House Financial Services Subcommittee Seeks Greater Accountability for Bank Failures

Expert witnesses called for independent investigations of the Federal Reserve Board ("FRB") and FDIC, greater accountability for regulators and supervisors, and "modernizing" deposit insurance, as the House Financial Services Subcommittee on Financial Institutions and Monetary Policy considers legislative proposals to address bank failures.

At the hearing, Subcommittee Chair Andy Barr (R-KY) criticized the reports delivered by the FRB and the FDIC (see previous coverage here and here). He said that "in the face of a need to inform Congress . . . the [FRB] and FDIC decided to devote resources to hasty self-serving reviews of supervisory failures to set a narrative."

The following witnesses testified:

• Margaret E. Tahyar, Partner, Davis Polk & Wardwell LLP. Ms. Tahyar encouraged conducting an independent investigation of the FRB and the FDIC to understand the failures of Signature Bank and SVB. She also identified a red flag in both the FRB’s and FDIC’s reports submitted to Congress on their evaluation of the failures: a lack of supervisory examiner resources. Ms. Tahyar advised Congress to look into the organizational structure of examination staff, in addition to the level of secrecy regarding the information they receive during their examinations.
• Jonathan Gould, Partner, Jones Day. Mr. Jones stated that given the "little progress in improving supervisory outcomes" since the 2008 financial crisis, he underscored that supervisory transparency and Congressional accountability are "critical." He added that Congress should consider dedicating a greater number of banking agency resources to supervisory activities due to the constraints on staffing that were cited by both the FRB and FDIC reports.
• Thomas Michaud, President and Chief Executive Officer, Keefe, Bruyette & Woods. Mr. Michaud called for modernizing deposit insurance coverage to address the speed at which money can be moved, leading to bank runs, and to "level the playing field" for small- and mid-sized banks to be able to enjoy similar coverage provided to "too big to fail" banks. He recommended regulators consider: (i) raising deposit account coverage limits, (ii) allowing banks to purchase additional FDIC insurance for certain accounts, (iii) adjusting deposit premiums to place more of the annual premium on too big to fail banks and (iv) limiting "Held to Maturity" amounts.

Legislative proposals under consideration include:

• H.R. ____, a bill to enhance the reporting and testimony requirements for Federal banking agencies which would (i) require the heads of the FDIC, the OCC and National Credit Union Administration to testify before Congress on a semi-annual basis and (ii) expand reporting requirements for the FDIC, OCC and NCUA to the House Financial Services Committee and Senate Banking Committee;

• H.R. ____, a bill to enhance FDIC transparency which would expand FDIC reporting requirements on receivership and resolution-related activities;

• H.R. ____, a bill to enhance Federal Reserve transparency which would enhance the FRB's transparency regarding emergency lending authorities during "unusual and exigent circumstances";

• H.R. ____, a bill to enhance Financial Stability Oversight Council transparency which would place any new budget requests from the FSOC into appropriations;

• H.R. ____, a bill to increase financial stabilization transparency which would (i) enhance the transparency of financial stabilization actions from banking agencies and Treasury and (ii) require confidentiality from Congress of any related-material; and

• H.R. ____, a bill to establish Federal Reserve Vice Chair for Supervision experience requirement which would require the FRB Vice Chair to have previous supervisory experience at a banking organization.