< 5 things we learned from the Senate hearing on the Silicon Valley Bank collapse

JUANA SUMMERS, HOST:

Silicon Valley Bank collapsed this month at what appeared to be lightning speed, but the storm clouds had been gathering for several years. Today a Senate committee began to explore the economic and regulatory climate that contributed to the nation's second-largest bank failure. Senators are also looking at who will pay for the cleanup and how to prevent similar messes in the future. NPR's Scott Horsley has been keeping an eye on all of this and this hearing and joins us now. So, Scott, what have we learned about the events that led up to the bank's collapse?

SCOTT HORSLEY, BYLINE: It starts with some bad decision-making by the people in charge of the bank. Now, CEO Greg Becker was not there to defend himself, although the committee hopes to hear from him in the future. But we did hear today from the top bank regulator at the Federal Reserve, Michael Barr. And he says Silicon Valley executives failed at the bread-and-butter basics of running a bank.

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MICHAEL BARR: This is a textbook case of bank mismanagement. They were quite vulnerable to shocks, and they didn't take the actions necessary to meet that.

HORSLEY: The bank's deposits ballooned in recent years as the tech industry was booming, and bank managers put a lot of that money into government bonds, which lost value when interest rates rose. Now, there are ways for banks to protect themselves and their customers from that interest rate risk, but Silicon Valley Bank didn't do that. And when customers got wind of the problem earlier this month, they raced to pull their money out.

SUMMERS: OK. So this was a classic bank run but at Silicon Valley speed.

HORSLEY: That's right. In true Valley fashion, the high-tech depositors moved fast and broke things. You might have heard about the $42 billion that customers pulled out of Silicon Valley Bank in a single day. That was Thursday, March 9. After that, bankers scrambled overnight to borrow money. But we learned today from Barr that by Friday morning, the bank run looked even worse.

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BARR: That morning, the bank let us know that they expected the outflow to be vastly larger. A total of $100 billion was scheduled to go out the door that day. The bank did not have enough collateral to meet that, and they were shut down.

HORSLEY: Now, nobody expected the bank's customers to bolt that quickly. But Barr confirmed today regulators had identified problems with the way the bank was managing its risks and it had been sounding alarm bells for well over a year.

SUMMERS: Well over a year. OK. So why were those warnings not acted on?

HORSLEY: We don't know for sure. Senate Republicans were a little defensive today. They insist that a 2018 law that relaxed bank oversight was not to blame for what happened here. Aside from that law, though, the Fed itself has been watering down bank regulation in recent years at the urging of bank lobbyists, and Maryland Senator Chris Van Hollen says that might have given bankers the idea they could ignore those warnings.

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CHRIS VAN HOLLEN: It seems to be part of a pattern of an effort to push back on regulators' authority and then come back and do the Monday morning quarterbacking and saying, where were they?

HORSLEY: Fed Chairman Jerome Powell said last week he does expect to see some beefed-up oversight of banks as a result of this failure. And Montana Senator Jon Tester says something's got to be done.

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JON TESTER: If it's the regulators' fault, it better be fixed. If it's a regulation fault, it better be fixed. If it's something else, I hope there's a report to this committee saying, you know what, guys? This can happen again unless this happens. But it looks to me like the regulators knew the problem, but nobody dropped the hammer.

SUMMERS: And, Scott, there is a pretty big price tag for this collapse. So who gets that bill?

HORSLEY: Yeah. The government promised to insure all deposits at Silicon Valley Bank, many of which were well over the $250,000 limit that's usually covered. So that's going to put an estimated $20 billion dent in the government's deposit insurance fund. Now, taxpayers won't foot that bill. Other banks will. And a number of senators complain that small banks in their states might end up paying the price for Silicon Valley's missteps. Wyoming Senator Cynthia Lummis pressed the FDIC chairman, Martin Gruenberg, who said there might be some wiggle room in how that bill's divvied up.

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CYNTHIA LUMMIS: Are you saying that you're able to exempt Wyoming's community banks from paying for this?

MARTIN GRUENBERG: I'm suggesting we have some discretion there, and we're going to consider that issue carefully.

LUMMIS: Will you exempt community banks from having to pay for this?

GRUENBERG: That's a judgment our board is going to have to make.

HORSLEY: And the FDIC is expected to spell out a formula for collecting that money in about a month.

SUMMERS: NPR's Scott Horsley. Thank you.

HORSLEY: You're welcome.

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