than be raised to 
40 

$250 billion (with mandatory evaluations for the ‘‘regionals’’ between $100 billion 

and $250 billion), would we have avoided the banking crisis of 2023? 

Counterfactuals, we know, are thought experiments. We cannot answer them definitively. But based on the information we have, I believe that the answer to this 

question is yes. In a world without 2155, we would not have seen such aggressive 

expansion by the three failed banks, we would not have seen such aggressive risk 

mismanagement, we would have seen more red flags in time to resolve these banks 

in a more orderly way, and we would have sustained a supervisory culture in this 

specific context that would have overridden bank objections when supervisors 

flagged these concerns. 

That is a long list of conclusions that require unpacking. It is clear, now as in 

2018, that discontinuities in regulatory treatment change bank behavior. The very 

fact that bankers now at the center of this crisis lobbied hard for a change in treatment reflects that desire. What 2018 did was give a green light for dramatic expansion. In the low-interest rate environment of the pandemic, with its clientele awash 

in liquidity, Silicon Valley Bank—to cite one of the three examples—decided to pour 

rocket fuel on its business model, but without adequate risk management to prepare 

for the consequence of such growth. If that decision had meant costlier enhanced 

prudential supervision, we can be sure that bankers would have responded with at 

least some caution, some modicum of cost-benefit analysis. Instead, they plunged 

full steam ahead. 

Even if these bankers had made the determination that growth at all costs was 

appropriate, they would have then been subject under the original Dodd-Frank to 

the enhanced liquidity and capital requirements that would have presented speed 

bumps along the way. By early 2023, the cake was baked, so to speak. Silicon Valley 

Bank was a failed institution. No amount of liquidity coverage ratios, living wills, 

capital requirements, or stress tests could have prevented it. What would have been 

different was the liquidity and capital context of 2021 and 2022. In that world, when 

the cake was still the batter, we would have had many more tools and many more 

warnings to prevent such wild, amateurish, and irresponsible risk taking from 

building into the rush of failure. 

This is a point worth emphasis. Rapid growth in banking is almost always a dangerous phenomenon, because it reflects a failure of diversification in both liability 

and assets. A sudden influx of funding will usually come from one source: a very 

large client, a very large group of brokered deposits, a single sector of the economy 

enjoying a surge in funds. That lack of diversification means the failure of that single source can result in the sudden failure of liquidity. And with the influx of that 

funding, banks must make rapid-fire decisions about where to put that money. In 

such an environment, they are likely to invest without diversification, which takes 

time. A failure in the asset class designated to hold this rapid growth will, in turn, 

be a failure of the newly large bank. 

Dodd-Frank was meant to put brakes on precisely this growth by imposing liquidity and capital requirements that would either check that growth completely or 

throw red flags to bankers and supervisors in the face of it. For the banks no longer 

subject to those early warning systems, the red flags would be fewer. 

What Bank Supervision Got Right, 2021–2023 

Fewer red flags, perhaps, but not missing entirely. Perhaps the most frustrating 

part of the story of the banking crisis of 2023 is the fact that these were not esoteric 

risks that these regional banks were taking. In the 2008 crisis, banks invested in 

such exotic instruments that even the bankers and policymakers themselves could 

not keep up. The world sat anxiously by as journalists, central bankers, and many 

others sought to explain the arcana of synthetic collateralized debt obligations and 

naked credit default swaps. 

In 2023, the risks that failed bankers at failed banks say caught them by surprise 

were the most garden-variety risks that any bank faces at any time. The basic business model of banking is to lend money out through deposits at rates lower than 

banks receive by investing those loaned funds into longer-term assets. In times of 

tightening financial conditions, this means that banks have to make changes—interest rates are going up, which means that the money they will have to pay to depositors will go up, while that same action will make the assets banks hold go down 

in value. There is an entire vast bank accounting apparatus meant to capture these 

risks, but the overwhelming majority of banks and bank supervisors caught this 

problem early on. As the Federal Reserve started aggressively hiking interest rates 

in 2022, banks had to scramble to fix their balance sheets so that they could stay 

solvent. 

Nearly all of them did. In an important study, economists have determined that 

of 4,700 banks in the United States, about 190 of them got this basic banking prob-
41 

8See Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorksi, and Amit Seru, ‘‘Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor 

Runs?’’, 24 Mar 2023. 9See Greg Becker, Testimony before the U.S. Senate Committee on Banking, Housing, and 

Urban Affairs, May 16, 2023. 

lem wrong and are effectively insolvent because they could not change their balance 

sheet in the long leadoff given by the Fed in this period of tightening financial conditions. 8 That is barely 4 percent, meaning 96 percent of banks have successfully 

managed these period of remarkable monetary transition. Another question for us 

to ask about the banking crisis, then, is not why did these banks fail, but why didn’t 

more of these banks fail? 

One important reason for this lack of failure is probably because bank supervision 

largely still works with incredible efficacy. Because the details of nearly every interaction between bank and bank supervisors is cloaked in secrecy, there is a fundamental asymmetry in bank supervision. Bank supervisors’ failures become extremely public and often demoralizing. Bank supervisors’ successes are wrapped in 

secrecy. 

What Supervision Got Wrong, 2021–2023 

A 96 percent success rate in these monetary conditions is an enormous credit to 

the U.S. banking system, including the U.S. bank supervisory system. But the fact 

that the three major failures were enough to tilt us into a costly, unjust, and inefficient bailout of banks and bank depositors is extremely troubling. What, then, went 

wrong? 

The basic discretionary activities of bank supervisors who monitor the simple, predictable, and predicted blunders of failed bankers did not go wrong, at least not in 

general. According to the postmortem conducted by the Federal Reserve after the 

failure of Silicon Valley Bank, bank supervisors did anticipate the very concerns, on 

both the liability and the asset sides of the balance sheets. It was a relief to read 

this supervisory fact, but not a surprise. Again, the failures at these banks were 

so basic as to be mystifying. The efforts by these bankers to displace blame to the 

macroeconomic, monetary, and even—perhaps most alarmingly—the social media 

context is sheer codswallop. 9 None of these factors comes anywhere near explaining 

why these failed bankers did so poorly at their work. Bankers knew that they were 

taking these breathtaking risks. Even when they didn’t know because their business 

talents were wanting they soon learned because they received warnings from bank 

supervisors. 

Here, then, is perhaps the most important legacy of S. 2155. Supervisors, even 

after the passage of that Act, retained discretion to warn bankers of their misbegotten behavior. What they lacked was a fast and nimble institutional apparatus to 

change that banker behavior. For that, supervisors need support from regulators, 

who need support from Congress. 

Supervisors raised red flags at Silicon Valley Bank. They almost certainly raised 

similar flags at other banks. Those other banks made important changes to their 

funding and assets in 2021–2022; Silicon Valley Bank (and perhaps others) did not. 

If those failed banks had paid the same heed to their supervisors that the successful 

banks did, there would have been no banking crisis in 2023. That the failed banks 

felt they could ignore their supervisors with impunity tells us something that is broken within bank supervision. Banks mostly do a very good job working productively 

with bank supervisors. What becomes problematic is when they don’t. Silicon Valley 

Bank did not work well with supervisors. It didn’t work well at almost anything. 

We need a system for that kind of misbehavior, too. 

Perhaps more than anything, this is the legacy of S. 2155. Regulatory relief 

meant, even sometimes explicitly, pulling back on the ability of supervisors to force 

bankers to wake up to the risks that they had taken. 

When we encounter a crisis of an entire asset class rendered recently insulated 

from enhanced regulatory scrutiny, we should ask ourselves not only whether that 

scrutiny would have prevented the crisis. I think the counterfactual suggests that 

increased scrutiny would have made all the difference, but recognize that scholars 

will continue to analyze the banking crisis of 2023 for years to come. The question, 

then, is slightly different. We should ask ourselves whether these regulatory and supervisory changes are good in themselves. That debate should be clear: so-called regional banks controlling more assets than the GDP of the country of Greece do indeed impose systemic risk to the rest of us. We should design our regulatory and 

supervisory strategies not only for the outstanding majority of banks that either 

spot their own risks or work well with supervisors to do so when they have been 
42 

10Federal Reserve Board announces that Vice Chair for Supervision Michael S. Barr is leading a review of the supervision and regulation of Silicon Valley Bank, in light of its failure, 

March 13, 2023. 11 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, April 

28, 2023. 12 I make these arguments in a forthcoming comprehensive political history of the Federal Reserve, ‘‘The Federal Reserve: An American History’’ (forthcoming, WW Norton). 13 An exception is in Title X of Dodd-Frank, which removed most consumer financial protection oversight from the Fed and deposited it at the Consumer Financial Protection Bureau. 14Pub. L. 95-452, 92 Stat. 1101 (October 1, 1978). 

slow at that basic task. We need a system that will require banks to make those 

changes before their misbehavior triggers a financial crisis for us all. 

The Need for Better Information From Within the Fed 

I present my main conclusions about the legislative, regulatory, and supervisory 

changes we should see as a result of the banking crisis of 2023 in Part I above. But 

there is more to learn. One of the most important questions, given the discretion 

that S. 2155 still provided to it, is why and how it exercised that discretion during 

the critical period leading up to the crisis. This includes two full years during the 

Biden administration when the President of the United States made clear a set of 

regulatory and supervisory priorities that the Fed appeared not to follow. It includes, too, the answers to the questions posed above: why did supervisory warnings 

not turn into supervisory actions? 

Almost immediately after the March 12 triggering of extraordinary Federal authority, Fed Chair Jerome Powell and Vice Chair for Supervision Michael Barr announced a ‘‘careful and thorough review’’ of the supervisory and regulatory failings 

that preceded the collapse of Silicon Valley Bank. 10 The subsequent report contained the Fed’s overview of these failures, including detailed excerpts of examination reports usually subject to restrictions on confidential supervisory information. 11

These disclosures are laudable. The conclusions of this report in some respects 

make good sense. But in my view, the investigation should never have occurred in 

public. The Federal Reserve and the extraordinary public servants who work therein 

are good at many things. They are not good at self-investigation for purposes of public accountability. 

Nor should we expect them to be so. 12 The Fed, through its history, has been 

among the very best institutions at navigating political complexity to its favor. Congress, even in the face of financial crisis or scandal, has expanded the Fed’s authorities, sometimes even over the Fed’s own objections. It has rarely removed that authority. 13 This is not an accident: the Fed fiercely manages its own reputation; cultivates politicians, journalists, and academics; and otherwise seeks to protect its 

own interests. 

I do not fault the Fed for this role. Its institutional character and policy prerogatives are important. But these very facts, these very principles, mean that it provides too much of its own oversight. This cannot be. The Fed cannot supervise itself. 

That is Congress’ job. 

Congress did create Inspectors General in 1978 to provide some of this oversight. 14 The inspector general for the Federal Reserve, however, is appointed by 

consultation between the Fed and the CFPB, which shares a single individual inspector general. To be more precise still, this inspector general oversees only the 

Fed’s Board of Governors, not the Federal Reserve System. 

We need better accountability than this system provides. In particular, I recommend three changes. First, the CFPB and Federal Reserve should be separated 

for these purposes. Their functions, structure, and purposes are all different. The 

oversight Congress requires for each agency should reflect those differences. Second, 

the Inspector General for the Federal Reserve should be for the full Federal Reserve 

System, including the Federal Reserve Banks and not just the Fed’s Board of Governors. Much of the policymaking as relevant to banking crises (and much more) 

includes the participation of the Federal Reserve Banks. They require congressional 

oversight too. And finally, the Inspector General for the Fed should be a separate 

presidential appointment, confirmed by the Senate. This is all the more important 

because other forms of accountability and oversight, principally through the courts, 

is mostly foreclosed when it comes to the Fed. A presidential appointment will enhance the independence and credibility of the Inspector General in a way the position does not currently enjoy. 
43 

Restoring the Fed’s Credibility by Removing Bankers From Federal Reserve Bank Boards 

The Federal Reserve Act, signed into law by Woodrow Wilson on December 23, 

1913, created a somewhat circuitous institution. It is a melange of institutions and 

individuals sometimes with ambiguities about who holds responsibility and to what 

end. Even when Congress rewrote that structure in 1935 to place most authority 

for the Fed’s functions in Washington, DC, it left the curiosities largely in place. 

The most nefarious of these is the presence, by law, of private bankers and those 

appointed by private bankers on the boards of directors of the twelve Federal Reserve Banks. The role of these private bankers has changed over time, but crises 

like the present invite opportunity to reflect on a more basic question: what business do these bankers have with formal, institutionalized seats at the table of their 

own regulators? 

No business, is the answer. Their presence invites mischief. Either their presence 

matters, which means they have influence over their own supervisors, whatever 

that influence may be. Or their presence doesn’t matter, in which case they give us 

the appearance of conflicts that invite conspiracies and destabilize confidence in the 

entire System. 

This mischief is not mere conjecture. Until days before Silicon Valley Bank’s collapse, its now disgraced former CEO Greg Becker sat on the board of directors of 

the Federal Reserve Bank of San Francisco. We do not know what role, if any, his 

presence played in the supervisory failures that preceded SVB’s collapse. I doubt he 

manipulated the Fed through this formal role. The very fact that we are asking the 

question and having this discussion—which, to be clear, requires investigation to 

confirm these doubts—is a tragic waste of resources and Fed credibility. 

For this reason, I support efforts to render these boards of directors advisory only, 

to give to the Board of Governors plenary appointment authority over the individuals who will hold these advisory positions, and remove from all banks the franchise 

to vote in their own to supervise their supervisors. The political compromises and 

context of the United States during the Wilson administration no longer apply. The 

time is far past to render these important public institutions fully public, to avoid 

both the appearance and fact of these conflicts. 

To be clear, I do not wish to overclaim and assert that if Mr. Becker had not been 

on the board of the San Francisco Fed that the supervisory failures associated with 

SVB would not have occurred. We have no evidence about what Mr. Becker’s role 

did or did not mean to those supervisory processes. My point is only that every 

minute we spend wondering about this conflict is a minute that takes away from 

the Fed’s credibility as a public institution endowed with protecting all interests, not 

just the special ones. 

Conclusion 

To conclude, the banking crises of 2023 were preventable. Government intervention to the spectacular degree that we have seen should not have occurred. There 

were failures of bankers, bank supervision, bank regulators, and a legislative regime 

altered too far, too fast, too soon after the last avoidable financial crisis. Some of 

the reforms I advocate here—enhancing prudential supervision for banks with assets between $100 billion and $250 billion, for example—are directly responsive to 

these challenges. Others are about information and accountability (changes to the 

Fed’s inspector general) and perception (removing bankers from Federal Reserve 

Bank governance). I hope we can take advantage of the lessons learned and the future crises we hope to avoid from these unfortunate 2 months. 

PREPARED STATEMENT OF PAUL H. KUPIEC 

SENIOR FELLOW, AMERICAN ENTERPRISE INSTITUTE

MAY 17, 2023 

Supervisory Lessons From the SVB Failure 

Chair Warren, Ranking Member Kennedy, and Subcommittee Members, thank 

you for the opportunity to testify at today’s Economic Policy Subcommittee meeting, 

‘‘Strengthening Accountability at the Federal Reserve: Lessons and Opportunities 

for Reform’’. I am Paul Kupiec, an economist and senior fellow at the American Enterprise institution where I follow banking, financial system, and Federal Reserve 

issues. This testimony reflects my own personal views and assessments and not 

those of the American Enterprise Institute which, as a matter of policy, espouses 

no institutional views of its own. 
44 

My background includes almost a decade of service at the Federal Reserve Board 

and a similar term at the FDIC. In my time at the FDIC I had extensive interactions with bank regulation, examination, and supervisory activities both as Chairman of the Basel Committee’s Reserve Task Force and as the FDIC Associate director who managed the economists that ran the FDIC’s own early warning econometric models and economists that assessed the adequacy of bank stress test and 

other internal models during the course of bank examinations. 

My testimony will focus on the proximate causes of the SVB bank failure, the supervisory role of the Federal Reserve and Board of Governors (BOG) of the Federal 

Reserve, issues related to the FDIC, the use of the systemic risk exception, and reforms might help to prevent a repeat of this unfortunate episode. 

I begin with a summary of my supervisory findings regarding the SVB failure and 

my recommendations for reforms: 

• The precarious nature of SVB’s condition was obvious from regulatory call report information. There was no need to know anything about SVB’s internal liquidity stress tests, internal regulatory capital stress tests, the results of a Federal Reserve Board stress test, its high quality liquid asset requirement under 

the Liquidity Coverage Ratio stress test, or the results of any other complex 

model-derived regulation to see that, by early March 2023, SVB was likely insolvent on a mark-to-market basis and in danger of experiencing a serious deposit run should its uninsured depositors recognize the bank’s true condition. 

• S. 2155 had nothing to do with the failure of SVB. The S. 2155 tailoring requirements deal with the Dodd-Frank enhanced regulations for large bank holding companies. In SVB’s case, the risks were obvious, and they were in SVB 

bank, and not in SVB’s holding company. 

• Federal banking regulators, including Federal Reserve bank supervisors, have 

ample powers under prompt corrective action legislation and related regulations 

to remedy any serious safety and soundness issues bank examiners identify in 

a regulated bank like SVB. Timely and proper exercise of the Fed’s prompt corrective action powers could have been used to de-risk SVB. 

• Virtually all of the corrective supervisory recommendations made to SVB concerned processes associated with model-based large bank regulations or procedures to measure, set, and monitor internal risk limits. None of the supervisory 

communications actually spoke to SVB’s actual liquidity risk associated with 

the SVB’s precarious funding mix, the financial ramifications of its interest rate 

risk profile, or the bank’s true capital adequacy risks. 

• The failure of the Federal Reserve’s examination team to appreciate the impact 

of rising short term interest rates on the market value of SVB’s held-to-maturity securities is shocking given that the bank reports this data in its quarterly 

regulatory call reports. Moreover, the Federal Reserve System was itself at the 

time experiencing a huge $1 trillion unrealized market value losses on the heldto-maturity securities in its system open market account. 

• The Board of Governors of the Federal Reserve’s November 2022 Financial Stability Report failed to highlight any of the issues that caused SVB, Signature 

Bank and First Republic Bank to fail. 

• SVB is an example of a situation for which the FDIC’s back-up authority was 

designed. I see no evidence that the FDIC pushed back on the Fed’s lack of zeal 

in enforcing prompt corrective actions even though the FDIC’s early warning 

models must have identified SVB as a failure risk. 

• It is highly unlikely that the FDIC’s large bank deposit insurance premium assessment system charged SVB bank anywhere near an appropriate deposit insurance premium since the FDIC’s assessment system does not seem account 

for the risk features that caused SVB to fail. 

• Dodd-Frank Orderly Liquidation Authority was designed to resolve a large failing banking organization without creating systemic risk. OLA was not used to 

resolve SVB. It is important to understand why it was deemed inappropriate. 

Some of the possible steps that, in my opinion, might reduce the probability of 

similar incidents in the future include: 

• I agree with the GAO recommendation to revisit the rules and guidance related 

to the use of prompt corrective action powers to add explicit nonregulatory capital triggers that would mandate remedial examiner actions. 

• Federal bank supervision and regulation of banks and bank holding companies 

has become exceedingly complex with a heavy reliance on economic modelling 

and hypothetical simulation exercises, especially in regard to large bank and 
45 

1The CAMELS rating is the confidential bank rating assigned under the FFIEC’s Uniform 

Financial Institution Rating System. The system is supposed to evaluate significant financial 

and operational factors that impact a bank’s safety and soundness. The system assigns a separate numerical rating for five risk factors: C-capital adequacy; A-asset quality; M-bank management quality; E-bank earnings; L-bank liquidity; and, S-bank sensitivity to market risk. Components are rated on a scale of 1 through 5: 1=Strong; 2=Satisfactory; 3=Less than Satisfactory 

or Fair; 4=Deficient; and, 5=Critically Deficient. The bank is also assigned a composite CAMELS 

score that reflects its overall comprehensive examination rating. 

bank holding company supervision. The SVB supervisory experience suggests 

that the emphasis on models has perhaps required too many bank supervision 

resources to be devoted to assessing modelling issues at a cost of distracting examiners from evaluating important fundamental bank risks obvious in call report data. 

• The power of the Federal Reserve Board, FDIC and Secretary of the Treasury 

to declare a systemic risk exception and release the FDIC from its least cost 

resolution mandate is not constrained by any checks and balances in legislation. 

Once a systemic risk exception is declared, the FDIC could use orderly liquidation authority to resolve an institution, issue blanket deposit insurance guarantees as it did in the case of SVB, guarantee bank holding company debt as it 

did in the past financial crisis, or perhaps take other measures. There should 

be some accountability structure put in place to guide the policies taken once 

a systemic risk exception is declared. 

• The FSOC and Federal Reserve Board are not very prescient when it comes to 

their assessments of issues constitute a systemic risk to the financial system. 

In fact, systemic risk is a term that is never defined in the Dodd-Frank Act 

even though the FSOC is empowered to require Federal regulator agencies to 

promulgate regulations to control the systemic risks it identifies. This ambiguity has made the FSOC a political tool rather than a trusted independent 

voice on actual risks that threaten financial stability. 

• FDIC risk-based deposit insurance premiums are not. The FDIC’s approach for 

setting risk-based deposit insurance premiums for large banks needs to be revisited. 

• Improve Federal Reserve oversight and accountability. A Senate confirmed IG 

may help. District banks should be subject to FOIA. Congress should also enhance its committee resources dedicated to Federal Reserve oversight. 

The Silicon Valley Bank Failure 

SVB grew very quickly during the COVID crisis without adequate risk management. It business model was concentrated on attracting large uninsured deposit balances from venture capitalists, their businesses, and private equity clients. Most of 

the bank’s accounts held balances in excess of the FDIC $250K insurance limits. For 

the most part, these accounts were not business transaction accounts, but were 

money market deposit accounts (MMDAs). 

Transactions accounts are typically ‘‘sticky’’ because they are associated with 

bank-provided financial services that are critical to running a business. It takes 

time and effort to move these types of accounts a new bank. In contrast, MMDAs 

have the character of liquid investments. They are typically placed by customers to 

earn a safe but modest return until they are needed to fund some other investment. 

MMDA balances are much more likely to be quickly withdrawn should depositors 

lose confidence in a bank. They are also more likely to migrate to higher yielding 

U.S. Treasury securities and SEC regulated money market mutual funds in a rising 

interest rate environment. 

SVB ultimately failed because it did not have the resources to meet an unanticipated surge of MMDA deposit withdrawals after events taken by the bank’s management caused the SVB’s customers to question the bank’s viability. 

Rapid Growth Fueled by Uninsured Deposits 

According to regulatory call report data, as far back as December 31, 2019, SVB’s 

funding was concentrated in deposits with account balances in excess of the $250K 

FDIC insurance limit. In December 2019, SVB had a little over 52 thousand fully 

FDIC-insured domestic accounts with total balances of $2.2 billion and about 19 

thousand domestic accounts over the deposit insurance limit. The latter, less than 

fully insured deposit accounts, had total deposits of $55 billion. 

Notwithstanding more than 96 percent of its domestic deposits held in accounts 

that were above the FDIC insurance limit, based on its 2019 examination, the Federal Reserve, the bank’s primary Federal regulator, assigned the bank a CAMELS 1
46 

2www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022dec/qbp.pdf Table 1-C 

3LFBO holding companies are rated on three components: capital planning and positions; liquidity risk management and positions; and, governance and controls. Each component is rated 

on a 4-point scale: broadly meets expectations; conditionally meets expectations; deficient -1; and 

deficient -2. A holding company must receive a broadly or conditionally meets expectations on 

each rating component to be considered ‘‘well managed’’. 4The supervisory letter indicates the results were verbally conveyed to SVB’s board of directors on July 21, 2022. 

component liquidity rating of 1, the highest possible rating. The bank was assigned 

a risk management rating of 2 indicating the examiners judged the bank’s risk management to be ‘‘fundamentally sound’’. SVB’s received an overall composite CAMELS 

rating of 2. 

Between December 31, 2019, and December 31, 2020, SVB grew from $69.9 billion 

to $113.8 billion in total assets. The bank’s growth was fueled by attracting deposits 

over the FDIC insurance limit. At the end of 2020, fully insured account balances 

had grown to $2.4 billion while SVB added about 4 thousand accounts with balances 

over the insurance limit. The latter accounts, 23 thousand of them, had total balances of $92.4 billion. SVB bank raised 97.5 percent of its domestic deposits from 

accounts with balances in excess of the FDIC insurance limit. On average, these 

large balance accounts held about $4 million each. For comparison purposes, as of 

Year-end 2022, the entire U.S. banking system had about $18 trillion in domestic 

deposits of which $7 trillion 2 (or about 43 percent) were in accounts with balances 

in excess of the FDIC insurance limit. 

SVB received its 2020 bank examination CAMELS rating in May 2021. It was 

rated 1 for liquidity and 2 for risk management. Its overall composite CAMELS rating was 2, again implying that the bank was fundamentally sound. The supervisory 

letter informing SVB of its CAMELS ratings summarizes the bank’s examination 

findings: 

The overall condition of Silicon Valley Bank (SVB or Bank) remains satisfactory . . . The institution’s overall financial condition and financial risk 

management practices remain satisfactory. Board of Director (Board) and 

management oversight is generally satisfactory. Capital levels and planning 

are adequate relative to SVB’s risk profile including rapid asset growth over 

the prior year . . . Earnings are at a satisfactory level, although are unable 

to accrete capital at a pace equal to asset growth. Liquidity is strong with 

sufficient sources of liquid assets capable of absorbing fluctuations in funding needs. Sensitivity to market risk and practices to measure and control 

market risk are satisfactory. 

By year-end 2021, SVB bank grew its assets to $208.6 billion. SVB’s growth was 

again funded by large uninsured deposit balances. It attracted an additional $2 billion in fully insured domestic deposits and $78.5 billion in new domestic accounts 

over the $250K FDIC insurance limit. Again, only 2.5 percent of its domestic deposits were held in accounts that benefited from full FDIC insurance coverage. The 

bank had 34,727 accounts that on average held balances of almost $5 million each. 

$158.5 billion of its deposits were held in large balance MMDA accounts. The bank 

reported owning $98 billion in high quality U.S. treasury and agency securities in 

its held-to-maturity portfolio valued on an amortized cost basis. The market value 

of these securities was estimated to be $97 billion. 

Following SVB’s 2020 bank examination cycle, the Federal Reserve migrated the 

SVB from the Fed’s regional bank supervision portfolio to its large and foreign bank 

organization (LFBO) supervision portfolio. According to the Fed’s discussion of the 

SVB bank failure, this change should have led to intensified Federal Reserve examination efforts including annual ‘‘horizontal reviews’’ of banks in the LFBO portfolio. 

SVB would be assigned more examination resources including staff with a greater 

depth of experience in assessing the safety and soundness and identifying any required corrective supervisory actions needed in large financial institutions. The 

Fed’s LFBO supervision process also includes an annual review and assessment of 

a large bank’s holding company. 3

Allegedly, as a consequence of delays associated with the handoff off of SVB’s supervision from the regional bank supervision process to the LFBO process managed 

from the Federal Reserve Board and the Board’s implementation of S. 2155 ‘‘tailoring regulations’’, SVB’s 2021 bank examination rating and associated supervision 

letter was not delivered until August 17, 2022. 4

The Fed’s 2021 LFBO holding company exam rated SVB’s holding company as: 

deficient -1 in its governance and controls rating; conditionally meets expectations 

in its liquidity rating; and broadly meets expectation in its capital rating. The su-
47 

pervisory letter informed the holding company management that its board oversight, 

risk management program, and internal audit functions were ‘‘less than effective’’. 

The LFBO assessment of the holding company’s management of liquidity stated: 

While actual and post-stress liquidity positions reflect a sufficient buffer, 

the firm lacks several foundational liquidity risk management elements. 

These missing elements may negatively affect the sufficiency of the Firm’s 

post-stress liquidity buffer. Notable elements that management must address include more granular deposit segmentation to produce effective modeling of deposit outflows during stress; more comprehensive testing of its 

contingent funding plan to assess the feasibility of funding options under 

stress; and more effective challenge provided by the second line independent risk function to ensure that the first line Treasury business unit 

has appropriately executed its liquidity risk management responsibilities. 

The LFBO assessment of the holding company’s capital planning process stated: 

The firm’s actual and internal post-stress capital positions reflect a sufficient buffer to comply with applicable regulatory requirements and to serve 

as a financial intermediary through a range of conditions. 

However, examiners did raise issues with SVB’s holding company liquidity management: 

Key liquidity risk management deficiencies, identified in the Liquidity Target Examination supervisory letter issued on November 2, 2021, include internal liquidity stress testing design weaknesses, such as the lack of deposit 

segmentation, the lack of differentiation between market and idiosyncratic 

risk scenarios, and the lack of testing of the firm’s contingency funding 

plan. The examination also identified a lack of effective challenge by the 

second line independent risk function over the first line treasury business 

unit. 

SVB’s 2021 CAMELS ratings were: Capital =2; Asset quality =2; Management =3; 

Earnings =2; Liquidity = 2 (downgraded from 1); and, Sensitivity to market risk =2. 

The bank’s overall CAMELS composite rating was 3, indicating that in the examiners’ opinion, from a safety and soundness perspective, the bank’s condition was 

‘‘less than satisfactory or fair’’. 

To summarize, SVB and its holding company received their last full-scope examination report before failing in the late summer of 2022. The report was based on 

the bank and holding company 2021 examination findings. The Federal Reserve 

LFBO examination team assessment rated Silicon Valley Bank overall condition as 

‘‘fair’’ and not ‘‘fundamentally sound’’ primarily because of management weakness. 

The examination team had issues with the bank holding company’s liquidity management process that needed to be improved but said that the holding company and 

SVB bank both had adequate liquidity. The examination report mentioned no issue 

regarding the bank or the holding company’s capital adequacy and planning process 

or its interest rate risk exposure. Indeed, in October 2022, SVB received another supervisory letter, its last before failing, informing the bank’s holding company of the 

results of the LFBO examination team’s horizontal review of the financial group’s 

capital adequacy and planning process. The report stated: 

The Capital rating for SVBFG remains unchanged at Broadly Meets Expectations (BME). SVBFG maintains adequate levels of high-quality capital to 

support ongoing operations and initiatives commensurate with its risk profile. The firm’s internal post-stress capital positions reflect a sufficient buffer to comply with applicable regulatory requirements and support the firm 

through a range of conditions. 

Notwithstanding SVB’s ‘‘fundamentally sound’’ liquidity and capital adequacy ratings, in a few short months SVB’s embedded interest rate risk would render it insolvent on a mark-to-market basis and spark a massive depositor run that would overwhelm SVB’s liquidity. 

SVB’s growth continued into 2022. By March 31, it held almost $218 billion in 

assets funded by $17.6 billion in foreign deposits and $182 billion in domestic deposits, $179 billion of which were held in accounts with balances in excess of the FDIC 

insurance limit. SVB’s March call report showed no Federal Home Loan Bank advances and $98.7 billion in held-to-maturity assets with an estimated market value 

of $91.7 billion. According to call report data, in the first 3 months of 2022, SVB’s 

unrecognized mark-value losses on it held-to-maturity securities portfolio increased 

from $1 billion to $7 billion. All of this information is reported in the SVB’s call report 
48 

5 Bank long-term loans and leases are not marked-to-market to reflect changes in interest 

rates. According to its December 31, 2022 regulatory call report, SVB had $73.6 billion in loans 

and leases net of loan loss allowances. Of these, about $6 billion were residential mortgages 

with remaining maturity over 5 years. The bank also had about $2 billion of loans and leases 

with maturity over 5 years that were not secured by residential properties. Taken together, 

these $8 billion of long-maturity loans and leases would have had significant mark-to-market 

losses that were not recognized in SVB’s regulatory capital requirement calculations. 

As the Federal Reserve began to raise short term interest rates beginning in late 

March 2022, SVB started to shed both deposits and assets. It should not have been 

difficult for examiners to forecast that large MMDA deposit balances might leave 

SVB for higher yields being offered by short-term Treasury securities and money 

market funds. Moreover, higher interest rates increased the unrecognized losses on 

SVB’s held-to-maturity securities portfolio. 

By June 30, SVB’s assets had declined to $212 billion. It foreign deposits shrank 

by $2 billion; its domestic deposits fell to $175 billion as more than $8 billion were 

withdrawn from accounts with balances in excess of the FDIC insurance limit. SVB 

used $3.5 billion in advances from the Federal Home Loan Bank of San Francisco 

to replace a portion of the withdrawn deposit funding. The bank’s unrecognized 

losses on its held-to-maturity securities portfolio increased to $11.2 billion. 

By September 31, SVBs assets had declined by another $1.6 billion. Its domestic 

deposits declined $10 billion, again driven by withdrawals from uninsured accounts. 

Foreign deposits fell by $1.5 billion. SVB’s Federal Home Loan Bank advances increased to $13.5 billion and its unrecognized losses on its held-to-maturity portfolio 

increased to almost $16 billion. 

By year-end 2022, SVB had $208 billion in assets. Domestic deposits declined by 

another $5 billion in the fourth quarter and its Federal Home Loan Bank advances 

increased to $15 billion. SVB’s unrealized loss on its held-to-maturity securities 

stood at $15.2 billion. 

SVB’s unrecognized losses on held-to-maturity securities and loans 5 were not 

counted in the bank’s regulatory capital requirements. However, beginning in early 

March 2023, investors and depositors were aware of these losses when evaluating 

the viability of SVB bank. While the bank satisfied all of its regulatory capital requirements, taking these unrealized losses into account (subtracting the bank’s unrealized losses from the bank’s nearly $17 billion in Tier 1 capital) the bank was 

likely insolvent on a mark-to-market basis. Depositors and investors could have 

learned this fact from the bank’s regulatory call reports, the last of which became 

public information in late February 2023. 

I stress that all of the information I have just presented—excepting information 

contained in SVB’s redacted confidential supervisory letters released by the California Department of Financial Protection and Innovation and the Federal Reserve 

Board—is based on data reported in SVB’s quarterly regulatory call reports. These 

reports become public information roughly 6 weeks following the end of a quarter. 

The precarious nature of SVB’s condition is obvious from regulatory call report information. There is no need to know anything about SVB’s internal liquidity stress 

tests, internal regulatory capital stress tests, the results of a Federal Reserve Board 

stress test, its high quality liquid asset requirement under the Liquidity Coverage 

Ratio stress test or the results of any other complex model-derived regulation to see 

that, by early March 2023, SVB was likely insolvent on a mark-to-market basis and 

in danger of experiencing a serious deposit run should its uninsured depositors recognize the bank’s true condition. It should not take a senior highly experienced bank 

examiners let alone a team of Federal Reserve Board LFBO examiner-overseers to 

recognize SVB’s heightened risk of failure. 

Depositors Recognize the Bank’s True Condition 

With SVB’s deposit exodus continuing, the bank needed to raise cash and equity 

capital. In a March 8 letter to it investors, SVB wrote, 

We have sold substantially all of our Available for Sale (AFS) securities 

portfolio with the intention of reinvesting the proceeds, and commenced an 

underwritten public offering, seeking to raise approximately $1.75 billion 

between common equity and mandatory convertible preferred shares. As a 

part of this capital raise, General Atlantic, a leading global growth equity 

fund and longstanding client of SVB, has committed to invest $500 million 

on the same economic terms as our common offering for a total raise of 

$2.25 billion. 

SVB’s sale of its available for sale securities resulted in an $1.8 billion after tax 

loss and its attempt to raise new capital failed. 
49 

The bank’s assurance of its financial soundness rang hollow with its depositors. 

SVB experienced $42 billion in deposit withdrawals on March 9. On March 10, $100 

billion in deposits tried to flee the bank. SVB was unable to satisfy depositor withdrawal demands and was closed by the California Department of Financial Protection and Innovation and the FDIC was appointed as receiver. 

Bank Supervision Issues 

From an ex post perspective, it is obvious that SVB failed because it had an 

unsustainable business model and was poorly managed. It is the job of Federal and 

State bank supervisors to identify bank management weaknesses, unsustainable 

bank risk taking behavior while a bank is still viable and require remedial bank 

actions to restore safe and sound bank practices and reduce the chance the bank 

will fail. In the case of SVB, bank supervisors failed to do their job. 

Federal Reserve bank supervisors did identify several risk management weaknesses that needed to be improved. They shared their concerns with SVB management, but not always in a timely manner. Supervisors did not aggressively push 

bank management to institute recommended remedial actions. Moreover, it is doubtful that the remedial actions supervisors communicated in their ‘‘matters acquiring 

(immediate) attention’’ would have prevented SVB’s failure had the bank implemented them in a timely manner. The issues examiners identified did not focus on 

curing the fundamental deposit concentration, interest rate risk and capital inadequacies that ultimately caused SVB to fail. 

Vice-Chair Barr’s review of the SVB failure identifies supervisory shortcomings, 

but seemingly attributes these shortcomings to Federal Reserve Board supervision 

policies implemented to comply with the regulatory tapering requirements of S. 

2155, the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act. 

To quote Vice Chair Barr’s cover letter to his SVB review: 

The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the 

stance of supervisory policy impeded effective supervision by reducing 

standards, increasing complexity, and promoting a less assertive supervisory approach. 

The Fed’s report on the failure of SVB leans heavily on the innuendo that, while 

imposing the regulatory tapering requirements of S. 2155, then Vice-Chair Quarrels 

mishandled the Federal Reserve’s Board’s transition to an S. 2155-complaint supervision oversight processes. The relevant section of S. 2155 that could have had impacted SVB’s supervision required the Fed: 

[W]ith respect to nonbank financial companies supervised by the FRB and 

certain bank holding companies, to: 

• increase the asset threshold at which certain enhanced prudential standards 

shall apply, from $50 billion to $250 billion, while allowing the FRB discretion 

in determining whether a financial institution with assets equal or greater than 

$100 billion must be subject to such standards; 

• increase the asset threshold at which company-run stress tests are required, 

from $10 billion to $250 billion; and 

My assessment is that S. 2155 had nothing to do with the failures of SVB, Signature, or First Republic Bank. The S. 2155 tailoring requirements deal with the 

Dodd-Frank enhanced regulations for large bank holding companies. In SVB’s case, 

the risks were obvious, and they were in SVB bank, not in the holding company. 

Federal banking regulators, including Federal Reserve bank supervisors, have 

ample powers under prompt corrective action legislation and related regulations to 

remedy any serious safety and soundness issues bank examiners identify in a regulated bank like SVB. Timely and proper exercise of the Fed’s prompt corrective action powers could have been used to de-risk SVB bank. There would be no need to 

invoke bank holding company regulatory powers to arrest reckless SVBs growth 

funded almost exclusively by uninsured MMDA deposit balances. For reference, I 

provide the text of the relevant sections of the Fed’s prompt corrective action authority in an appendix to this testimony. 

Federal Reserve examiners had the authority to limit SVB’s growth, to require it 

to diversify its depositor base as a condition for growth, to better manage its interest 

rate risk exposure, to require SVB to increase its capital to offset unrecognized 

losses on its loans and held-to-security portfolios, and require SVB to preemptively 

pledge collateral at the San Francisco Federal Reserve Bank’s discount window so 

that bank could quickly secure discount window funding in a crisis. Yet the bank 
50 

supervisors from the Fed and the State of California did not take any of these actions or even suggest to SVB management that such actions were needed. 

SVB bank was essentially run like a money market mutual fund without the SEC 

regulations that restrict the duration of money market fund permitted investments. 

Moreover, unlike an SEC regulated money market fund, the interest earnings of 

SVB accrued to SVB management and shareholders instead of to its MMDA depositors. 

SVB funded itself by growing its large deposit MMDA accounts during a period 

when short term interest rates on these accounts were close to zero. It invested most 

of the proceeds in longer maturity securities and loans to earn a positive yield. Most 

of these securities had a Federal Government guarantee and hence low or zero regulatory risk weights. It should have been obvious to bank examiners that SVB’s business model was unsustainable in a climate of rising short term interest rates. The 

bank would either have to raise the rate it paid on MMDA deposits to retain its 

funding or replace lost deposits with new higher rate funding sources. Either alternative would eventually erode the bank’s net interest income (or result in net interest losses) and create unrecognized losses on its long-term loans and held-to-maturity securities. 

The Federal Reserve Board’s Dodd-Frank Act holding company stress test would 

not have identified interest rate risk as a major issue because the Fed’s scenario 

of the next banking apocalypse was steep recession with declining interest rates. 

None of the institutions that have failed thus far were part of complex holding companies and so little would have been to be gained from the Dodd-Frank holding company living will requirements. Given SVB’s concentration of uninsured deposit funding and its asset holdings, the bank’s liquidity and interest rate risk exposure were 

obvious for years based on the regulatory call report data banks report quarterly. 

As for former Vice Chair Quarles role in the SVB failure, according to the Federal 

Reserve Board, Michael Barr assumed the position of Vice Chairman of Supervision 

on July 19, 2022. Instead of launching a crusade to conquer real or imaginary climate-change risk in his ‘‘holistic’’ capital review, taxpayers and U.S. financial stability would have been much better served had Mr. Barr focused examiner efforts 

on assessing basic banking risks, like interest rate and liquidity risk, especially give 

the Fed’s need to aggressively increase short term interest rates. The SVB failure 

occurred while Vice Chair Barr’s was fully in charge of Federal Reserve Board bank 

supervision. 

Virtually all of the supervisory recommendations in SVB ‘‘matters acquiring (immediate) attention’’ communications concerned processes associated with modelbased large bank regulations or procedures to measure, set, and monitor internal 

risk limits. None of the supervisory communications actually spoke to SVB’s actual 

liquidity risk associated with the bank’s precarious funding mix, the financial ramifications of its interest rate risk profile, or the bank’s true capital adequacy risks. 

As I have demonstrated, all of these very real financial risks were obvious from simply analyzing call report data. 

Instead of focusing on the bank’s actual financial condition, examiners recommended corrective actions that focused on improving governance structures and 

compliance processes, not on curing the basic financial and concentration risks that 

endangered the safety and soundness of SVB bank. For example, the supervisory 

letter from November 2021 addressing SVB liquidity risk matters requiring attention specified the following: 

Required Action: By December 31, 2021, SVB is required to enhance their 

project plan for liquidity risk management as follows: 

1. Update the project plan and the associated gap assessment to address applicable supervisory expectations and requirements, including those related to 

the findings cited in this supervisory letter. 

2. Ensure sufficient staffing and resources are allocated to execute the plan to 

meet established timelines. 

The corrective actions recommended concerned SVBs internal liquidity risk stress 

testing models. Examiners argued that the bank needed to develop ‘‘more granular 

deposit segmentation to produce effective modeling of deposit outflows during 

stress.’’ 

Separating deposits into finer behavioral buckets for modeling purposes as examiners recommended would have provided no useful information that would have 

helped SVB avoid its fatal bank run. It turns out, a huge proportion of large uninsured depositors attempted to withdraw their deposits simultaneously. These depositors acted identically. Examiners’ recommendation to model depositors as multiple distinct ‘‘granular groups’’ with differing behavior in the bank’s internal liquid-
51 

6While the Fed states Vice-Chair Barr’s official start date as July 19, 2022, the Federal Reserve Board also reports that Mr. Barr voted as Vice-Chair of Supervision to approve: (1) the 

application of Bank First Corporation on June 18, 2022; (2) the application of benchmark Community Bank on June 30, 2022; (3) and, a Board motion to solicit public comment on a rule 

related to LIBOR on July 15, 2022. Curiously, he did not vote on a Board motion to extend the 

public comment period on a rule related to G–SIB resolution plans on June 30, 2022. 7The Federal Reserve Board voted to make Jerome Powell Chair Pro Tempore on February 

11, 2022. He was sworn in as Chairman on May 23, 2022. 8Governor Brainard became Vice Chair on May 23, 2022. Governor Jefferson was also sworn 

in on May 23, 2022. 

ity stress test modeling was misguided. Moreover, the veracity of SVB’s internal liquidity stress had no bearing on its survival. Practically speaking, there would have 

been no point in SVB wasting resources to run a hypothetical internal liquidity 

stress test scenario that mimicked reality—where $140 billion of the bank’s $160 

billion in deposit ran in a matter of days. You don’t need a stress test model to know 

that the bank would fail. 

Examiner guidance would have been better focused on requiring the bank to perfect its capacity to access emergency liquidity should it be needed. The Fed’s SVB 

review found that: 

SVB did not test its capacity to borrow at the discount window in 2022 and 

did not have appropriate collateral and operational arrangements in place 

to obtain liquidity. While stronger operational capacity to obtain contingency funding in March 2023 would likely not have prevented SVB’s failure, it could have facilitated a more orderly resolution. 

Requiring a bank to identify adequate collateral, have it pre-positioned, and have 

the operational processes in place to access Fed discount window lending in an 

emergency seems like a basic supervisory function. In particular, the quality of loan 

collateral pledged must be assessed before the Fed can provide discount window 

funding. This process takes time. While one might presume that bank supervisors 

determine that a bank has the necessary arrangements in place in order to receive 

a ‘‘fundamentally sound’’ CAMELS liquidity rating, but apparently this is not the 

case. Examiners’ holding company supervisory letter did mention ‘‘the lack of testing 

of the firm’s contingency funding plan,’’ but did not specify the concrete steps needed to remedy this shortcoming. The examiners seemingly were much more concerned with perceived liquidity risk modeling inadequacies than in ensuring that a 

bank had timely seamless access to lender of last resort funding should it be needed. 

Was Anyone in Washington Paying Attention? 

Federal Reserve Board Vice-Chair of Supervision Randal Quarrels left the Federal 

Reserve Board on December 25, 2021—long before the results of the FRBO’s 2021 

examination of SVB and its holding company were finalized. Taking office July 19, 

2022, 6 Vice Chairman Barr would have been on the job for the month during which 

SVB’s 2021 LFBO holding company examination rating letter was being finalized. 

Given that SVB was a very large Fed member bank for which the Board of Governors (BOG) had assumed supervisory responsibility, it would be surprising if Vice 

Chair Barr did not review or receive a briefing on LFBO’s SVB examination conclusions before the supervisory letter detailing LFBO’s finding were communicated to 

the bank on August 19, 2022. 

For the much of the time between Vice-Chair Quarrels departure until the time 

Mr. Barr assumed his duties, the BOG had an acting Chairman, 7 and only three 

governors: Governor Brainard, 8 Governor Bowman, and Governor Waller. In prior 

years, Governor Tarullo fulfilled the function of Federal Reserve Board Vice Chair 

of Supervision but was never officially nominated and confirmed to that position. 

After Vice Chair Quarrels departure, it is unclear from publically available information which if any Federal Reserve Board Governor acted in a temporary capacity 

fulfilling the duties of Vice Chair of Supervision. 

The failure of the Federal Reserve’s examination team to appreciate the impact 

of rising short term interest rates on the market value of SVB’s held-to-maturity 

securities is shocking given that the bank reports this data in its quarterly regulatory call reports. Moreover, the Federal Reserve System was itself experiencing 

huge unrealized market value losses on the held-to-maturity securities in its system 

open market account. The Federal Reserve System’s 2022 audited financial statements show that, by December 31, 2022, the Fed’s $8.6 trillion in Treasury, agency 

debt, and agency mortgage backed securities had unrealized mark value losses of 

more than $1 trillion. 

The Fed’s official position is that these market value losses will never be realized 

as cash losses because the Fed will hold the securities until maturity. Federal Re-
52 

serve member banks may voice a similar justification for valuing their held-to-maturity securities at amortized cost instead of current market value. However, market 

value losses on held-to-maturity positions inevitably turn into cash operating losses 

in a leveraged institution like the Federal Reserve or a Federal Reserve member 

bank. Unrealized market value losses are an indication that the cost of financing 

the securities to maturity is expected to exceed the interest earnings the security 

will generate for the institution. A colleague and I explain this phenomenon in a 

recent Wall Street Journal op ed. 

Indeed, because its funding costs exceeded the Fed’s securities portfolio yield, the 

Fed began reporting system operating losses in mid-September 2022. The Fed’s 

monthly operating losses are continuing and have only grown larger as the Fed has 

increased short term interest rates to fight inflation. Between September 2022 and 

May 11, 2023, the Fed’s H.4.1 statement shows the system has incurred $57 billion 

in actual cash operating losses and these losses will continue to accumulate as long 

as short term interest rates exceed the yield on securities the Fed owns. Banks face 

similar issues on their held-to-maturity securities portfolios and long maturity loans 

only, unlike the Fed, their continued existence is imperiled when unrealized markto-market losses erode their equity capital. 

The Board of Governors of the Federal Reserve’s November 2022 Financial Stability Report failed to highlight any of the issues that caused SVB, Signature Bank 

and First Republic Bank to fail. In its discussion of bank capital adequacy, the report concluded: 

Leverage at banks and broker-dealers remained relatively low.higher levels 

of loss-absorbing capacity in the banking sector and among broker-dealers 

that have prevailed since the structural reforms introduced following the 

2007–09 financial crisis signal resilience in those institutions. 

In its assessment of liquidity risk in the banking sector, it stated: 

Funding risks at domestic banks are low, but structural vulnerabilities persist in other sectors that engage in liquidity transformation. large banks 

that are subject to the liquidity coverage ratio (LCR) continued to maintain 

levels of high-quality liquid assets (HQLA) that suggest that their liquid resources would be sufficient to meet redemptions during periods of stress, 

and their reliance on short-term wholesale funding remains low. 

According to the BOG stability report, the banking system was liquid and well 

capitalized. However, it concluded that the financial sector as a whole faced systemic risks created by nonbank financial institutions that, coincidently, are not regulated by the BOG. For example, on nonbank financial institution capital adequacy 

(called leverage in the BOG report), the report finds, 

[C]omprehensive measures of hedge fund leverage remained somewhat 

above their historical averages. leverage at many types of NBFIs [nonbank 

financial institutions] can be difficult to measure or monitor in a timely way 

with available data. These gaps raise the risk that such firms are using leveraged positions, which could amplify adverse shocks, especially if they are 

financed with short-term funding. 

When it comes to the liquidity risk posed by SEC regulated nonbank financial institutions, the BOG financial stability report finds: 

Prime and tax-exempt MMFs as well as other cash-investment vehicles remain vulnerable to runs, and some of these vehicles maintain stable net 

asset values (NAVs) that make them particularly susceptible to sharp increases in interest rates. Some open-end bond mutual funds continued to 

be susceptible to large redemptions because they hold assets that can become illiquid amid stress while promising shareholders the right to redeem 

their shares every day. 

To be fair, the BOG report did conclude that, ‘‘[u]nexpectedly and persistently 

high inflation and higher interest rates could pose risks to the economy and the financial system.’’ However, the alleged risk was not that banks would fail, but that 

persistent inflation and high interest rates would diminish the ‘‘ . . . debt service 

capacity of households and businesses . . . [leading to] an increase in delinquencies, 

bankruptcies, and other forms of financial distress. Household purchasing power 

would be eroded by higher prices, and a steep rise in rates would also increase businesses’ borrowing costs.’’ 

Instead of recognizing the stability risk that rising interest rates created in the 

banking sector, the BOG’s financial stability report featured a full page ‘‘box’’ on the 

Fed’s efforts to measure ‘‘climate-change risk’’ in the banking sector. The box states: 
53 

The unprecedented nature of climate change means that anticipating its potential effects on the safety and soundness of financial institutions and on 

financial stability requires forward-looking analyses. One such approach is 

climate scenario analysis. A climate scenario posits a potential future path 

of important climate-related factors, allowing analysts to explore the resulting effects on the economy and financial system. 

To summarize, in November 2022, the BOG issued a report that assured the 

American public that the banking system was financially sound, liquid and well-capitalized. However, the financial system still faced important risks from ‘‘climate 

change’’ and nonbank financial institution activities that were outside the BOG’s 

regulatory reach. 

Thus far, the BOG’s November 2022 financial stability assessment included very 

little that has proven to be prescient—the banking system faced a depositor run 

caused the failure of several large banks. These runs required the Fed, FDIC and 

U.S. Treasury to invoke a ‘‘systemic risk exception’’ so that emergency measures 

could be taken to stabilize the banking system. Fed officials are now discussing a 

new source of systemic risk-the risk that these bank failures will constrict the availability of bank credit and cause a recession. To date, no report I have seen attributes recent bank depositor runs to the risks of ‘‘climate change’’. Meanwhile 

SEC-regulated money market mutual funds are, thus far at least, providing household savers with a return on their liquid balances without the drama playing out 

in the banking system. 

Before March 9, 2023, addressing real or imaginary climate-change banking risks 

was a BOG priority. Shortly after the Biden administration took office, its FSOC 

declared that climate change represents a systemic risk to financial sector. Such a 

designation requires FSOC members to formulate appropriate regulations to mitigate this newly identified risk. Vice Chair Barr’s holistic review of regulatory capital 

requirements was in part designed to incorporate new climate-change stress test 

capital requirements into the Dodd-Frank enhanced regulatory requirements that 

apply to large bank holding companies. Repealing provisions of S. 2155 would allow 

the BOG to apply these new climate-change stress test requirements to smaller regional bank holding companies in addition to G–SIBs. 

The FSOC more recently decided that nonbank financial institutions—a.k.a. 

‘‘shadow banks’’—are potentially an important source of financial sector systemic 

risk. In its recent March 2023 meeting, the FSOC reportedly agreed to revisit the 

procedures they use to designate as ‘‘systemically important’’ large nonbank financial institutions and thereby subject them to BOG supervision and Dodd-Frank enhanced regulations. You may recall the FSOC’s existing procedures for designating 

nonbank financial firms as systemically important were discredited when Metlife 

won its court case arguing that the FSOC’s designation process was arbitrary and 

capricious. 

To keep the FSOC’s newest ‘‘climate-change’’ and ‘‘shadow bank’’ systemic risk 

declarations in perspective, consider that the FSOC has never to my knowledge 

issued any forewarnings identifying interest rate risk and contagious banks runs as 

systemic risks in the banking sector worthy of elevated attention. 

The Role of the FDIC in SVB’s Failure 

The FDIC does not escape blame for the SVB failure. The FDIC is proud of ‘‘supervisory back up authority,’’ a power it has to participate in any bank examination, 

regardless of a bank’s primary Federal regulator, and in special circumstances, to 

conduct an independent exam should the FDIC deem a bank or bank holding company to be material risk to the Deposit Insurance Fund. 

SVB is an example of a situation for which the FDIC’s back-up authority was designed. I see no evidence that the FDIC pushed back on the Fed’s lack of zeal in 

enforcing prompt corrective actions even though the FDIC’s early warning models 

must have identified SVB as a failure risk. 

The FDIC is also responsible for setting bank deposit insurance premiums. Bank 

deposit insurance premiums, by law, are supposed to be risk-based. The FDIC large 

bank insurance pricing model probably does not charge sufficiently elevated deposit 

insurance premiums for banks like SVB with large unrecognized loss on their loans 

and held to maturity securities or for high concentrations of deposit over the FDIC 

insurance limit unless these risks reflected in in a bank’s component CAMELS ratings or the bank has other special features that trigger premium adjustments factors. 

The FDIC’s large bank insurance premium assessment model bases premiums on 

a weighted average of component CAMELS ratings. It has adjustments for unstable 

bank funding, but the adjustment raises premiums when a bank uses a lot of broker 

deposit funding and has time deposits over the deposit insurance limit. Brokered de-
54 

9Signature Bank did not have a holding company, so OLA would not have been an option 

in that case. 

posits were not an issue for SVB and SVB’s and the FDIC does not consider MMDA 

accounts to be time deposits. 

Large bank deposit insurance premiums are also impacted by a bank’s liquidity 

ratio and the potential losses to the DIF should the bank fail. SVB owned lots of 

HQLA securities and most of SVB’s deposit were uninsured so the DIF would have 

suffered no losses in a normal SVB FDIC resolution. Neither of these factors would 

have resulted in an elevated deposit insurance premium for SVB bank according to 

the FDIC’s large bank assessment rule. While SVB’s deposit insurance assessments 

are not public information, it appears likely that SVB was not being appropriately 

charged for the true risk it posed to the deposit insurance fund. Because of the systemic risk exception, SVB is the most expense bank failure in FDIC history. 

The Systemic Risk Exception 

Because the simultaneous failures of SVB and Signature Bank sparked runs at 

other regional banks, many of which also had large unrecognized mark-to-market 

losses on their held to maturity securities, the Federal Reserve Board, the FDIC 

board, and Secretary Yellen all agreed to invoke a systemic risk exception for these 

two banks and apply an FDIC blanket guarantee on all deposits in these banks regardless of size. In addition, Secretary Yellen inferred that they would apply the 

blanket deposit guarantee to other banks if authorities deemed it necessary. 

The source of systemic risk that mandated the need for a systemic risk exception 

and a blanket deposit insurance guarantee was the simultaneous loss of depositor 

confidence in a significant number of large banks. The SVB and Signature Bank 

failures catalyzed depositor concerns in early March. However, it was lax Federal 

supervision that, as the Fed raised interest rates throughout 2022, allowed interest 

rate risk and market value capitalization shortfalls to endanger the safety and 

soundness of multiple large banks. To its credit, the FDIC’s quarterly banking profile did mention unrecognized losses on held-to-maturity bank securities as a stability risk to the banking system. If the FSOC and BOG took an honest measure 

of financial system stability in the Fall of 2022, they would have designated Federal 

bank supervision as a source of systemic risk. 

Under normal FDIC rules, because of the magnitude of their uninsured deposit 

balances, SVB and Signature Bank could have been resolved without any losses to 

the FDIC deposit insurance fund. Zero losses. 

The blanket deposit guarantee raised the SVB resolution cost to at least $20 billion and cost of the Signature Bank Rescue to something like $2.5 billion. The three 

failed bank FDIC receiverships (including First Republic Bank) are borrowing well 

over a hundred billion dollars from the Federal Reserve—which is highly unusual 

to say the least. I am guessing it is because the debt ceiling precludes the FDIC 

from borrowing the U.S. Treasury as it usually does—but no one in Congress has 

grilled the regulators yet on this anomaly as far as I know. 

Post Dodd-Frank Act, a systemic risk exception was supposed to trigger the use 

of the FDIC’s new orderly liquidation authority, where the FDIC would take over 

the SVB holding company, cancel its equity and bonds, and liquidate its assets to 

keep SVB bank open and operating. 9 For some unspoken reason, the Government 

did not use OLA. As far as I can tell, OLA was never even considered as a way 

to manage SVB’s failure. The FDIC should have been required to assess the cost 

to the deposit insurance fund of using OLA as compared to SVB liquidation. 

Other Issues 

The BOG’s vice-chairman of supervision, Michael Barr spearhead the Fed’s review 

of the SVB bank failure. In contrast to most Federal agencies, the Fed does not have 

a Senate-confirmed independent Inspector General to examine its mistakes. The Fed 

has its own Board-appointed IG office and the GAO has some investigative powers, 

but these arrangements fall short of the investigative powers of a true independent 

IG. Moreover, Federal Reserve district banks are technically owned by their member 

commercial banks. They are not considered to be Federal agencies as defined by the 

1967 Freedom of Information Act (FOIA) and therefore are not subject to the provisions of FOIA. 
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PREPARED STATEMENT OF MAYRA RODRI ́GUEZ VALLADARES 

MANAGING PRINCIPAL, MRV ASSOCIATES

MAY 17, 2023 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM MARK BIALEK 

Q.1. Mr. Bialek, on October 4, 2021, the Board of Governors of the 

Federal Reserve System requested that the Federal Reserve Office 

of the Inspector General ‘‘conduct an independent review of whether the 2020 trading activities of Rob Kaplan, President of the Dallas Federal Reserve Bank; Eric Rosengren, President of the Boston 

Federal Reserve Bank; and Rich Clarida, Vice Chair of the Board 

of Governors of the Federal Reserve System violated the law or 

Federal Reserve policies, whether the trading activities warrant 

further investigation by other authorities, and any other related 

matters that you deem appropriate.’’ 

On July 11, 2022, your office released the findings of the investigation into former board member Rich Clarida. When do you expect to release the findings of your investigations into Rob Kaplan, 

President of the Dallas Federal Reserve Bank, and Eric Rosengren, 

President of the Boston Federal Reserve Bank? 

A.1. Our investigations of senior Federal Reserve Bank officials are 

ongoing. I can assure you that we are working as efficiently as possible and are committed to conducting a thorough and comprehensive review of these serious allegations. These investigations are 

complex because of the nature and volume of information we are 

reviewing. Once our investigations are completed, we will disclose 

our findings to the extent allowable under the law. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY 

FROM PETER CONTI-BROWN 

Q.1. Unlike traditional deposit insurance which leverages a riskbased assessment unique to each bank, the FDIC’s proposed special 

assessment rulemaking leverages uninsured deposits as the mechanism to assess banks. 

To what extent is there variation in the overall stability of uninsured deposits? 

A.1. Thank you for this question, Senator Kennedy. I think it’s a 

great topic to explore and suspect that some sources of uninsured 

deposits are more stable than others, but I do not have the relevant 

expertise to answer with any confidence. 

Q.2. To what extent would this framework differentiate across uninsured deposits that may have different characteristics? 

A.2. I remain very curious about this set of questions but have not 

studied it to have an informed opinion. 

Q.3. Recent bank failures were prompted by poor interest rate risk 

and asset liability management, to put it simply, failing at basic 

banking 101. These banks did not appropriately recognize or manage the interest rate risk associated with a high proportion of unstable deposits and longer duration assets. This was widely recognized in recent post-mortem reports across the agencies. 

Dodd-Frank included a number of important provisions designed 

to ensure that the methodology used to assess deposit insurance is 

appropriately tied to risk. 

Why do you believe the special assessment veers away from the 

risk-based methodologies that the FDIC traditionally leverages? 
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A.3. My tentative sense is that the FDIC does not price its insurance with sufficient individualized attention to bank risk taking. 

Instead, it uses basic proxies for its assessments that do not reflect 

that variation in risk taking. I would like to see the FDIC impose 

those costs directly to wealthy depositors who take advantage of 

nonpriced implicit guarantees so that they can be more mindful of 

them. 

Q.4. How does this impact stable, cash intensive activities? 

A.4. For businesses that use a transaction account to, for example, 

make payroll, there remains a major concern about the costs associated with maintaining these kinds of accounts. For this reason, 

I would favor extending deposit insurance protections to small businesses to one order of magnitude higher than the level available to 

retail depositors. For example, under the current regimen that 

would mean insurance for small businesses of $2.5 million, more 

than enough to cover the needs of most small businesses. 

Q.5. How did the FDIC evaluate special assessments following the 

financial crisis? Was it a risk-based assessment? 

A.5. Loosely, yes. There is some sensitivity to individual bank risk 

and to bank depositors. I think the risk assessments undertaken in 

pricing deposit insurance do not reflect the risks these banks have 

taken. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY 

FROM PAUL H. KUPIEC 

Q.1. Impact of Bank Regulations on Main Street Business/Economy. Banks of all sizes play an important role in helping businesses of all sizes meet their financial objectives. They support 

businesses in managing their cash week to week for making payroll 

and paying their suppliers. They support businesses by providing 

advice on how to make investment decisions when they are considering opening a new store or factory, or acquiring new equipment. 

When businesses need more cash, banks provide them short term 

loans on lines of credit, or long term loans to help them fund their 

growth. For some larger businesses, banks can help with hedging 

market risk through products like interest rate swaps—especially 

helpful nowadays given the challenging interest rate policy from 

the Federal Reserve in recent months. 

So here’s my concern. There is a lot of talk about imposing new 

regulations on banks. I’m not ruling out new regulation, but we 

need a more serious conversation about what the tradeoff would be 

for main street businesses and banks’ other customers. 

Would more regulation imposed on banks, including increased 

capital requirements, make it more expensive for them to lend and 

offer other services to businesses? 

A.1. Complying with bank regulations is expensive. Banks have to 

hire external consultants, compliance staff, or divert existing bank 

staff’s attention from other activities to ensure that a bank complies with Federal bank regulations. The extra expense incurred is 

passed on to depositors in the form of reduced interest, to borrowers in the form of higher interest rates on loans, and to the 
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bank owners in the form of reduced dividends and retained earnings. 

According to an S&P Global Market survey, of the banks responding to their survey, 

49 percent said compliance costs were up 20 percent or 

more since Dodd-Frank was implemented, and another 22 

percent said these costs were up between 10 percent and 

20 percent. 

40 percent of respondents said compliance costs now account for 10 percent to 20 percent of their annual expenses. Another 14 percent pegged the share at 20 percent 

to 30 percent, and 5 percent estimated the figure topped 

30 percent. 

A case study by CFPF involving 7 banks sought to understand 

how a specific set of ongoing regulations impacted the compliance 

costs of the & [sic] participating banks. The study estimates the 

percentage increase in costs associated with on-going consultant 

and staff resources devoted to complying with on-going consumer 

protection-related regulations. It does not estimate the start-up 

compliance costs associated with a newly imposed regulation. The 

compliance cost estimates in the study refer to a specific set of consumer protection regulations associated with banks’ deposit taking 

activities like truth in savings, electronic funds transfer, fair credit 

reporting and consumer privacy regulations. The study did not consider compliance costs associated with minimum regulatory capital 

or liquidity requirements. 

As mentioned, regulatory costs are necessarily passed on to depositors, borrowers and bank owners. I am not aware of any academic study that estimate the respective shares of the costs borne 

by these three separate constituencies. 

Q.2. Role of Basel Committee on Bank Supervision. The Basel Committee on Banking Supervision, in their words, ‘‘is the primary 

global standard setter for the prudential regulation of banks and 

provides a forum for regular cooperation on banking supervisory 

matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.’’ 

Most of my constituents could not tell you what country Basel is 

in, and even fewer are interested in the work of the Basel Committee on Bank Supervision. It is not to say the work of BCBS is 

without merit, but my constituents deserve a say in how these 

standards could impact them if U.S. banking regulators intend to 

adopt them. 

Is the U.S. required to adopt banking standards developed by the 

Basel Committee? 

A.2. BCBS member country compliance with Basel bank regulatory 

standard is voluntary. Given the leadership position of U.S. bank 

regulators in crafting the Basel regulatory standards that ultimately are adopted by the BCBS, it would be highly embarrassing 

if the U.S. did not adopt the regulatory standards set by the BCBS. 

Many member countries ‘‘adopt’’ BCBS standards but tailor the 

standards to account for national differences of to make the standards acceptable politically in their member country. In many coun-
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tries, capital regulations must be imposed through specific legislation unlike in the U.S. where regulators have rulemaking powers. 

Q.3. Could the U.S. be put at a global disadvantage if we adopt 

these standards but other large markets—such as European 

Union—do not adopt the standards? 

A.3. The U.S. often adopts BCBS standards and applies them in 

the most restrictive form—so called ‘‘gold plating’’ the Basel regulatory capital rules. Other country legislations or regulatory chose 

to ‘‘water down’’ the BCBS standards when they implement them 

in their country. The rigor or ease of bank regulatory capital rules 

based on stress testing are completely controlled by the severity of 

the imaginary stress test and regulatory authority’s loss estimates. 

Compliance with these regulations is a subjective exercise as stress 

loss estimates cannot be objectively verified. 

Q.4. Would you support legislation that gives Congress more of a 

say for how U.S. regulators engage with the Basel Committee? 

A.4. Yes. The U.S. Congress must assert its authority over BCBS 

regulatory agreements before these agreements are finalized in 

Basel. Once they are finalized, the damage has been done. 
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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY DENNIS M. KELLEHER, PRESIDENT AND 

CEO OF BETTER MARKETS, INC. 
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