GAO Director Testifies on FRB/FDIC Supervision over Failed Banks

GAO Financial Markets and Community Investment Director Michael E. Clements testified on the findings from a GAO report on the regulatory and supervisory shortcomings related to the SVB and Signature Bank failures.

In testimony before the House Financial Services Subcommittee on Oversight and Investigations hearing, Mr. Clements highlighted the banks’ (i) reliance on uninsured deposits to support their rapid growth and (ii) "weak" liquidity and risk management, such as SVB’s exposure to interest rate risk and Signature Bank's exposure to deposits from digital assets, (see also, previous coverage). He said that neither the Federal Reserve Board ("FRB") nor the FDIC’s response to identified liquidity and management risks at SVB and Signature Bank were sufficient in mitigating these risks. He explained that the FRB gave SVB "satisfactory" ratings throughout its examinations of the bank despite noting multiple concerns, which Mr. Clement said were the same issues that contributed to SVB’s failure. Further, Mr. Clement characterized the FRB’s redress of SVB’s liquidity and management deficiencies as "lack[ing] urgency" and that they failed to issue a single enforcement action against the bank.

Mr. Clement reported that the FDIC found that Signature Bank's practices were not appropriate for its "complexity, risk profile, and scope of operations" due to liquidity contingency planning and internal control weaknesses. Mr. Clement stated that while the FDIC did take some supervisory actions to account for Signature Bank's deficiencies, they were inadequate and similar to the FRB, the FDIC staff "lacked urgency."