[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                          FEDERAL RESPONSES TO
                          RECENT BANK FAILURES

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND MONETARY POLICY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 10, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-20
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-932 PDF                  WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------     

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
       Subcommittee on Financial Institutions and Monetary Policy

                     ANDY BARR, Kentucky, Chairman

BILL POSEY, Florida                  BILL FOSTER, Illinois, Ranking 
BLAINE LUETKEMEYER, Missouri             Member
ROGER WILLIAMS, Texas                NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Georgia            BRAD SHERMAN, California
JOHN ROSE, Tennessee                 GREGORY W. MEEKS, New York
WILLIAM TIMMONS, South Carolina      DAVID SCOTT, Georgia
RALPH NORMAN, South Carolina         AL GREEN, Texas
SCOTT FITZGERALD, Wisconsin          JOYCE BEATTY, Ohio
YOUNG KIM, California                JUAN VARGAS, California
BYRON DONALDS, Florida               SEAN CASTEN, Illinois
MONICA DE LA CRUZ, Texas             AYANNA PRESSLEY, Massachusetts
ANDY OGLES, Tennessee
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 10, 2023.................................................     1
Appendix:
    May 10, 2023.................................................    41

                               WITNESSES
                        Wednesday, May 10, 2023

Gould, Jonathan V., Partner, Jones Day...........................     6
Judge, Kathryn, Harvey J. Goldschmidt Professor of Law and Vice 
  Dean for Intellectual Life, Columbia Law School................     9
Michaud, Thomas, President and Chief Executive Officer, Keefe, 
  Bruyette & Woods (KBW), a Stifel company.......................     7
Tahyar, Margaret E., Partner, Davis Polk & Wardwell LLP..........     4

                                APPENDIX

Prepared statements:
    Gould, Jonathan V............................................    42
    Judge, Kathryn...............................................    47
    Michaud, Thomas..............................................    55
    Tahyar, Margaret E...........................................    64

              Additional Material Submitted for the Record

Sherman, Hon. Brad:
    Chart, ``Unrealized Gains (Losses) on Investment Securities''    70
Waters, Hon. Maxine:
    Written responses to questions for the record submitted to 
      Jonathan V. Gould..........................................    71
    Written responses to questions for the record submitted to 
      Thomas Michaud.............................................    72
    Written responses to questions for the record submitted to 
      Kathryn Judge..............................................    73

 
                          FEDERAL RESPONSES TO
                          RECENT BANK FAILURES

                              ----------                              


                        Wednesday, May 10, 2023

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Monetary Policy,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Members present: Representatives Barr, Posey, Luetkemeyer, 
Williams of Texas, Loudermilk, Rose, Timmons, Norman, 
Fitzgerald, Kim, De La Cruz, Ogles; Foster, Velazquez, Sherman, 
Beatty, Vargas, and Casten.
    Ex officio present: Representative Waters.
    Also present: Representative Emmer.
    Chairman Barr. The Subcommittee on Financial Institutions 
and Monetary Policy will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Federal Responses to Recent 
Bank Failures.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Thank you to our witnesses for appearing before us today. 
Because of economic mismanagement under the Biden 
Administration, and failures of bank supervision, we now face 
increased odds of recession. Following the bipartisan CARES 
Act, a partisan, reckless, nearly-$2 trillion American Rescue 
Plan Act was enacted by the President, which fueled runaway 
inflation. While the Administration and the Federal Reserve 
tried to convince the American people that inflation was 
transitory, it definitively was not.
    Inflation skyrocketed and persisted, and Americans were 
hammered by rising costs in grocery aisles and at the pump and 
saw their wages rapidly eroding in real terms. Despite warnings 
from my Republican colleagues and myself, the Federal Reserve 
was late to the game in responding to inflation, and therefore 
had to raise interest rates at one of the fastest paces in 
modern history. The precipitous interest rate increases put 
heightened interest rate risks into the system, and regulators 
and supervisors at the Fed were, again, late to react. All of 
the context in which these bank failures occurred has to be 
looked at in the context of this historical set of facts.
    These risks were not attended to by Federal or State 
regulators and supervisors, but were recognized by depositors. 
This led to bank runs and systemic stress. We now face 
increasing odds of a credit crunch, as banks of all sizes 
anticipate more-onerous regulations and market scrutiny. If 
recent events are not dealt with productively, we also run a 
risk of ending up with a banking system with a small number of 
too-big-to-fail banks and a scattering of very small banks. 
Such a barbell banking system is not good for communities 
across the country.
    The Vice Chair for Supervision at the Federal Reserve has 
signaled his desire to go beyond reviewing supervisory failures 
that contributed to the recent bank runs. He continues to 
signal his desire to increase capital charges and impose more-
stringent regulations on already well-capitalized banks that 
are not to blame for recent stresses in the system.
    Following the failures of Silicon Valley Bank and Signature 
Bank, which were caused by bank runs, key regulators decided to 
issue their own self-referential, self-assessment reports on 
those failures to set a narrative. The Chair of the FDIC 
ordered a review of Signature Bank's failure, taking some blame 
for inadequate supervision, but the review mostly blamed the 
banks and internal FDIC vacancy issues. The full Board of the 
FDIC did not adequately participate in the review. The FDIC 
also issued a term paper on deposit insurance and what it 
believes Congress should focus on before responding to multiple 
inquiries from this committee for information, so Congress 
could arrive at our own conclusions.
    The Federal Reserve Vice Chair for Supervision, Michael 
Barr, led his own self-serving politicized review of the 
failure of Silicon Valley Bank and made regulatory 
recommendations. The full Board of the Fed did not participate 
in the review. The review, by the way, said nothing about the 
monetary policy errors and the late-to-the-game of monetary 
normalization that contributed mightily to the problem. In the 
face of a need to inform Congress and respond to multiple 
requests from this committee for timely information, the Fed 
and the FDIC decided to devote resources to a hasty, self-
serving review of their own supervisory failures to set a 
narrative.
    To be clear, the Board of the Federal Reserve System and 
the Board of the FDIC should not view their recent narratives 
about the failures of Silicon Valley Bank and Signature Bank as 
precedents for how Congress is informed in the future. Rather 
than being responsive to Congress so that we may consider 
potential legislative needs, Federal agencies and officials 
have slow-walked us. Instead, they have spent their time 
writing their own narratives to cover their mistakes and 
injecting politicized calls for more regulation into the public 
sphere. That is simply unacceptable. And it clearly shows why 
we need to change emergency authorities for the Fed and the 
FDIC, and Treasury to at least obtain accountability and 
transparency.
    We need to ensure that the full Boards at the Fed and the 
FDIC are adequately consulted in important decision-making and 
that a single regulatory actor cannot act unilaterally to 
inject their political preferences into regulations. The bills 
noticed today get at the heart of increasing accountability and 
transparency at our Federal financial regulators and emergency 
actions. The bills are not intended to be partisan, and their 
provisions would apply independent of what party is in power. 
They are simply about accountability to the American people and 
Congress of financial regulatory actors who take actions that 
affect trillions of dollars of resource flows. I look forward 
to discussing these issues today.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Illinois, Dr. Foster, for 5 
minutes for an opening statement.
    Mr. Foster. Thank you, Mr. Chairman, and I will not use my 
whole 5 minutes, as I think this is the time where Congress is 
best served by and the people are best served by listening 
instead of speaking.
    There are a couple of new factors and old factors that we 
see in this. The new factor is the internet-driven runs that, 
when we had our first emergency Zoom meeting with the FDIC, 
caused them to look kind of shell-shocked at the speed at which 
these runs occurred. And that is a risk that everyone 
recognizes, and we are going to have to understand what kind of 
emergency liquidity support will be needed to defend against 
those. And for anyone providing that emergency liquidity, they 
will have to be able to tell at a glance that the entity they 
are providing that liquidity to will ultimately become solvent. 
And that is the difficulty with what we are going to be facing 
here.
    I see the value of both internal and external reviews, and 
I think they were valuable. The reports produced were, in fact, 
valuable as starting points to this. I also think we have much 
to learn with a comparison of the Credit Suisse failure and the 
recent effects of the bank failures of banks of the order of 1 
percent of U.S. GDP, which were not in and of themselves 
systemically crucial and they wouldn't have brought down the 
economy if they, by themselves, failed.
    In contrast, the Credit Suisse was over 100 percent of 
Swiss GDP. It was truly too-big-to-fail. And when it failed, it 
failed gracefully without really a whiff of contagion and 
without leaving the Swiss taxpayer so far on the hook. I think 
the difference there is contingent capital, the contingent 
capital that was insisted upon by the Swiss banking regulators. 
As Credit Suisse failed, they allowed a mechanism to have a 
mandatory capital injection into the carcass of Credit Suisse 
that made it something worth buying, and took the value of 
Credit Suisse from roughly negative-$14 billion to plus-$3 
billion and allowed a white knight to step in and take it over. 
So, I think we should look hard at that as a model. And I know 
I share with Chairman McHenry an enthusiasm for this general 
approach on a contingent capitalism market-based approach to 
have another set of eyes on the books of these banks, and at 
the risk posture.
    Anyway, I am eager to get on with this hearing, and with 
that, I will yield back the rest of my time.
    Chairman Barr. The gentleman yields back. We will now hear 
from our witnesses.
    First, Ms. Margaret Tahyar. Ms. Tahyar is a partner at 
Davis Polk & Wardwell and a member of their fintech practice. 
Her practice focuses on providing strategic bank and financial 
regulatory advice. In addition to her full-time practice, she 
teaches financial regulation as an adjunct lecturer in law at 
Harvard Law School.
    Second, Mr. Jonathan Gould. Mr. Gould is a partner at Jones 
Day in Washington, D.C., where he provides bank and financial 
regulatory and strategic advice to financial services providers 
of all types. Previously, Mr. Gould served as the Senior Deputy 
Comptroller and Chief Counsel of the Office of the Comptroller 
of the Currency.
    Third, Mr. Thomas Michaud. Mr. Michaud is president and CEO 
of Keefe, Bruyette & Woods, an investment bank specializing in 
the financial services sector, where he began his career in 
1986. He was named chief executive officer in October of 2011 
and is responsible for directing all of the firm's business 
lines in both the United States and Europe.
    And finally, Professor Kathryn Judge. Professor Judge is 
the Harvey J. Goldschmidt Professor of Law and vice dean for 
intellectual life at Columbia Law School. Ms. Judge currently 
serves as an editor of the Journal of Financial Regulation and 
a research member of the European Corporate Governance 
Institute. She previously served on the Financial Stability 
Task Force and the Financial Research Advisory Committee to the 
Office of Financial Regulation.
    We thank each of you for taking the time to be here. Each 
of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, each of 
your written statements will be made a part of the record.
    Ms. Tahyar, you are now recognized for 5 minutes for your 
oral remarks.

STATEMENT OF MARGARET E. TAHYAR, PARTNER, DAVIS POLK & WARDWELL 
                              LLP

    Ms. Tahyar. Thank you, Chairman Barr, and Ranking Member 
Foster. The banking crisis is like a burning house. Just 
watching it, we know that mistakes were made, there are lessons 
to be learned, and changes are coming. Think of it as three 
stages. In the emergency stage, heroic firefighters are rushing 
to the flames to save the house and the people. Dedicated 
agency staff have been working around the clock. I have 
personally received a message at 2:45 a.m., asking if I am 
available to talk right then.
    The reliance on firefighting is not a path to a better way. 
Once the flames died down, it is the what-happened stage, the 
time to think about the very different people who were living 
in the house when it caught fire. That was management and the 
supervisors, what did they do or not do to let this fire 
happen? The final stage we need to ask is, did something in the 
construction of the house cause the fire? If the problem was 
the electricity, let's not focus on how people felt about the 
plumbing.
    For each stage, we need fact-based lessons learned and 
policy changes that encourage a strong, multi-tiered banking 
sector. So far, there are many suggestions based on political 
priors, which assume regulatory changes without proof of any 
links to the burning house. We also need much more 
transparency. It is not possible for the firefighters to be 
transparent in real time when the house is burning. But 
afterwards, there needs to be a full accounting.
    Here are some preliminary thoughts. There should be 
independent reports by professional investigators. There are 
many good elements in the report you have before you, but they 
are drastically incomplete. They are only a first step in any 
fact-based exercise. There should be a structurally-independent 
investigation by trained professional investigators done on a 
bipartisan basis.
    There is a deep red flag in the reports that Congress 
should not ignore. They point to severe resource challenges for 
examiners, lacunae in the skill sets, weakness in the job 
candidates, as well as heightened turnover. It is concerning 
that new examiners resigned before completing their training 
and that fully-funded posts cannot be filled. And there are 
press reports of culture problems and low morale causing 
experienced examiners to leave. The consequence is that at 
critical times, examiners were slow to react, did not have 
internal deadlines, and became distracted by process and 
consensus.
    The many media leaks from the supervisors complaining about 
the culture or attempting to absolve themselves are also clues 
that something is amiss. The Barr report hints at confusion 
around internal governance, escalation roles and 
responsibilities, and deadlines and accountability. It raises 
the question of whether the supervisors were well-managed. It 
is deeply unfair to blame overworked line examiners who were 
not given fully-updated training and were suffering from poor 
direction and management.
    These red flags might be a more plausible cause, at least 
in part, for the supervisory failures rather than an 
unexplained shift in tone from the previous leadership, the 
tailoring or the guidance on guidance. All of the agencies need 
to engage in a holistic review of how the supervisory staff is 
hired, trained, and managed. Virtually all of banking 
supervision takes place in secret. The lack of transparency 
sits uncomfortably with the securities laws and with 
accountability to Congress in the public. It is impossible for 
Congress, academics, and the public to judge the effectiveness 
of the regulatory framework, supervision, or emergency actions 
when what the public sees is only a very small tip of a very 
large iceberg. We really need to ask, who is watching the 
watchmen?
    Finally, let's be careful out there. There is one big thing 
where Congressional action as opposed to oversight is 
necessary, a hard look at reforms to the deposit insurance 
program. We have never seen a deposit run of such scale and 
speed happening overnight and on a weekend. In a world with 
social media, mobile banking, and when many companies and 
consumers are multi-banked, uninsured deposits can flee with a 
click. And the multi-banking is the point that hasn't gotten a 
lot of attention. If you are going to flee with a click, you 
have to have two bank accounts. And if you think about the 
difference, there was a reference to a barbell banking system, 
which we don't want. Many of the customers of regional banks 
are sticky; they are not necessarily multi-banked. That is 
something to look into.
    Anyway, with instant payments, open banking, data 
portability, or central bank digital currency, it is going to 
make it worse or better. Absent deposit insurance reform and 
solving the red flags, the regulatory changes being suggested 
will be window dressing. It matters, because an impact on 
banking is an impact on the economy and credit, which is 
already fragile. For those of you who remember Hill Street 
Blues, ``Let's be careful out there.'' Thank you.
    [The prepared statement of Ms. Tahyar can be found on page 
64 of the appendix.]
    Chairman Barr. Thank you for your testimony.
    Mr. Gould, you are now recognized for 5 minutes.

       STATEMENT OF JONATHAN V. GOULD, PARTNER, JONES DAY

    Mr. Gould. Chairman Barr, Ranking Member Foster, and 
members of the subcommittee, thank you for the opportunity to 
discuss the Federal responses to recent bank failures. My 
testimony will focus on the recently-issued reports from the 
Fed and the FDIC on their supervision of Silicon Valley Bank 
and Signature Bank. My testimony is my own. I am speaking today 
solely in my personal capacity. I am not speaking on behalf of 
any clients or my law firm.
    According to the Federal Reserve's Office of Inspector 
General (OIG), ``Examiners identified key safety and soundness 
risks, but did not take sufficient supervisory action in a 
timely manner to compel the boards of directors and management 
to mitigate those risks. In many instances, examiners 
eventually concluded that a supervisory action was necessary, 
but that conclusion came too late to reverse the bank's 
deteriorating condition.'' This statement might well summarize 
the report from the Fed and the FDIC, but it was actually 
issued in 2011 in connection with the OIG's review of Fed 
supervision of the 35 State member banks that failed in the 
aftermath of the 2008 financial crisis.
    In the years following this assessment, Congress has 
enacted major banking reforms and the banking agencies have 
promulgated a host of new regulations and revised their 
supervisory approaches. And yet, we seem to have made little 
progress in improving supervisory outcomes without recourse to 
extraordinary interventions, like guaranteeing uninsured 
deposits. Agency self-reflection is appropriate, but 
supervisory transparency and Congressional accountability are 
critical.
    The Fed and FDIC reports offer a starting point for further 
fundamental review by Congress. Supervision and regulation are 
complementary, but worth distinguishing. Regulation is broadly 
applicable and implements statutory imperatives. Supervision is 
the practical art of applying that regulatory framework to 
individual banks through the exercise of examiner judgment.
    In the case of SVB, the Fed acknowledges that its 
supervision failed to identify, much less address, some of the 
most-basic safety and soundness risks applicable to a bank. It 
is particularly hard to explain the Fed's failure to supervise 
for interest rate risks when it created that risk through its 
own monetary policy actions. Neither report explains the many 
failures of supervision, and significant portions of the 
reports are distractions. An independent review and disclosure 
of internal agency communications about SVB and Signature Bank 
about supervision would seem to be an obvious next step in any 
credible investigation. Both reports raise questions about the 
adequacy and allocation of resources at these agencies, but the 
reports give us little information as to how the agencies 
prioritize their resources.
    Congress should request and review budgetary detail and 
supervisory staffing models, including those for the San 
Francisco Fed, to determine whether the agencies are giving 
short shrift to their supervisory functions or if it disagrees 
with their priorities. The Fed report does address changes in 
regulation in May following the Economic Growth Act. Others 
have addressed the lack of causal connection between that law 
and the bank failures.
    I will merely add that: one, the Federal Reserve did not 
enforce regulations that did apply to SVB; two, the 
proliferation of regulations since the 2008 crisis may have 
reduced risk management and supervision to mirror compliance 
exercises, damaging both in the process; and three, 
overreliance on preferred regulatory tools may have blinded 
supervisors to risks that do not appear when viewed through 
that tools particular lens.
    The Fed has an unique governance and structure that differ 
from other bank supervisors. Congress should consider whether 
and to what extent the Fed structure and governance is a 
contributing factor to its supervisory failures. A clear 
presentation from the Fed of roles and responsibilities within 
this System and between the Board and Reserve Banks is a 
prerequisite for basic accountability. The Fed report 
identifies some potential conflicts of interest between the 
Reserve Banks and the Board, and of even greater concern is the 
inherent conflict of interest between the Fed's monetary policy 
and bank supervision functions.
    The Fed's rapid interest rate hikes are a source of 
systemic risk to the banks it supervises and were a cause of 
SVB's failure. Congress should explore how the Fed's monetary 
policy decisions, including its macroeconomic outlook, affect 
its supervisory strategies in general, and its supervision of 
SVB in particular.
    The business of banking is built on trust and confidence, 
but that trust and confidence is currently in doubt. Competent 
bank supervision is a prerequisite to restoring it. 
Transparency into the supervisory strategies and priorities of 
the Fed and the FDIC, particularly as they were applied to 
these failed banks, is a critical first step in understanding 
what went wrong. Given past failures at self-reform, Congress 
can and should exercise its full oversight authorities to 
ensure a different outcome this time.
    Thank you again for the opportunity to testify. I look 
forward to your questions.
    [The prepared statement of Mr. Gould can be found on page 
42 of the appendix.]
    Chairman Barr. Thank you, Mr. Gould.
    Mr. Michaud, you are now recognized for 5 minutes.

  STATEMENT OF THOMAS MICHAUD, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, KEEFE, BRUYETTE & WOODS (KBW), A STIFEL COMPANY

    Mr. Michaud. Good afternoon, Chairman Barr, and Ranking 
Member Foster. Thank you for having me here today, and thank 
you to the rest of the members as well.
    By way of background, my name is Tom Michaud, and I am 
president and CEO of Keefe, Bruyette & Woods (KBW), a Stifel 
Company. I have been with KBW for 36 years, and I have focused 
my career on being part of a team that delivers high-quality 
banking and financial services research advice, particularly to 
mid-sized and regional banks. We also produce the Keefe Bank 
Index and the Keefe Regional Bank Index, both of which are 
standards upon which bank performance is rated.
    The current banking crisis has been driven by fear. 
Although each bank crisis is unique, they all have one thing in 
common: depositors lose confidence that their money is safe and 
they seek a safer haven. That is why the FDIC was created 90 
years ago, and no insured deposit has ever lost value since. 
FDIC insurance has allowed the U.S. to have a diverse banking 
system of all sizes: global banks, regional banks, mid-sized 
banks, and community banks.
    The recent bank failures have illustrated two developments 
since Congress last modified deposit insurance 13 years ago. 
First, money now moves faster than ever before. The speed of 
the run at Silicon Valley and Signature Banks was staggering. 
Second, the market has embraced that the biggest banks are 
likely too-big-to-fail, and that there is an implicit 
government guarantee that stands behind them.
    Those are the two key factors that have changed since 
Congress last changed the rules. Left unaddressed, I believe 
that there will be strong forces that will restructure the 
banking industry, and current Fed data suggest that it is 
underway right now.
    Having banks of all sizes is critical to the success of our 
economy. America's largest banks are global leaders and 
standout amongst their international peers. While the biggest 
banks have most of the deposits, they don't make most of the 
small business loans in America. For America's economy to 
prosper and benefit all Americans, not just in large financial 
centers, regional banks are essential. That was demonstrated 
when they provided 60 percent of the Paycheck Protection 
Program (PPP) loans during the recent pandemic.
    But there is an opportunity to level the playing field 
since the deposit limits were last changed. I believe that the 
big banks can continue to operate the way they do, but that the 
mid-sized and smaller banks need more deposit insurance to 
neutralize that too-big-to-fail guarantee. The modifications I 
propose are on the belief that deposit insurance will continue 
to be an industry expense, and in no way encompass taxpayer 
support.
    Therefore, I believe that Congress should address the 
problem with three actions: one, raise the debt limits for 
operating accounts so that small businesses and nonprofits can 
keep their funds in a local bank and not worry; two, allow 
banks to buy additional insurance directly from the debt; and 
three, further tailor premiums for the systemic banks to 
account for the too-big-to-fail implicit guarantee.
    I would also encourage that, first, healthy bank mergers 
and acquisitions (M&A) be allowed and accepted so that banks 
can seek the same scale benefits that their larger competitors 
have. Also, we need healthy bank M&As so that healthy banks can 
acquire underperforming banks and save an ultimate loss 
possibly to the Deposit Insurance Fund.
    Second, regulators should modify held-to-maturity 
accounting treatment, as well as modify treatment of other 
comprehensive income (OCI) into other regulatory ratios. And 
third, as a comment that was made recently during the 
introduction, a review should be done to ensure that government 
agencies have the proper systems in place to support the 
financial system as real-time payments become a reality, 
especially with the rollout of FedNow in July.
    I believe that these steps would be sufficient in 
addressing the current instability in banking. The stocks, 
again, were very weak today. I also believe that the lack of 
complexity of these changes reduces the risk of unintended 
consequences and that this approach avoids the possibility of 
additional regulations that could prove to be 
counterproductive.
    Thank you for the opportunity to be in front of you today, 
and I look forward to hearing your questions.
    [The prepared statement of Mr. Michaud can be found on page 
55 of the appendix.]
    Chairman Barr. Thank you, Mr. Michaud.
    Professor Judge, you are now recognized for 5 minutes.

STATEMENT OF KATHRYN JUDGE, HARVEY J. GOLDSCHMIDT PROFESSOR OF 
  LAW AND VICE DEAN FOR INTELLECTUAL LIFE, COLUMBIA LAW SCHOOL

    Ms. Judge. Thank you, Chairman Barr, Ranking Member Foster, 
and members of the subcommittee. It is a pleasure to be here 
today, and I appreciate the opportunity to discuss the recent 
bank failures and the lessons that we can learn from those 
failures.
    I want to spend my time just setting the stage with two 
broad points that hopefully cut across the range of different 
issues at stake in today's deliberations. And I want to spend a 
few moments just building on and responding to some of the 
comments from my fellow witnesses.
    First, the recent bank failures reveal fundamental 
shortcomings in the regulation and supervision of large 
regional banks. Since the beginning of March, four regional 
banks have failed, and three of those banks failed in ways that 
impose significant costs on the Deposit Insurance Fund. The 
FDIC currently estimates the Deposit Insurance Fund will lose 
$20 billion in connection with the failure of SVB, it will lose 
$2.5 billion in connection with the failure of Signature Bank, 
and it will lose $13 billion in connection with the failure of 
First Republic.
    Moreover, two of those banks failed in ways that pose such 
a risk to systemic stability that all of the regulators 
involved voted to approve the use of the systemic risk 
exception (SRE) to the requirement that the FDIC otherwise 
resolve the bank in a way that imposes the least cost on the 
Deposit Insurance Fund. This was not a political decision. Both 
the Board of Governors of the Federal Reserve and the FDIC 
Board, [inaudible] bodies, and there was unanimity among these 
bodies, that this was the correct course of action under the 
circumstances. The imposition of such significant costs to the 
Deposit Insurance Fund and the existence of such a widely-
recognized threat to the stability of the financial system 
clearly demonstrate that the regulations currently governing 
large financial institutions, large regional banks are not 
adequate, and more needs to be done.
    This episode is a powerful reminder of the ways that the 
digitization of finance has and will continue to change the 
nature of banking, the pressures that banks face, and the 
structure of the financial system. It is a critical time for 
regulators and for Congress to stay on top of recent 
developments and to look broadly to identify emerging risks.
    Although it might not seem directly relevant to today's 
hearing, the new guidance proposed by the Financial Stability 
Oversight Council (FSOC) for designating non-bank financial 
institutions is systemically significant, and a proposed 
analytical framework for systemic risks is a prime example of 
the way regulators should be using the available tools to 
address emerging risks before they pose a threat to the 
financial system.
    More work could also be done to consider how best to 
protect the financial intermediaries and financial 
infrastructure that provide critical credit and financial 
services needed to promote a healthy and balanced economy. This 
could include more efforts to promote the vitality of community 
financial institutions, including community banks, Minority 
Depository Institutions (MDIs), and Community Development 
Financial Institutions (CDFIs), and helping to ensure that they 
remain focused on serving the small businesses and the wide 
array of families and individuals who need access to the 
services that they can provide.
    Finally, I want to comment quickly that I agree with my 
fellow witnesses on the importance of supervision in the coming 
era. Again, digitization means that a lot of things are moving 
and they are moving quickly. It is often during periods of 
higher inflation and higher interest rates that we end up with 
more disruptive changes to the structure of the financial 
system. So, it has never been so critical to have really 
qualified supervisors on the ground who are willing to ask the 
hard questions and are willing to think creatively about what 
are the tail risks, what are the low-probability events that 
could result in things happening that we haven't seen in the 
past but could be incredibly destructive to the safety and 
soundness of an individual bank, or to the health of the 
broader financial system.
    And I would encourage you, in trying to think about how we 
create the right culture and environment to attract the type of 
supervisors that we are going to need, that going forward, you 
take time to consider what is the type of environment that is 
going to allow those supervisors to ask hard questions and to 
respond in a way that is appropriately responsive and at times, 
when needed, aggressive in making sure the banks are attuned to 
the ways their actions could undermine their own safety and 
soundness, and even more disconcertingly, potentially undermine 
the health of the broader financial system.
    Thank you again for the opportunity to be here, and I look 
forward to your questions.
    [The prepared statement of Professor Judge can be found on 
page 47 of the appendix.]
    Chairman Barr. Thank you for your testimony, and the Chair 
now recognizes himself for 5 minutes for questions.
    Let me start with Ms. Tahyar. As I mentioned in my opening 
statement, the Vice Chair for Supervision at the Fed and the 
Chairman of the FDIC led self-assessments, self-referential 
reviews. In your view, do these reports provide the impartial 
accountability for the Fed and the FDIC to Congress?
    Ms. Tahyar. No.
    Chairman Barr. And I also alluded to the fact that we have 
made multiple requests for more information, supervisory 
information, information about the weekend of March 10th and 
about the events leading up to the decisions to seize the 
banks, and about FSOC meetings. We have nothing from the 
regulators in terms of visibility into those deliberations. 
What are the consequences of having opaque bank regulators that 
block the information flow to Congress?
    Ms. Tahyar. I guess I would start by having a little bit of 
sympathy for the firefighters, who have been working virtually 
24/7, which is why I am in three stages. But I think over time, 
Congress, on both sides of the aisle, needs to get a lot more 
information and a lot more transparency. And the consequences 
are the consequences that we have seen here, which is we have 
had a failure of supervision, a failure of management, and a 
banking panic. There will always be banking panics, we can't 
prevent them, but we can mitigate them.
    Chairman Barr. Mr. Gould, let me talk about that 
supervision piece. In the Fed's review that it just recently 
published, it talks about the fact--I am drawing on memory 
here, but I believe that Silicon Valley Bank surpassed the 
$100-billion asset mark sometime in early 2021. The failure, of 
course, was in March of 2023. There was some effort made to put 
a new supervisory team in place, but am I correct in saying 
that the bank was subject to enhanced prudential standards all 
the way back to February, March of 2021?
    Mr. Gould. Yes. That is correct. The bank was subject to 
certain enhanced prudential standards.
    Chairman Barr. And this is, by the way, the Dodd-Frank Act, 
as amended by the bipartisan Regulatory Relief Act. So, it is 
not as if Silicon Valley Bank wasn't subject to enhanced 
standards under those regulatory regimes. Am I correct about 
that?
    Mr. Gould. That is correct. And some of the standards to 
which they were subject such as the internal liquidity and 
stress testing requirements, the Federal Reserve was not even 
actually enforcing.
    Chairman Barr. Yes. This excuse for supervisors, that 
somehow they were psychologically impacted by the regulatory 
relief law, doesn't really hold water when you consider they 
had a charge under existing regulation, existing laws to apply 
those enhanced supervisory standards to this institution for 
well over a year before it failed.
    Mr. Gould. They did, and beyond the regulatory framework to 
which they were subject, the failings were so basic, so 
fundamental to kind of risk management one-on-one as to be 
glaringly obvious under any regulatory framework.
    Chairman Barr. Yes. Let me just say, interest rate risk is 
something that bank examiners have looked at long before Dodd-
Frank was ever enacted, right? You don't need Dodd-Frank to 
supervise interest rate risk.
    Mr. Gould. That is fundamental to the business of banking. 
That is how banks make money.
    Chairman Barr. Yes. So, this attempt to blame regulatory 
tailoring or even an insufficiently-robust Dodd-Frank regime is 
really missing the point here. This was a classic supervisory 
failure; interest rate risk is the business of banking and the 
supervision was a failure.
    Mr. Gould, if Vice Chair Barr used Silicon Valley Bank and 
Signature Bank failures as leverage to impose higher capital 
charges on banks, even though SVB and Signature were 
capitalized before the bank runs they experienced, would that 
be good for the economy and for Americans who rely on bank 
credit?
    Mr. Gould. I think there are others who are better-equipped 
to answer that question, but I don't think anyone has a 
monopoly on common sense. So, I would merely add that there are 
clear tradeoffs when you raise capital in terms of reduced 
availability of credit.
    Chairman Barr. Mr. Michaud, for the small regional to mid-
sized banks, if we were to eliminate regulatory tailoring, and 
to the extent there are some stresses related to deposit 
migration out of these mid-sized banks, should we be imposing a 
one-size-fits-all regulatory capital liquidity requirement on 
those smaller banks right now?
    Mr. Michaud. I think it would permanently change the face 
of the dynamics of banking forever if that happened. I think 
that you would see the mid-sized banks be absorbed into the 
bigger banks. You need to have that tremendous bar-belling that 
we talked about, where there would be banks which only had 
clients that were smaller than $250,000, and then all of the 
other clients would end up in the bigger banks.
    Chairman Barr. My time has expired. I wanted to get to 
deposit insurance, but I am sure my colleagues will. I will now 
recognize the ranking member of the subcommittee, Dr. Foster, 
for 5 minutes.
    Mr. Foster. Thank you. Mr. Michaud, you brought up 
something that has been brought up by many people, which is the 
idea of fully insuring transaction accounts, operating 
accounts. Could you speak on what are the pros and cons of 
that? Why isn't it a good idea at this point?
    Mr. Michaud. Let me give you an illustration, because many 
of us have been talking about this bar-belling of the industry. 
I am just going to say, for instance, assume you are the CFO or 
a treasurer, an employee, or a volunteer of a nonprofit in one 
of your communities, and you have over $250,000 in your 
operating account to run your nonprofit. The way things stand 
now with the current limits, you have to do your own credit 
analysis of your bank or go towards moving your money to a too-
big-to-fail bank, because you need this--
    Mr. Foster. Correct. This is, I think, well understood by 
many, but not all potential customers.
    Mr. Michaud. But my view is that you need that support. I 
don't know if it needs to be unlimited, but I do think it needs 
to be raised considerably. I think it needs to be targeted, 
because I think it is those small businesses that will choose 
to be in a too-big-to-fail bank, regardless of the price of the 
service or the relationship they have with their smaller bank. 
And that trend will happen over time if deposit insurance isn't 
changed, in my opinion.
    Mr. Foster. Okay. Professor Judge, on your end?
    Ms. Judge. I would agree that when it comes to the small 
businesses, it is important that they have the peace of mind to 
know that their transaction accounts at least are safe. And I 
think the FDIC did a nice job laying out the different options 
and showing how segmentation, a way of you saying that there is 
something different for individual accounts and what the 
appropriate cap is relative to the small and mid-sized 
businesses that might need meaningfully more deposit insurance 
in order to make things like payroll. So, trying to think about 
how we responsibly institute a system of segmentation could be 
incredibly helpful in promoting the health of community and 
other small banks, and also helping to promote the stability of 
the clients that they serve.
    Mr. Foster. Mr. Michaud, you also mentioned using 
differential FDIC insurance premiums as a way to sort of level 
out the barbell. This strikes me as having a lot of elements of 
a sort of a big banks tax and a redistribution of wealth, if 
they are not based on actuarial risks. I was just wondering 
what you think of that, which I am not necessarily opposed to, 
but we have to sort of treat it for what it is.
    Mr. Michaud. There is an implicit guarantee in this too-
big-to-fail position that these banks are in. They get the 
benefit of paying less for deposits because of the tradeoff for 
safety, so they are actually getting value in that aspect for 
being too-big-to-fail. And the question is, can we have them 
pay more for deposit insurance for some of that value they are 
getting for being too-big-to-fail? That is the thinking.
    Mr. Foster. One of the reasons that I think Chairman 
McHenry and I are fans of contingent capital, is a mechanism 
for making the big banks pay for the tail risk of their 
continued existence in troubled times. Are there any lessons to 
be learned about the market-to-market of losses due to interest 
rate shifts, because that is something that we struggled with 
during the Dodd-Frank time, with the market of mortgage-backed 
security losses, whether you should immediately recognize those 
or allow the fiction that these will be carried to maturity, 
which may or may not turn out to be true. Are there lessons 
learned there from any of the witnesses?
    Mr. Michaud. I think there are, and actually, in my 
proposal to you all, I did say that there should be some 
adjustments and that you can put in place targets where there 
could be limits to a degree of how those ratios come to bear. 
But the market was very focused on these mark-to-market losses 
of Silicon Valley Bank, for example, even though it wasn't 
necessarily counted in certain regulatory ratios. And I think 
there is an opportunity to amend some of that approach that 
could build a safer and sounder system. Also, remember we have 
had a 5 basis point move in 14 months, which is extraordinary, 
but that is what the rules should be built for.
    Mr. Foster. It was clear to all market participants that 
there was an interest rate shift coming, that was telegraphed 
in advance, and that it would be big, and many banks hedged 
appropriately and some decided that they wanted to be more 
profitable this quarter and not pay for the hedge. So, I 
personally have sort of limited sympathy because I appreciate 
the moral hazard effect of this. A lot of the customers who 
went to Silicon Valley Bank went there because they were paying 
higher interest rates than their competitors, and part of that 
was that they had lots of uninsured deposits. So, we have to 
think this through carefully so that we don't inadvertently 
just start subsidizing the tail risk and allow those costs on 
smaller and smaller banks.
    My time is now up, and I yield back.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from Florida, Mr. Posey, is now recognized for 5 
minutes.
    Mr. Posey. Thank you very much, Mr. Chairman. As I recall, 
this committee was told there wouldn't be any bank failures 
like this if we created the Consumer Financial Protection 
Bureau (CFPB). I am kind of shocked we are here if the CFPB was 
doing its job.
    First, Ms. Tahyar, rates go up, capital values go down. 
Barron estimated that the undeclared loss on Silicon Valley 
Bank's bonds due to the rapid run up in interest rates, 
starting in March 2022, would have wiped out nearly all of the 
banks $16-billion equity capital base at year end 2022. Would 
it be fair to say that capital was not the real problem here?
    Ms. Tahyar. It was not. Capital was a lagging indicator and 
the banks that failed were well-capitalized upon failure. We 
saw the same thing with adequate capitalization during the 
financial crisis.
    Mr. Posey. Very good. Thank you.
    Mr. Gould, is there any reasonable capital standard or 
level that would have protected against the interest risks of 
Silicon Valley Bank's asset base in the period after Fed rate 
hikes began in March 2022?
    Mr. Gould. No.
    Mr. Posey. Thank you.
    Mr. Michaud, wasn't the rapid and massive increase that the 
Fed began in March 2022, to curtail our 40-year record 
inflation, a contributing factor in Silicon Valley Bank's lack 
of liquidity, given that its asset base was heavily invested in 
fixed-rate mortgage-backed securities?
    Mr. Michaud. That move was significant. Correct.
    Mr. Posey. Thank you.
    Professor Judge, to what extent did the Federal Open Market 
Committee (FOMC) anticipate the kinds of interest rate impacts 
we saw with Silicon Valley and prepare an alert or strategy for 
regulators to prepare for such impacts?
    Ms. Judge. The overarching aim of the FOMC is to fulfill a 
dual mandate focusing on both employment and price stability in 
a period where inflation was rising rapidly, not just in the 
United States, but in countries around the world, and their 
primary focus for the health of the economy, I believe, was 
probably trying to make sure that we managed to promote price 
stability, and get that inflation under control.
    And precisely because of these environments, it has never 
been more important to have sufficiently-robust regulatory 
structures in place and to make sure going forward, that we 
have supervisory structures that are responsive to a rapidly-
changing environment. And when there are not procedural hurdles 
or perceptions of procedural hurdles that allow people to 
respond quickly and appropriately in the face of such a 
rapidly-changing environment.
    Mr. Posey. My questions are answered, Mr. Chairman. I yield 
back. Thank you.
    Chairman Barr. The gentleman yields back. The gentlewoman 
from New York, Ms. Velazquez, is now recognized.
    Ms. Velazquez. Thank you, Mr. Chairman. Professor, Judge, 
the rescue of depositors at Silicon Valley Bank and the 
invocation of the systemic risk exception by Federal regulators 
demonstrates that regulators think regional banks can pose a 
systemic risk to the system. Do you think that these banks 
should face the same rules as the gypsy banks?
    Ms. Judge. There continues to be some differences between 
large regional banks and the global systemically important 
banks (G-SIBs). I think all of the proposals on the table 
recognize some differences, but the question is the extent of 
the magnitude of what those differences should look like.
    And one of the things that we have learned over the course 
of this episode is regardless of what might have seemed 
reasonable at an earlier point in time, these banks are so 
systemic that everybody involved, who was operating in real 
time, felt like they posed a meaningful threat to the stability 
of the financial system. The risks at Signature looked somewhat 
different than the risk at Silicon Valley Bank. So, this was 
not just one single bank or a whole variety of different bank 
models that were under strain. And what we have further learned 
is that the resolution of these banks is far from easy to do.
    Even with respect to First Republic, where we did not 
actually have to invoke the systemic risk exception, we saw a 
$13-billion hit to the Deposit Insurance Fund, which suggests 
that we have a long way to go to make sure that they are 
regulated in a manner commensurate with the risk they pose.
    Ms. Velazquez. Thank you. You note in your testimony that 
bank leaders can seek to game the rules and take on additional 
risks in order to seek higher profits. I recently wrote a 
letter, with Senator Van Hollen, to Federal regulators 
encouraging them to finalize their rulemaking under Section 956 
of Dodd-Frank, which is supposed to prohibit incentive-based 
compensation structures that encourage excessive risk-taking. 
Wouldn't you agree that it is well past time for regulators to 
finalize this important rule?
    Ms. Judge. It is clearly past time for that rule to be 
finalized. I think the letter is exactly what we need to create 
the pressure to try to make sure the regulators are fully using 
the suite of tools currently available to them, that Congress 
has given them to address the incentive issues that continue to 
arise. And that encourage bank management at times to take 
risks from which they could profit, but where others bear the 
loss.
    Ms. Velazquez. Thank you. And you also note that the tools 
that regulators have to penalize and remove bank officers and 
hold them accountable remain inadequate. What additional 
measures should we consider to hold bad actors accountable?
    Ms. Judge. A more robust set of callback tools will also be 
appropriate as the situation well demonstrates. Clawback tools 
are a mechanism of responding when an executive has received 
compensation because they appeared to be earning it, but where 
we know with the benefit of hindsight that they were actually 
making decisions that undermined the safety and soundness of 
the institutions they were overseeing and imposing costs that 
ultimately hit the Deposit Insurance Fund. We want to make sure 
the bank executives, first of all, don't have the incentive to 
take the types of risks that would undermine the health of 
their institutions because they know they are going to have to 
pay the money back, and where there is a greater sense of 
fairness, that they are not profiting at the expense of others.
    Ms. Velazquez. Thank you. In your testimony, you state that 
in 2019, the Federal Reserve made a choice to implement the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
in a manner that was meaningfully more deregulatory than the 
revised statutory scheme required. Can you further explain this 
statement, and how do you think Congress, not regulators, can 
address this issue?
    Ms. Judge. Two points there, the first thing to note is 
that Congress potentially appropriately at the time gave the 
Fed discretion over what to do with banks of certain thresholds 
with the idea that the Fed was closer to the ground, so they 
might have better information over how risky banks, for 
example, in the $100-billion to $250-billion range, actually 
were and the appropriate suite of enhanced prudential 
requirements to apply in light of that. And we saw that they 
did not actually use that discretion in a manner that was 
commensurate with the risk we now know that those banks were 
assuming. For me, that suggests going forward, we have been 
back on that discretion, understanding that there might be a 
tendency towards excessive deregulation, because the costs are 
only felt in the future, and really trying to potentially 
hardwire standards that are more commensurate with what we have 
learned recently is the nature of the threat that these banks 
have the potential to pose.
    Ms. Velazquez. In conclusion, Congress needs to act. Thank 
you. I yield back.
    Chairman Barr. The gentlelady yields back. The gentleman 
from Missouri, Mr. Luetkemeyer, is now recognized.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and I thank our 
witnesses for being here today.
    I want to start out by going to Ms. Tahyar. You mentioned 
in your initial remarks that the social media phenomenon of 
being able to get out there and get a message out there that 
caused, I think, in somebody's words here, a ``banking panic,'' 
is very concerning, not necessarily from a bank by bank basis, 
but from a systemic situation. This is where I want to go with 
my questions here, because some individual banks are going to 
be well-run, and some not well-run. And in the situation we 
have here, I think we have a lack of regulatory oversight 
embankments management on the two, three banks we are talking 
about, but the system is what I am concerned about.
    The overall system can be played with. I sit on the House 
China Select Committee as well, and it scares the dickens out 
of me when I can see that we are playing games with our own 
financial system now while the tweets are going on and their 
social media is going on. And I just know the Chinese are 
sitting there watching what is going on.
    So, we have another tool in our toolbox to play around with 
the United States economy, their banking system, and we are 
doing nothing about it. And it is very concerning to me because 
from a system standpoint, we have to be thinking in terms of 
what the bad guys are going to be doing to us, and to be able 
to prevent that from happening, or put a tool in toolbox for 
the regulators to be able to manage the crisis.
    Mr. Gould, I think you said that the system is built on 
trust and confidence, and Mr. Michaud said it is driven by 
fear, that people lose time or lose confidence in the system, 
and things happen. My concern is also that we have real-time 
payments coming around the corner here shortly. And we saw $42 
billion went off the books of Silicon Valley in less than 48 
hours. And real-time payments will take 48 minutes to do $42 
billion if we are not careful, and we don't understand how the 
system works and put some things in place to stop it.
    I have a couple of ideas I want to run by you this 
afternoon. One is to put in place the ability for the FDIC to 
put--and they did this back in 2010--in place a 60-day ability 
to protect the transactional accounts and deposits at these 
institutions across the country. And now, they can do it on a 
bank by bank basis, but if the risk is systemic enough that we 
could have the whole system be under attack, I think it would 
be worthwhile to be able to have them go at least on a 60-day 
basis with just transactional accounts. What do you think about 
that, Ms. Tahyar?
    Ms. Tahyar. Thank you very much for those thoughts. I agree 
with all of them, and they terrify me as well, and I think we 
should all be terrified. Social media and bad state actors in 
this panic is a new thing and we have to grapple with it.
    My own view is that providing the FDIC the power with the 
three keys of the systemic risk exception to temporarily 
guarantee deposits up to whatever level the FDIC chooses, is an 
important tool. Congress limited it, and Dodd-Frank was a 
different time, and the house was burning for a different 
reason. It feels to me like what Congress said is, thank you 
very much for the firefighting, now we are going to defund the 
firehouse. So, I hope that Congress really thinks about putting 
that back in place.
    Mr. Luetkemeyer. Mr. Michaud?
    Mr. Michaud. I would agree. I think orderliness is 
important, and I think that tool could create a more-orderly 
moment to address the bigger picture and make important 
corrections.
    Mr. Luetkemeyer. I think it makes them calm, and the system 
gives you 60 days to settle down to figure out if you really 
have a threat or not.
    Mr. Michaud. One hundred percent.
    Mr. Luetkemeyer. Can you come to Congress to do something, 
but you don't have a threat ticket off and off you go?
    Mr. Michaud. What you will see is there is a lot of churn 
in equity and fixed-income markets and bank securities, which 
is a reinforcement for concern.
    Mr. Luetkemeyer. Mr. Gould, what do you think of that?
    Mr. Gould. I think you should just make sure you understand 
the cost and the incentive of such a mechanism with the SEC 
going forward. And I think as a prerequisite to informing 
yourself as to whether that is appropriate, I think you need to 
get more transparency from the Fed and the FDIC as to actually 
what happened during that 3-day time period, which I think, as 
yet, we still haven't seen. So in order for you all to make an 
informed decision, I think you first and foremost need to get 
more information from them.
    Mr. Luetkemeyer. Very good. We had SEC Chairman Gensler 
here a couple of weeks ago, and we asked him whether he had the 
authority to stop the short-selling on an industry-wide basis. 
In fact, today in The Wall Street, there is another article 
with regards to short-selling banks.
    Ms. Tahyar, do you think that he has the authority right 
now to do it across-the-board? He kind of waffled on that.
    Ms. Tahyar. Well, the Chair of the SEC did it in September 
2008 and nobody questioned the authority at that time.
    Mr. Luetkemeyer. Okay.
    Ms. Tahyar. So, he clearly has it.
    Mr. Luetkemeyer. Okay. Thank you very much. I yield back.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from California, Mr. Sherman, is recognized for 5 
minutes.
    Mr. Sherman. Thank you. I don't think we can tell the bank 
regulators that it is not their fault because we had different 
monetary policies or fiscal policies over the last few years. I 
am very old, and we have some other old people here. We have 
some young people too, some younger than myself. But as old 
people remember, we have had zero-percent interest rates, and 
we have had 16-percent interest rates. Interest rates go up, 
and interest rates go down. We have had fiscal budgetary 
surpluses under Clinton, and we had enormous fiscal budgetary 
deficits under Trump and others. Fiscal policy goes up, and 
fiscal policy goes down. We need a banking system where banks 
can survive not only the existing fiscal and monetary policy, 
but changes as they may occur.
    Mr. Gould, you are wise to have pointed out the governance 
structure of the Fed and the whole system. First, we have forum 
shopping. We don't allow that and you can't say, well, I don't 
like this IRS; I want to go to the other IRS to audit my 
returns. And we have a governance structure in which the banks 
elect the people on their regional boards, who are then in 
charge of auditing them. And if we had a system where only 
billionaires subject to audits would determine who is running 
the IRS, we would have a very different tax system.
    Mr. Michaud, you bring up an interesting proposal on FDIC 
insurance. We kind of have two proposals. One is for expanding 
coverage of operating accounts. When you say operating 
accounts, are you limiting that to non-interest bearing 
checking accounts?
    Mr. Michaud. Pretty much operating transaction accounts as 
defined.
    Mr. Sherman. Yes. How would you define that?
    Mr. Michaud. Typically, I think it would be the operating 
accounts that businesses and nonprofits and others use for 
their daily business. And it could be--
    Mr. Sherman. It is very hard to determine am I a business, 
or am I just an individual? Do they have a definition?
    Mr. Michaud. In their report, the FDIC laid it out and gave 
you the bookends for what you could use for a definition.
    Mr. Sherman. Okay. I would think that we would want to 
limit that to non- or low-interest rate accounts if people have 
more than a quarter million dollars to invest earned interest. 
That is a different circumstance.
    The other policy idea is having, on occasion, temporary, 
system-wide unlimited insurance. And I am concerned that if we 
did that, people would pull their money out during that 
temporary period or we make it permanent and just have total 
FDIC insurance, which comes very close to a bailout.
    Mr. Michaud and Mr. Gould, do you see unlimited insurance 
of all FDIC accounts either temporary or permanent as a way to 
go?
    Mr. Michaud. I have been a fan of the targeted approach, 
which is you can pick certain types of accounts, but not 
necessarily insuring all accounts.
    Mr. Sherman. I want to put up this chart here. What we see 
here is huge, unprecedented, unrealized losses on marketable 
securities. We saw our 2018 law allow the Fed to not be tough 
on these issues with regard to mid-sized banks.
    Ms. Judge or Mr. Gould, is it standard practice as part of 
regulating a bank to calculate how much the bank has lost 
because of interest rate risk? You can do that, obviously, on 
marketable securities, but on portfolio loans, you say, ah, 
that is a 5-year loan, at the time the loan was extended rates 
were at 2 percent for 5-year loans. Now, they are at 6 percent 
for 5-year loans, so it's pretty easy to calculate back and 
determine how much the bank has lost. And then, compare those 
losses, unrealized losses, on loans and bonds to the bank's 
capital. Is that a standard part of regulating a bank?
    Ms. Judge. Clearly, it is for the largest banks.
    Mr. Sherman. But we couldn't do it with all the banks, 
could we?
    Ms. Judge. As a regulatory matter going forward, we should 
be clear--
    Mr. Sherman. So, you are saying that preparing a schedule, 
showing losses due to interest rate risk, is something we 
didn't bother to do on mid-sized banks, not because it is hard, 
but because we didn't want to know the answer?
    Ms. Judge. I don't know what they were looking at, at the 
time. I believe if I am going to provide any defense that there 
was an expectation that you would have some type of offset, the 
regional banks--
    Mr. Sherman. What you do is you blind yourself to how much 
money you have lost by believing your customers are willing to 
subsidize you by leaving the money in. If you believe that, you 
would probably run up a $35-billion cost to our system.
    Ms. Judge. Which is exactly why, going forward, regardless 
of what was true in the past, depositors have woken up and it 
is very clear we need to--
    Chairman Barr. The gentleman's time has expired. The 
gentleman from Texas, Mr. Williams, is now recognized.
    Mr. Williams of Texas. Thank you, Mr. Chairman, and thank 
you all for being here today. Americans are struggling under 
the weight of crippling inflation and families are being forced 
to decide whether to put food on the table or pay the rent. The 
Biden Administration's massive spending spree of Executive 
Orders has fueled this crisis. The Democrats' partisan American 
Rescue Plan injected $1.9 trillion into the economy, ignoring 
the warnings that this plan would cause skyrocketing inflation. 
And as a result, the Federal Reserve has continued to increase 
interest rates to their highest levels since 2007.
    Mr. Gould, in your testimony, you stated that the Federal 
Reserve's rapid interest rate hikes are a source of systemic 
risks to the banks. They supervise and were a cause of Silicon 
Valley Bank's failure. So, can you elaborate on how interest 
rate hikes caused these bank failures and how do you think the 
Fed failed to supervise the banks they oversee for this risk?
    Mr. Gould. Yes, sir. The rising interest rate risks caused 
the bond portfolio, the investment portfolio of banks like SVB 
to decrease and accrue all of these unrealized losses, which 
investors began to pick up on and see that there were 
significant unrealized losses on the bank's assets on their 
balance sheet.
    This is a phenomenon that was well-understood, and well-
known. In fact, as recently as a month before Silicon Valley 
Bank's failure, the Fed Board made a statement on the impact of 
rising interest rate risks, on banks, on their balance sheets 
and their investment portfolios. And literally, the case study 
was Silicon Valley Bank a month before it failed.
    Mr. Williams of Texas. The Federal Reserve's report 
reviewed the supervision of Silicon Valley Bank. Key findings 
determined that Silicon Valley Bank's board of directors--you 
just touched on that--failed to manage the risks. On top of 
that, the key findings go on to say Fed supervisors did not 
appreciate the extent of the bank's vulnerabilities. In 2022 
alone, the Federal supervisor issued three findings on SVB's 
ineffective board oversight, their weakness in risk management, 
and the bank's flaws in their internal audit function.
    So, it should raise major concerns that the Federal 
Reserve, which is tasked with regulating and overseeing banks' 
risky practices, identified vulnerabilities for more than a 
year but failed to take corrective actions to ensure that SVB 
fixed those problems. So despite there being two main causes of 
the SVB failure, the Fed report stated this experience 
emphasized why strong bank capital matters and goes on to 
discuss the need for stronger bank capital.
    So again, Mr. Gould, in your opinion, would you think about 
requiring more regulatory capital above the current levels? 
Would that have prevented the failures of Silicon Valley Bank 
and Signature Bank, which were well-capitalized banks? Would 
high capital levels have prevented SVB mismanagement or the Fed 
supervisory failures?
    Mr. Gould. Sir, even under higher capital standards, it 
would seem that according the Fed report, Silicon Valley Bank 
would have remained adequately capitalized. I think there are 
questions around whether or how to treat unrealized losses in 
certain investment portfolios, and whether or not that 
volatility should flow through to regulatory capital. I think 
those are questions that should be examined. But at least as I 
understand it, regulatory capital levels at SVB, even had they 
been higher, would have still been met.
    Mr. Williams of Texas. Okay. As a result of the failures of 
banks in California and New York, taxpayers in Texas, which is 
where I am from, and across the United States could be left 
footing the bill for these banks' mistakes and mismanagement. 
And now, Texas banks face possible FDIC insurance assessments 
for something they had no part in creating. The FDIC has an 
obligation to get the best pricing at failed bank auctions and 
to avoid having to use taxpayer funds to bail out these banks. 
During the auctions of SVB and Signature, the FDIC did not move 
fast enough to find a viable buyer, letting multiple days pass. 
Well, there were reports of several offerings to these banks 
before a bid was approved.
    So finally, Mr. Gould again, could taxpayers have been 
spared from paying for the failures of these banks if the 
bidding process had moved more forcefully and swiftly, and did 
the FDIC leave value on the table?
    Mr. Gould. Congressman, it is certainly the case. A failed 
bank is often likened to a melting ice cube in that you want to 
move quickly to sell it, to preserve as much franchise value as 
possible. I think the situation is simply that we don't have 
all of the facts, or at least as I sit here, I don't have all 
of the facts about what actually occurred over these weekends. 
But you are not similarly limited. You can obtain from the FDIC 
the facts since you are their overseer.
    Mr. Williams of Texas. I am in the car business, and 
sometimes we say, your first deal is the best deal. You want to 
react and sell it. So with that in mind, Mr. Chairman, I yield 
back. Thank you.
    Chairman Barr. The gentleman yields back. The gentleman 
from California, Mr. Vargas, is now recognized.
    Mr. Vargas. First of all, thank you, Mr. Chairman. I 
appreciate the opportunity to have this hearing. I want to also 
thank the ranking member, of course, and the witnesses here 
today.
    I do have to say I want to challenge the premise that 
somehow President Biden has created all this inflation in the 
United States. In fact, it is interesting because it has been a 
worldwide phenomenon. If we look at our peers across the ocean, 
our European peers, they have been running harder than we are. 
The U.K. inflation rate is over 10 percent. The EU is still at 
8.8 percent or so. Some notion that somehow miraculously or 
infamously, the Biden Administration created it--no, obviously 
it was the pandemic, and a whole bunch of other problems that 
we have had globally, and we have had international inflation. 
It has been everywhere.
    Anyway, I just had to get that off my chest because every 
time I hear my colleagues say, I just don't think it is true. 
Dodd-Frank, what is a good loan? Was it the right thing to do 
at the right time, Dodd-Frank? Let me start with you, Professor 
Judge.
    Ms. Judge. I think it seemed like a reasonable move at the 
time. And I think over time we are learning we probably should 
have gone further when we had the opportunity. Clearly, that is 
proven by the fact that we are sitting here, not that much 
later, and we are facing the magnitude of the bank failures 
that we are now facing and of the losses to the insurance fund 
that we are now facing. Again, some of that was changes in 
Dodd-Frank and regulatory changes that went even further than 
the statutory changes. But I think Dodd-Frank brought about 
much-needed changes. And I think there is always more work to 
be done. It is the nature of financial regulation.
    Mr. Vargas. Thank you.
    Mr. Gould, I think that you said something like, we have 
passed a bunch of laws, but they haven't done much, or 
something of that sort. Would that include Dodd-Frank?
    Mr. Gould. Sir, I think that expectations of what Dodd-
Frank could accomplish and what some of its proponents said it 
would accomplish were overstated. As far as I can tell, it did 
not end the era of boom and bust. At least based on the actions 
of the regulators just a couple of months ago, it would seem 
that at least under certain circumstances, there are banks that 
can fail in ways that would have systemic impact. So at least 
in two major areas, I think it came up short.
    Mr. Vargas. Do you think it was a good law in general or do 
you think we shouldn't have had a law?
    Mr. Gould. No, sir, I do not think it was a good law in 
general.
    Mr. Vargas. Okay. Thank you.
    Ms. Tahyar?
    Ms. Tahyar. Dodd-Frank was what, 800 pages, with a dozen 
titles? There are good parts of it. And there are parts of it 
that, as Jonathan has said, were overstated. I think the 
paradigm shift in macroprudential regulation was a good one. I 
think time goes on and things change, and there is a need for 
adjustments in some places.
    Mr. Vargas. Okay. It would be unfair, Mr. Michaud, if I 
didn't ask you. Go ahead, sir.
    Mr. Michaud. Terrific. Thank you. I think that Dodd-Frank 
succeeded in bringing more capital and liquidity regulation to 
the industry, which has been well-served. But I think that 
there are parts of it that might have gone a little bit too 
far, and still might need adjusting, but I think the 
preponderance of it was supported from capital and liquidity. 
And I don't think the banks that failed, failed because of 
capital or liquidity. I think they were overwhelmed by a bank 
run at a moment in time.
    Mr. Vargas. Let's get to that. In fact, that was one of the 
points that I wanted to talk about. I do believe we should have 
very large banks. I think that is good for the United States 
and good internationally. I also think that regional banks are 
very, very important. And of course, the smaller community 
banks are important, but they always seem that they would be 
susceptible, both the regional and the community banks to a 
run, especially with the digitized ability to move money so 
quickly, so won't they always strategically be vulnerable? Yes, 
go ahead?
    Mr. Michaud. And just to finish saying, I didn't want to 
also not say that there were mistakes made about interest rate 
management to that prior question. I am not absolving those big 
banks that have failed.
    Mr. Vargas. Right. Let's speak about this one.
    Mr. Michaud. I think these companies are trying to build 
themselves in a more diversified manner. As long as they manage 
their concentrations and their capital well, look, there are 
4,700 other banks that are doing it successfully right now. I 
know that these three failures were spectacular and 
unfortunate, but there are over 4,700 that are doing a really 
good job, I believe.
    Mr. Vargas. Yes. Thank you. My time has almost expired. But 
I want to say it just seems that structurally, when you can 
move $42 billion within a few days, it is always going to be 
structurally problematic. Thank you.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from Georgia, the Vice Chair of the Subcommittee, Mr. 
Loudermilk, is recognized for 5 minutes.
    Mr. Loudermilk. Thank you Mr. Chairman, and thank you for 
holding hearings on this issue, hearings that are extremely 
important with the things that are going on. So, it is great 
that we are actually able to address these types of issues now.
    Mr. Gould, in hindsight, the interest rate problem should 
have been clear, not the least to the Federal Reserve in the 
case of Silicon Valley. And in Vice Chairman Michael Barr's 
report, he attributes the lack of concrete supervisory action 
in the lead-up to SVB's failure to a myriad of causes including 
supervisory culture under the previous Vice Chair for 
Supervision. Do you think this is an accurate self-assessment 
from the Fed or could this just be simply shifting the blame?
    Mr. Gould. Sir, it is impossible to tell, since, for 
example, we don't have the interview notes on which those kinds 
of allegations are based. So for me sitting here, it is 
impossible to tell, but it can certainly be the latter.
    Mr. Loudermilk. Okay. Considering the Federal Reserve 
supervisors failed to anticipate obvious systemic risks 
directly related to their own response to rapid inflation, do 
you believe it is appropriate that they continue pursuing other 
major supervisory initiatives such as Basel Endgame or Vice 
Chairman Barr's holistic capital review?
    Mr. Gould. I think they should focus on their supervisory 
failures and enforcing the regulations that are on the books 
rather than pursuing additional regulations.
    Mr. Loudermilk. Basically, do the job that you already have 
appropriately before you start taking on more responsibilities 
or you are just going to fail on those?
    Mr. Gould. That is correct.
    Mr. Loudermilk. I agree with you on that. Thank you. One of 
the recommendations in Mr. Barr's report is that we work to 
change supervisory behavior and promote faster, more decisive 
supervisory action. My concern with this is that many of the 
supervisory recommendations made in relation to SVB were 
unrelated to the risks that caused the collapse. How would we 
guarantee that unbridled supervision wouldn't create an 
environment where supervisors dictate management decisions 
unrelated to safety and soundness?
    Mr. Gould. I think that is an excellent question, and one 
which I think supervisors grapple with all the time. I think 
internally, you obviously need to have a strong management 
culture. Unlike regulation, if you are an examiner, your 
training is on the ground, it is based on judgment acquired 
over years of experience. All of the regulators will say that 
they apply kind of a risk-based focus to how they think about 
supervision and making sure that they are in fact, focused on 
the risks that really matter versus kind of check-the-box 
exercises on extraneous risks that don't actually matter, it is 
really tough.
    And frankly, there is also always a cost from the bank 
management perspective, if you have several dozen MRAs, they 
might be distracted, rather than focusing on the MRAs that 
really matter. Understanding that, I think is really a function 
of having good leadership and good training.
    Mr. Loudermilk. But one thing just brought up is culture. 
And one of the issues that I have seen with the culture of 
regulators, as we have seen this transition from the idea that 
originated in agencies is to work in partnership with industry 
to come up with regulations that ensure safety and soundness. 
But in many cases, we see a culture that is adversarial-based, 
where regulators are the adversaries, or at least are viewed as 
adversaries by the banks or financial institutions or the 
businesses. Is that what we are seeing in a lot of these 
financial regulators? Is it an adversarial relationship.
    In other words, we see that a lot in management 
supervision, which changes depending on who is in the White 
House at the time. But when it comes to the regulators on the 
ground, is that culture an issue? Is it is more of a, 
``gotcha,'' environment, instead of, let's ensure the soundness 
and safety of your bank.
    Mr. Gould. I think that is a risk. The banking agencies' 
prudential regulation is very different from say, the SEC and 
the CFTC, which are market regulators and viewed more as 
enforcement agencies. I think there is a potentially worrisome 
trend of the banking agencies looking more and more like 
enforcement agencies over time. I don't know if that serves the 
larger policy interest of maintaining systemwide safety and 
soundness, if they adopt kind of a more, ``gotcha,'' attitude.
    Here though, at least, based on what the Fed report says 
about Silicon Valley Bank, I don't think the issue was a 
failure to be adversarial. I think there was just a lack of 
follow-through and allowing these issues to linger and get 
bigger and bigger and not be addressed.
    Mr. Loudermilk. Thank you. That was part of the point is, 
in some areas it is adversarial, and in some areas it is like, 
let's turn our eye to this one. So thank you, Mr. Chairman, and 
I yield back.
    Chairman Barr. The gentleman yields back. The gentleman 
from Illinois, Mr. Casten, is now recognized for 5 minutes.
    Mr. Casten. Thank you to the gentleman from Kentucky and 
all of our witnesses. I appreciate you being here on these 
important issues. I also feel a little bit like that scene in 
Planes, Trains, and Automobiles, where you know they are you 
are going the wrong way, even know where we are going. Like 
Neal and Del, there is a lot of bad stuff in the rearview 
mirror, but what is coming down the pike is a lot worse right 
now.
    Professor Judge, I want to start with you. Treasury 
Secretary Yellen has said that we are going to be unable to pay 
our bills by June 1st, if we don't come to some agreement on 
the debt ceiling. Do you have any sense of what is going to 
happen to Treasury yields if we miss a payment?
    Ms. Judge. Clearly, resolving the debt ceiling has to be a 
top priority. The Biden Administration is making it a top 
priority. They are looking for cooperation. We clearly are 
going to see adverse consequences on the ability of the U.S. 
Government.
    Mr. Casten. I am asking just numerically, because I don't 
have a Bloomberg terminal in front of me. When I looked 2 weeks 
ago, there was about a 300 basis points spread between 
Treasuries coming through before and after the default date. I 
don't know if you all have seen--
    Ms. Judge. I don't have a number off the top of my head. 
There are various estimates that have been out there, none of 
which look pretty.
    Mr. Casten. Okay. We are talking about rapid interest rate 
spikes that created mark-to-market problems where it was that 
volume of an increase over 9 months. Do you have some sense of 
how many banks are about to get, ``SVB'd,'' from a mark-to-
market perspective if all of a sudden there is a roughly 300-
percent increase in interest costs on Treasuries?
    Ms. Judge. I expect a number of banks will face challenges 
if there is a significant change in the Treasury rate. Again, I 
think a lot of what banks hold are longer-term instruments that 
are also keyed off of the risk-free rate. So it is interesting 
and challenging to know, which is precisely why going back to 
where you started, it is never been more important for 
regulators and for supervisors to be engaging in these forward-
looking analyses and trying to understand, what are the tail 
risks?
    Mr. Casten. Second question. My colleague was talking about 
Dodd-Frank. We don't require banks to hold capital for risk-
free assets. If Treasuries are about to not get risk-free, 
there is something like an 8-percent capital charge. How much 
capital do the nation's banks have to raise if the Treasuries 
are suddenly deemed to be not risk-free assets?
    Ms. Judge. It is a great question. I don't have the number 
for you off the top of my head.
    Mr. Casten. Does anybody on the panel know that? The 
numbers I have heard are at the low end of that as $160 billion 
overnight? I see heads nodding directionally. Okay.
    Mr. Gould. It depends on the risk weight to which they 
would be subjected.
    Mr. Casten. Sure. But if you just look at like 8 percent of 
what is out there right now, it is a big number.
    Mr. Gould. Correct. It is a big number. I don't know the 
number, but it is a big number.
    Mr. Casten. Are you concerned about any banks that might 
not be able to raise that volume of capital overnight?
    Ms. Tahyar. I don't see how banks can raise capital in the 
middle of a debt default.
    Mr. Casten. Me, neither. What happens to repo markets, if 
the Treasuries that are used as the swap on the risk-free 
premium are no longer risk-free?
    Mr. Michaud. This would be a new moment for the markets. 
And I think there would be a lot of big concerns in a variety 
of areas to deal with, if that happens.
    Mr. Casten. Okay. If we allow the United States economy and 
the global economy to go into freefall, what happens to long-
term U.S. structural deficits, as the American people are 
looking for us to provide social services that the banks can no 
longer lend money to provide up or down? Do tax revenues go up? 
Can they go up?
    Ms. Judge. A range of bad things can happen, which is why 
it is all the more important that we are having this hearing 
and really trying to figure out, how do we make sure the banks, 
but also non-bank financial institutions, are prepared for the 
range of risks that might hit at any point in time?
    Mr. Casten. Okay. Last question. Moody's did an analysis of 
the proposal that my colleagues across the aisle have put 
forward, in exchange for not committing suicide, we would thank 
the economy. Moody's analysis is that it would increase the 
likelihood of recession and result in 780,000 fewer jobs. If we 
go into recession and spike the unemployment rate, do long-term 
structural deficits go up or go down? It is not a trick 
question.
    Ms. Tahyar. They go up.
    Mr. Casten. Thank you. Like I said, we are going the wrong 
way. And my colleagues across the aisle would have us believe 
that the only choice before us is, how we would like to die? 
There are more choices that we have. And I hope we can take 
this issue seriously and move forward and not kill the entire 
U.S. economy over some pettiness because somebody doesn't like 
a prior tax vote or a prior spending vote.
    I yield back.
    Chairman Barr. The gentleman yields back. The gentleman 
from Tennessee, Mr. Rose, is now recognized.
    Mr. Rose. Thank you, Chairman Barr, and thank you Ranking 
Member Foster, for holding the hearing, and thank you to our 
witnesses for being here.
    At the start, I want to respond quickly to Mr. Vargas' 
opening comments about inflation and what I would call the 
Biden inflation. Years ago, my professors at Tennessee taught 
me that inflation is caused when you have too many dollars 
chasing too few goods and services. So, I reflect back to a 
couple of years ago when many of us in this room were sounding 
the alarm, as the Biden Administration was kind of doubling 
down on the COVID relief funds at a point when even people like 
former Treasury Secretary Larry Summers was saying, ``This is 
going to be inflationary.''
    The fact that other countries made the same mistake does 
not excuse the bad policy choices that the Administration put 
in place, of not only putting too many dollars in the economy, 
but also, at the same time, restricting production, which dealt 
with the other side of that equation so that we ended up with 
that classic situation that causes inflation. And we got it in 
just as former Treasury Secretary Summers predicted. And 
unfortunately, we oftentimes have to repeat the mistakes of the 
past. I just wanted to answer that.
    So, the Administration's own policies, I think, got us to 
where we are today. I think that is important because then the 
response, the policy response to that from the Fed has been to 
dramatically raise interest rates in such a short period of 
time as part of what has created the stresses that we see that 
are leading to the bank failures that we have seen in recent 
weeks.
    Mr. Michaud, First Citizens Bank's stock has nearly doubled 
since acquiring Silicon Valley Bank, but the FDIC kept its 
potential gain, our gain on First Citizens stock at $500 
million. In your opinion, do you think the FDIC got a raw deal?
    Mr. Michaud. It is very hard for me to know all the 
features that went into the bid that First Citizens made. And I 
think typically what happens in these whole bank acquisitions, 
is there a variety of tradeoffs in terms of what a bank may pay 
to acquire a failed bank. So I don't know what tradeoff they 
may or may not have gotten as part of that stock appreciation.
    Mr. Rose. Why not allow the Federal Government to recoup or 
the FDIC, in this case, to recoup more of its losses and share 
in those gains?
    Mr. Michaud. I think that question would be best for the 
FDIC to know exactly what the alternatives were at the time, 
which unfortunately is not something that I know.
    Mr. Rose. Sure. Thanks for your insights there. Last year, 
Senator Elizabeth Warren sent a letter urging Comptroller of 
the Currency Hsu to block the TD Bank-First Horizon deal. And 
the deal fell apart just last week, because they were not given 
a timetable for regulatory approvals. And First Horizon stock 
was down nearly 40 percent last week.
    So Mr. Gould, do you believe the OCC's actions of being 
influenced by members of the Democratic Party, like Senator 
Warren, specifically as it relates to bank mergers, do you 
believe that their actions are being influenced?
    Mr. Gould. I would certainly hope not.
    Mr. Rose. Do you think it is appropriate for regulators, 
like Comptroller Hsu, to give weight to any one Member of 
Congress?
    Mr. Gould. I think it is appropriate for independent 
regulators to look to the statutory factors that Congress as a 
whole as a body has required them to do so. And that is where 
their analysis should begin and end.
    Mr. Rose. Mr. Gould, we have seen this not only at the OCC, 
but at the SEC, the FDIC, the FTC, and the CFPB. The list goes 
on and on. So my question is, is it important for regulators to 
be apolitical and to make judgments based on objective 
criteria? I think you have already answered that, but in his 
report, the Fed Vice Chair for Supervision, Michael Barr, 
touched broadly on the type of regulations that the Fed may 
consider in their review of the recent bank failures. According 
to Barr, actions might include increasing capital requirements 
and adding early triggers to required stress testing when a 
bank crosses the threshold from one category to the next. The 
bottom line is that the incremental costs to the banking 
industry are likely to fall upon that tier of banks below the 
G-SIBs.
    Mr. Gould, my question is, won't these actions just further 
entrench the G-SIBs and make it harder for the regionals to 
compete?
    Mr. Gould. Sir, I think that the imposition of additional 
kind of regulations on regional banks will have an impact on 
the specific markets that they serve, including the 
availability of credit. The comparative analysis, as between 
one type of bank and another, I think is a little hard to tell. 
And I would hope that the Fed is thinking that through before 
they put forward any proposals.
    Mr. Rose. Thank you. Mr. Chairman, I yield back.
    Chairman Barr. The time has expired. The gentlewoman from 
Ohio, Mrs. Beatty, is now recognized for 5 minutes.
    Mrs. Beatty. Thank you, Chairman Barr, and Ranking Member 
Foster, and to all of our witnesses, thank you for being here 
today. I am sorry my colleague, Congressman Vargas, has left 
for another hearing, but let me say that I want to be on the 
record as associating myself with his opening statements on 
inflation.
    And certainly, if we look back, and I think a report that 
the President gave just a month or so ago in March talked about 
looking over the last 12 months at how inflation had actually 
reduced. And certainly, we know gas and food had contributed to 
it. Gas prices also came down. My colleague mentioned COVID. 
Certainly, there were a lot of dollars and things put in place. 
Over a million people had died because of COVID. Small 
businesses and the economy was affected. So for those things 
that he did in that space, I support Mr. Vargas and his opening 
statements.
    Now, let me start with Professor Judge. In the resolution 
of Silicon Valley Bank and Signature Bank, do you think that 
the Federal Government took the appropriate steps to intervene 
and prevent contagion by invoking the systemic risk exception 
and insuring all deposits of both banks?
    Ms. Judge. Yes, I defer to the policymakers who had the 
information. But what we see is policymakers of both parties 
were unanimous in their perception that this posed a threat to 
the stability of the financial system. And we have seen that 
actually, no such disruption subsequently materialized, and 
instead, we managed to maintain a relatively resilient banking 
system despite major losses.
    Mrs. Beatty. Some of my colleagues on the other side of the 
aisle are proposing legislation that would place additional 
requirements on the President, Treasury, and Federal banking 
agencies before they can take action to respond to the bank 
failure.
    Would those additional requirements, in your opinion, slow 
down the ability of those agencies to respond to a bank 
failure?
    Ms. Judge. Yes. I am very concerned about the way that they 
might impede the ability for them to respond appropriately. I 
think that Ms. Tahyar did a great job in her comments earlier 
comparing the situation to a house on fire, and the first rule 
is for the firefighters to put out the fire. And I think 
anything that impedes their ability to make sure the fire is 
contained, could have adverse consequences on the health of the 
economy.
    Mrs. Beatty. Okay. Thank you. We have already spent a lot 
of time talking about the FDIC and the change to the $250,000 
limit on deposit insurance. But let me go back to our hearing, 
I believe it was on March 1st, when I asked Chair Gruenberg 
about this. And he didn't make a comment on it or declined to 
make a comment on any particular proposal until the whole 
review was completed.
    But earlier this month, I think it was in the FDIC report 
that they released, they outlined three options for reforming 
the deposit insurance: it was unlimited; it could be targeted; 
or it could be limited coverage. And stated that the FDIC 
believes that targeted coverage will be the most promising 
option to improve financial stability. Do any of these options 
resonate with you? And I will ask each one of you.
    Ms. Judge. Yes, I thought the report was exceptionally 
well-done. And the notion that we might want more targeted 
approaches to deposit insurance that allow small business 
owners to have the additional protection they need and to also 
maintain that close relationship that they so value with their 
local community bank, makes a lot of sense.
    Mrs. Beatty. That prompts me to ask the other Members, do 
you think Congress should focus on expanding coverage to small-
business payment accounts?
    Mr. Michaud. I, 100 percent agree. I think the targeted 
approach is the right approach. And I think that is the right 
cohort to focus on.
    Mrs. Beatty. Mr. Gould?
    Mr. Gould. I was a Congressional staffer here in 2005, when 
Congress raised the deposit insurance limits from $100,000 to 
$250,000 for examiner accounts, and I have seen them go up 
since then. One thing that I think Congress should really look 
at is historically, what have the levels been? What problem are 
you trying to solve? And make sure whatever you do in deposit 
insurance reform, if you do anything, that it addresses 
specific problems. And then, you also understand that it is not 
just deposit insurance reform; you also have other mechanisms 
to reduce the risk of runs, including from incompetent 
supervision.
    Mrs. Beatty. Thank you for reminding all of us or many of 
us that we raised it recently. And I will end with you, Ms. 
Tahyar.
    Ms. Tahyar. I thought the FDIC report was very well-done. I 
think deposit insurance reform is something Congress has to 
look at. I have nothing to add except to say that unlimited 
insurance--we would be the only country in the world to do 
that, so I would have--
    Mrs. Beatty. Thank you.
    Chairman Barr. The gentlelady's time has expired. The 
gentleman from South Carolina, Mr. Timmons, is now recognized.
    Mr. Timmons. Thank you, Mr. Chairman. I just want to begin 
by saying it is shocking to me that some of my colleagues 
across the aisle are still living in a fantasy land, where they 
believe that the $7 trillion of extraordinary spending did not 
cause the highest inflation environment in my life. I just 
don't understand. I guess, let's just start here. I just want 
to say that pandemic spending needed to happen. But I would say 
that number was between $1 trillion and $2 trillion, and that 
was bipartisan. There was $5 trillion on top of that, that was 
largely partisan. So I guess just as a show of hands, well, 
let's just do yes-or-no questions each.
    Ms. Tahyar, do you believe that the $7 trillion of spending 
done in the last 3\1/2\ years caused inflation? Just yes or no?
    Ms. Tahyar. Yes.
    Mr. Timmons. Mr. Gould?
    Mr. Gould. Yes.
    Mr. Timmons. Mr. Michaud?
    Mr. Michaud. Yes.
    Mr. Timmons. Professor Judge?
    Ms. Judge. I look across the Atlantic, and I see the U.K. 
sitting there, and they engage in--
    Mr. Timmons. We are going to that next year. You can say 
no; it is fine.
    Ms. Judge. It does not seem like it was the perfect--
    Mr. Timmons. Okay. So, I guess this is the next thing. The 
dollar is still the global reserve currency until this 
President undoes that, and he just nominated somebody to lead 
his Economic Council who believes that we should actively go 
off the dollar as the reserve currency, which is insane.
    Mr. Gould, I will start with you. Do you see a relationship 
between the inflationary environment that we experience in the 
United States, the reserve currency, and that impacting other 
countries' inflation and causing hyperinflation in certain 
countries; is there a relationship there?
    Mr. Gould. I assume if the value of the dollar is not 
stable over time, it will lose its appeal as a global reserve 
currency.
    Mr. Timmons. And many believe that the inflation being 
experienced in other countries can be partially blamed on the 
United States.
    But let's just go to the issue at hand, SVB. Mr. Michaud, 
do you think it is best practice to have a chief risk officer 
for a bank?
    Mr. Michaud. Yes, I do.
    Mr. Timmons. Okay. So the fact that SVB didn't have a chief 
risk officer from April of 2022 until January 2023, that is a 
problem.
    Mr. Michaud. I don't know the specifics. But it's something 
I would look into, given those facts.
    Mr. Timmons. What do you think is the appropriate ratio of 
diversity officers to risk officers? Is it at least one-to-one? 
Fair enough? You don't have to answer that.
    So, 11 of the 12 branches of the Federal Reserve System 
were warning banks about stress testing higher interest rate 
environments, while the San Francisco Fed was beating the ESG 
drum. They were not communicating in the same way that the 
other 11 were.
    Ms. Tahyar, is that a problem? Do you think that the San 
Francisco Fed should have been telling the banks to stress test 
higher interest rate environments? Would that be best practice?
    Ms. Tahyar. I don't know what was going on at the San 
Francisco banks because we don't have the facts. In theory, in 
a vacuum, all of the Reserve Bank's should have been focusing 
on interest rate risks.
    Mr. Timmons. I have spoken to a number of people who are 
aware of what they were doing and they were not encouraging 
that.
    Let's go to Congress's role in all this. We delegated our 
authority to bail out future banks because of the Troubled 
Assets Relief Program (TARP). If Treasury and the FDIC did not 
have the authority to invoke the systemic risk exception, do 
you think Congress would have done it? Mr. Gould, what are your 
thoughts?
    Mr. Gould. I'm sorry, sir. Do I think--
    Mr. Timmons. Do you think Congress would have bailed out 
SVB and Signature, if not for Treasury and the FDIC having the 
statutory authority to invoke the systemic risk exception?
    Mr. Gould. That is tough to predict. I recall back in 2008, 
the first time TARP was up for a vote, it did fail. My guess is 
it would be tough.
    Mr. Timmons. Probably not. And the President and the 
Treasury Secretary said that this was not a bailout. It did not 
impact citizens all over the country. But unfortunately, with 
them ignoring the quarter-million-dollar FDIC max and just 
saying, well, we are just going to insure everybody, that 
creates risk, which results in initial premiums, which my 
constituents are going to pay, so that was a lie. It was just a 
lie.
    The President focused on this concern about payroll, which 
would have been met, and the President and the Treasury 
Secretary focused on the fact that it wasn't a bailout and it 
wouldn't affect anybody. I don't think that the Federal 
Government should have bailed out banks which made poor 
decisions. I think that those banks should have made their 
customers 90 percent whole, and the shareholders should have 
lost everything. I think that is what needs to happen when you 
lose. The free market has corrections. And when Congress gets 
involved and bails people out, the free market ceases to exist. 
I do not believe they should have been bailed out, and I am 
sick and tired of my constituents being stuck with the bill for 
failed Democrat policies. With that, Mr. Chairman, I yield 
back.
    Chairman Barr. The gentleman yields back, and just a 
reminder to Members not to engage in personalities. With that, 
the ranking member of the Full Committee, the gentlewoman from 
California, Ms. Waters, is now recognized.
    Ms. Waters. Let me thank our witnesses for being here today 
and sharing the information that you have shared. I have been 
looking at some of the reports that have been coming out, not 
only from GAO, but from the Fed, et cetera. And based on what I 
am seeing, everybody is to blame.
    You have management at the banks that was not taking care 
to do what they should be doing, particularly when we look at 
Silicon Valley Bank. And I don't know who was examining their 
balance sheets, but they didn't seem to know or understand that 
many of the securities that they were holding had much less 
value than when they were acquired, which is one of the 
problems. I don't know whether, because they were the go-to 
bank for the young creative business people or the startups, 
they cared whether or not they had insurance. I don't know a 
lot about some of the issues that we are beginning to hear 
something about.
    But evidently, there were management problems. They grew 
too fast to begin with, and perhaps they were too lenient in 
the way that they made loans, too many uninsured depositors and 
all of that, but the regulators also had problems. Now, some of 
those problems were created by S.2155, which certainly did, as 
I remember, reduce the prudential oversight, particularly as it 
related to stress testing, for example. Now, those who said, we 
will say that the regulators had options, they could have 
exercised some of the regulation that was created by S.2155, 
they didn't have to.
    But I want to direct this question to Ms. Tahyar. I 
appreciate that you are knowledgeable in your testimony that 
the White House and Fed Vice Chair Barr raised constructive 
ideas to strengthen the regulatory framework for regional 
banks, some of which you agree with and some you may not 
specifically. Which prudential standards did they highlight 
that you think should be improved?
    Ms. Tahyar. I think the long transition period moving from 
one category to another is something that ought to be looked 
at. I also think that the not passing through OCI in capital, 
which is something that has been on the books since 2013, 
should be revisited, and I think Vice Chair Barr's statement 
that size alone is not what makes an institution risky is, in 
fact, a good one.
    Ms. Waters. Thank you. Let me just touch on something that 
is always controversial as we deal with this oversight. Should 
regulators look to strengthen the stress testing and liquidity 
requirements, among other prudential standards? When we talk 
about additional capital, everybody goes crazy. What do you 
think?
    Ms. Tahyar. I think there are likely some improvements that 
could be made there, but I would be reluctant to put the same 
amount of Liquidity Coverage Ratio (LCR) or high-quality liquid 
assets (HQLA) requirements on regionals as we have on the G-
SIBs. I really hope that the regulators will look at that 
carefully, and be fact-based in the policy changes they make.
    Ms. Waters. Well, since you are going there, let me just 
ask you, as I look at our regionals now, I am a bit concerned, 
and I want to make sure that we can do everything to ensure 
that they are functioning and that they are safe. But why is it 
that I keep hearing so much about protection for regionals 
when, in fact, we know that we would be better off keeping a 
close eye on them now?
    Ms. Tahyar. I think I am influenced here, Congresswoman, by 
the fact that I am from a small town in Michigan, so I know 
what it is like for small and mid-sized businesses that aren't 
in major coastal cities. I think our regional banks are the 
banks that are providing small and mid-sized enterprises with 
the most credit they can get. When I teach classes, I talk a 
lot about Joe's Auto Body Shop. He has 25 auto body shops in 
the Tri-County region. Joe isn't somebody who changes his bank 
at a click.
    Ms. Waters. Thank you very much. I yield back.
    Chairman Barr. The gentlewoman's time has expired. The 
gentlewoman from California, Mrs. Kim, is now recognized.
    Mrs. Kim. Thank you, Chairman Barr and Ranking Member 
Foster, for organizing this timely hearing to discuss the 
recent bank failures. And I would like to say on the record 
that I believe the Biden Administration's American Rescue 
Plan's $1.9-trillion injection into the economy helped spur 
inflation to 9.1 percent in 2022, an inflation rate that we 
haven't seen in 40 years. And to tame that inflation, the Fed 
was forced to act swiftly by raising interest rates at a pace 
also not seen in decades.
    Unfortunately, in the State of California, where I am from, 
we have seen firsthand how partisan economic policies can lead 
to the failure of two of its biggest banks, wiping out nearly 
half a trillion dollars in assets in just a matter of days. So, 
this is why we are having this hearing to get to the bottom of 
those bank failures, and we are trying to strengthen our 
financial system and protect the backbone of our economy. Those 
are the small and mid-sized financial institutions, because 
they are the ones who provide much-needed capital for our small 
businesses.
    Let me ask the first question to Mr. Gould. A lot has been 
discussed regarding the FDIC's actions to resolve and sell SVB. 
Do you think it was a mistake by the California Department of 
Financial Protection and Innovation to close SVB by midday on 
March 10th?
    Mr. Gould. Congresswoman, based on what I know from the 
reports, SVB lost something on the order of over $40 billion in 
deposits on Thursday. And I think at least based on, again, 
what I read in reports, regulators anticipated another $100 
billion was going to flow out the next day. That is, as I 
understand it, a deposit run of huge magnitude. So, I think the 
decision to close them was really all that was left to do. They 
had no other options. I think there are good questions that can 
be asked about what led up to those events. I think the time 
Thursday, Friday, looking at those kinds of deposit offloads, I 
think that gave them great falls.
    Mrs. Kim. Do you think there could have been other things 
the California regulator and the FDIC could have done 
differently in the resolution of SVB?
    Mr. Gould. Again, I think it is a little hard for us to 
judge simply because we don't have all of the information of 
what went on in the period immediately preceding the closures 
by California. But also, over that weekend, and then in the 
kind of week or so that elapsed until the FDIC found a buyer or 
at least a partial buyer.
    Mrs. Kim. Let me follow up, and then I will ask another 
question. I know this has already been discussed by previous 
Members who asked the question, and my understanding is that 
the regulators have the tools, like S.2155, to prevent bank 
failures. Can you elaborate on that, because I wasn't here when 
that conversation took place. Can you elaborate on your 
thinking on the argument that S.2155 caused the bank failures?
    Mr. Gould. Sure. The discretion that S.2155 afforded the 
Fed in particular, but the regulators in general gave the 
ability to tailor enhanced prudential standards based on the 
asset size of the banks. They did so over the course of 2018, 
2019, and 2020. Had SVB been subject to the enhanced prudential 
standards that would have existed, but for S.2155, with the 
exception of the LCR, which they would have failed, they would 
have passed every single other test.
    And even failing the LCR, it is important to note they were 
already failing the more important internal liquidity stress 
testing, and the Fed was not enforcing the existing regulations 
on the book. And if they had in order to pass the LCR or to 
pass an internal liquidity stress testing, they would have had 
to bulk up on even more high-quality liquid assets, which are 
themselves ironically subject to interest rate risk. So, they 
would have bought more government obligations, thus increasing 
their exposure to interest rate risk. That is a perverse and 
ironic impact of regulation in this particular case.
    Mrs. Kim. Okay. I only have 9 seconds, so maybe I will just 
ask that, and hopefully you can follow up with that last 
question that I was going to ask. I will yield back. Thank you.
    Chairman Barr. The gentlelady yields back. The gentlewoman 
from Texas, Ms. De La Cruz, is now recognized.
    Ms. De La Cruz. Thank you, Chairman Barr, for holding this 
hearing today, as this committee seeks to continue to uncover 
facts around the recent bank failures at Silicon Valley Bank 
and Signature Bank, and most recently, First Republic Bank. It 
is critical that this body continues to investigate the 
circumstances around these bank failures and how the Biden 
Administration and the financial regulators responded to these 
events. I am the Congresswoman in South Texas, and most of my 
community is rural. And a lot of my constituents rely very 
heavily on smaller institutions or regional banks. So, this is 
an area of particular focus to me.
    When the bank failures occurred, I got on the phone and I 
spoke with those smaller banks, those community banks, and 
regional banks to ask, how are you all doing? And they said, 
``Congresswoman, we have adequate capital, we are fine, we will 
be able to get through this period. But what we are most 
worried about is that because of the lack of good management in 
these banks, and the failure of the regulators, that we are 
going to bear the consequences as small community banks and 
regional banks.''
    So, my question really goes to all of you. Should the 
Federal Reserve call for stronger regulatory tools, as appears 
to be implied by the Vice Chair for Supervision? And what 
consequences could this have on our small community and 
regional financial institutions in districts like mine, that by 
the way, serve a large population of Hispanics? In fact, we are 
one of the largest Hispanic communities in the entire nation. 
Yes, sir?
    Mr. Michaud. Maybe, I will take the first shot at that. My 
view is that the regulators do already have the tools they need 
to adequately supervise. And what you speak about, I think 
speaks to tailoring, which is the approach that has been done 
very recently. So, I believe that the tools are in place and it 
is a matter of how it is supervised, rather than needing new 
rules or laws for the Federal Reserve at this moment.
    Ms. Tahyar. I agree with that, and I think we have a multi-
tiered banking system because we are a large and complex 
country. And we need to continue to have different sizes of 
banks serving different communities. I think that the agencies 
need to focus on supervision, and they need to clean house more 
than they need to focus on regulatory change.
    Ms. De La Cruz. Thank you. Yes, Professor?
    Ms. Judge. For me, there is a need to do both. There is 
clearly a need to ramp up supervision. At the same time, I 
loved your framing and the attention that you are paying to the 
community banks, and the important roles that they are playing 
in your district and in local communities across the country. I 
actually believe that appropriately regulating very large 
regional banks, banks with over $100 billion in assets that we 
have learned cannot be resolved in an orderly fashion, would 
actually help to encourage people to focus on those true 
community banks and the smaller regional banks that really are 
focused on serving their community.
    Ms. De La Cruz. Let me ask you a question, ma'am. Where do 
you live?
    Ms. Judge. I live in New York City, but I actually grew up 
in Ann Arbor. The community bank that I worked with most is the 
State Bank of Graymont, which is based in Pontiac, Illinois. We 
have some farmland exposure to Illinois and they are actually 
doing an amazing job with agriculture lending.
    Ms. De La Cruz. You live in New York. How many years have 
you lived there?
    Ms. Judge. I have lived there about 11 years.
    Ms. De La Cruz. Eleven years now. So, when was the last 
time you went to rural America and spoke with community and 
regional banks about what you are proposing?
    Ms. Judge. The last time I went to rural? I spent a lot of 
time all around the country. I gave the inaugural--
    Ms. De La Cruz. In the last 3 months?
    Ms. Judge. Yes, I gave the inaugural family and small 
business lecture at the University of South Carolina, because I 
could not be more dedicated or supportive of small businesses. 
And I went to South Carolina and I traveled at lot--
    Ms. De La Cruz. I yield back. In the last 3 months speaking 
after this failure, I think that being among community and 
regional banks, we will hear the same thing over and over 
again, which is exactly this, and I think it has been repeated 
several times. The Fed was not enforcing current regulation on 
the books, and if they did just that, we would not be in this 
situation, and community and regional banks would not have the 
fear that they have now.
    Chairman Barr. The gentlelady's time has expired. The 
gentleman from Tennessee, Mr. Ogles, is now recognized.
    Mr. Ogles. Thank you, Mr. Chairman, and witnesses. I know 
it has been a long afternoon, but thank you, and thank you for 
indulging us. Mr. Chairman, I reject the premise that small to 
mid-sized banks are somehow a problem in our economy. Mr. 
Michaud, you said that roughly 4,700 of the small to mid-sized 
banks are getting it right. So, the three banks that failed 
were poorly run, they were poorly managed, and they were poorly 
supervised.
    This is an either/or question for--we can go down the line. 
We will start with you, Ms. Tahyar. What is more important: for 
banks to examine their liquidity risk or their climate risk?
    Ms. Tahyar. Sorry. Was that liquidity risk?
    Mr. Ogles. Liquidity versus climate?
    Ms. Tahyar. Liquidity.
    Mr. Gould. Liquidity.
    Ms. Judge. Liquidity and both.
    Mr. Ogles. Okay. Same premise, interest rate risk or 
climate risk?
    Ms. Tahyar. Interest rate risk.
    Mr. Gould. Interest rate.
    Mr. Michaud. Interest rate.
    Ms. Judge. Interest rate doesn't have to be a choice.
    Mr. Ogles. We are stating the obvious, right? But when we 
look at these banks, when we look at SVB in particular, which 
was so focused on climate risk versus their deposit structure--
you want to think of actuarial tables. When I think of 
liquidity risk and I think of interest rate risk, I think of 
dollars and cents. I think of numbers.
    But the problem was, these banks were putting polar bears 
and penguins above their fiscal responsibility. So, any effort 
to target or impede or to increase the cost structures of our 
small to mid-sized banks will face a strong headwind from this 
committee, in particular from me, because I represent rural 
areas, and it is the small businesses in the communities that 
are the backbone of my communities. And it is the small to mid-
sized banks that are lending to those small businesses.
    Mr. Chairman, I will also reject the premise that Biden's 
policies are not to blame here. Econ 101, when the government 
puts more money into the economy than the economy can produce 
itself, the back side risk of that is always going to be 
inflation. So, when you force an omnibus bill on the American 
people that is an additional $2 trillion that doesn't need to 
be had, at a time when retail prices are going up, and when 
underlying commodities are screaming, stop the madness, and we 
did nothing other than spend more money.
    Biden's policies were reckless, they were feckless. And I 
am appalled at the idea that he is not to blame. At the same 
time, he is creating choke points in production, choke points 
in energy production. So with that, according to the FDIC 
report, unlimited coverage of deposits, Mr. Gould, would 
increase the size of the Deposit Insurance fund just to retain 
basic ratios of insured deposits to the Fund itself. And the 
estimates could be increased 70 percent more, which is going to 
lead to increased assessments on the banks. Is that a good or a 
bad thing?
    Mr. Gould. That, in and of itself, is a bad thing, whether 
or not it is justified by whatever benefit it provides.
    Mr. Ogles. Again, when I think of the increased assessments 
and the impact that is going to have on my small to mid-sized 
banks in my district and all of the rural districts across the 
country, isn't that an argument against unlimited deposit 
coverage?
    Mr. Gould. That is certainly an argument. Yes.
    Mr. Ogles. When I think about where we are and how we got 
here, it is easy to armchair-quarterback. It is easy, quite 
frankly, to lay blame. I have said this before, and I will say 
it again, Ronald Reagan says the scariest phrase in the 
American language is, ``I am from the government and I am here 
to help,'' So, what should we not do as we move forward? Ms. 
Tahyar?
    Ms. Tahyar. We should look at fact-based evidence and then 
make policies. We shouldn't just be with our political priors.
    Mr. Ogles. That is right.
    Mr. Gould. We should examine the efficacy of the 
regulations on the books and see whether they are out there 
performing as promised, including resolution or recovery 
planning,
    Mr. Michaud. We should make sure the solution is targeted 
for the need, but also something we haven't spoken about yet, 
which is, there has been a real headwind to healthy bank M&A 
and that has been the message that has been sent to the 
industry. I think ultimately, the industry would be healthier, 
the mid-sized banks would be healthier, and the industry would 
be able to resolve weaker banks in that manner without the 
defund if there was a more efficient way to consolidate than 
there is right now.
    Mr. Ogles. Right.
    Ms. Judge. I completely agree that we should look at the 
facts and we should look at the efficacy of the current 
regulatory scheme. And in light of recent events, we had three 
major bank failures imposing massive losses, so I think we have 
to see that the current scheme is coming up wanting.
    Mr. Ogles. Mr. Chairman, I have just a few seconds left to 
give you the last word.
    Chairman Barr. I appreciate the gentleman yielding. I think 
we are running out of time. We may do just another quick round. 
And so, I will take that time the gentleman yielded and I 
appreciate him yielding.
    And with that, without objection, we are going to go to 
just one additional round with the indulgence of the witnesses 
and the ranking member. And we have agreed that each one of us 
will ask one more round of questions.
    Let me just follow up the question about M&A to Mr. 
Michaud. On resolutions, if there is a need for additional 
resolutions, is it important to avoid more industry 
consolidation for regulators if there are additional failures 
to give regional banks as opposed to G-SIBs the opportunity to 
acquire or merge with failing institutions to preserve that 
diversity within our financial ecosystem that you talk about?
    Mr. Michaud. I very much support the Congressional limits 
where banks with more than 10 percent of the deposits in the 
country should not be acquiring other banks. And I think the 
industry needs to build competitors for the 4 banks that have 
40-percent market share. I think the economy would be better 
off if we had other banks that were able to compete with them 
more.
    Chairman Barr. So, an FDIC reluctance to approve mergers, 
particularly among regional banks or small banks, can actually 
be quite anticompetitive?
    Mr. Michaud. Right now, it is not the FDIC as much as the 
Fed. The amount of time it takes to complete a merger in the 
United States has doubled in the last 2 years. Not only that, 
but there is uncertainty as to the process and the outcome, 
should you look to undertake consolidation. The consolidation 
that has been happening is regional banks have been trying to 
combine to create these regional champions to serve their 
regions and compete with the bigger banks.
    Also, I believe, even as we sit here today, there are banks 
that are willing to take on other banks that may be 
underperforming. But the banks would be unwilling to take that 
action because they don't know if the regulatory response would 
allow them to do it and they can't afford that risk.
    Chairman Barr. Mr. Gould, your testimony was interesting 
when you said the proliferation of regulation since the 2008 
crisis may have reduced risk management and supervision to mere 
compliance exercises, damaging both in the process. Can you 
elaborate?
    Mr. Gould. Yes, sir. I think sometimes regulation, 
particularly in the absence of competent supervision, provides 
the illusion that we are addressing risks. And I think that is 
a problem. I think we should not be overly reliant on mere 
regulation. I think supervision is what matters. And I think 
supervisors have all of the tools, most fundamentally of which 
is just examiner judgment, to ensure the safety and soundness 
of banks.
    Chairman Barr. Yes. An overreliance on regulatory tools 
such as some stress testing may have blinded supervisors to 
risks that are hiding in plain sight, like basic interest rate 
risk. I also thought it was very interesting that you pointed 
out that the one regulation that Silicon Valley Bank was not 
subject to as a result of S.2155 and regulatory tailing was a 
requirement that hadn't been imposed on them, that would have 
actually increased their interest rate sensitivity. The 
requirements, had the Fed enforced it on the liquidity coverage 
ratio and shifting holdings to high quality liquid assets.
    Final question to Ms. Tahyar, thank you. Professor Judge 
claimed a regulator transparency legislation would impede 
supervisory responsibilities. I would note that nothing in 
these bills takes away any regulatory supervisory or emergency 
powers. They are only transparency and reporting requirements. 
Would that in any way impede the firefighting that you talked 
about in your analogy?
    Ms. Tahyar. Mr. Chairman, I haven't had a chance to look at 
the specifics of the legislation. I would be happy to put 
something in the record. But in general, we are living in an 
environment where there is not enough transparency from the 
banking agencies, and that makes it more difficult for Congress 
and others to do their oversight.
    Chairman Barr. Let me just stipulate that nothing in this 
collection of bills takes away any emergency powers of the 
regulators. And let me just stipulate for the record, that the 
goal of these bills is to give the American people, through 
their Representatives in Congress, greater visibility into 
decision-making at the time of the house fire, and after the 
house fire. In that scenario, does that in any way impede the 
ability of regulators to do their job?
    Ms. Tahyar. No, it doesn't, Mr. Chairman.
    Chairman Barr. And with that, I yield 5 minutes to the 
ranking member, Dr. Foster.
    Mr. Foster. Thank you. I was wondering if any of you have 
at this point any general after-thoughts about the systemic 
risk exception? Did it function as designed? Was this an 
appropriate use of it? Are there any changes that we might kind 
of play on that? Obviously, it is a big issue with a lot of the 
Members here as to how the special assessment is going to land. 
If you have any advice on if you were to craft the special 
assessment, what would it look like?
    And if I remember correctly, only the first two banks had 
the systemic risk exception and the third did not. So, most of 
the hit actually will come through the special assessment. Does 
anyone want to venture any thoughts on how that--
    Mr. Michaud. I will start with the systemic exception. I 
think it was a good decision to do that. Because if I think it 
hadn't happened, I think more banks would have failed. And it 
was due to the sudden nature of the bank runs. I think in that 
moment, it was important to do.
    The other thing is that closing a bank in the middle of the 
day is highly unusual. It makes things disorderly. I know that 
Mr. Gould spoke earlier about how it would be interesting just 
to learn what we can do better in the future as to what 
happened in those hours. I think the impact after that was 
dramatic. So, I think it is best if this resolution happens 
when the markets are not open.
    Mr. Foster. Any other thoughts, Ms. Tahyar?
    Ms. Tahyar. The systemic risk exception should be rare, but 
it is there for a reason, and this time, it was used wisely. I 
think the three keys do provide some political checks and 
balances, but, again, I think we still need to have after-
action reports with transparency and accountability around what 
happened, when, and how.
    Mr. Foster. Are there any aspects that give you heartburn? 
For example, there is a lot of freedom in the special 
assessment. And there is a lot of danger that it will be very 
politicized and unavoidable?
    Ms. Tahyar. Yes. Thank you, Ranking Member Foster. The 
special assessment is we already have the White House Fact 
Sheet, which is saying that it shouldn't fall on community 
banks. I think that is appropriate, given the need to protect 
community banks. But other than that, I think there needs to be 
a fairness about how that special assessment is allocated among 
the bigger banks and among the regional banks.
    Mr. Foster. And what sort of factors, if you were to write 
it, would be considered the fraction of uninsured deposits? In 
terms of fairness, what you would want is banks, which had a 
similar business profile as Silicon Valley Bank or Signature 
and so should be preferentially hit with the assessment. Are 
there reasonable ways to do that?
    Ms. Tahyar. You are thinking if you have a higher 
proportion of uninsured deposits.
    Mr. Foster. Whatever the risk factors? You want to punish 
banks that had similar risk factors, in some sense?
    Ms. Tahyar. That particular point makes sense to me. I have 
to say that I feel like there is still a lot to learn on how 
that special assessment should happen. So, I would prefer to 
wait and see what the FDIC proposes and then react to that.
    Mr. Michaud. And Ranking Member Foster, I would just do 
what we talked about earlier, I think there is a lot of value 
in being too-big-to-fail, that these banks just because of 
their size, are receiving more deposits as we speak. And so I 
believe that those banks should bear a higher proportion of 
this assessment. Not all, but should bear a higher proportion 
than they do today.
    Mr. Foster. And any thoughts on the extraordinary support 
that was provided to banks holding Treasuries, and using them 
as collateral, I guess, for loans at par, which seemed like 
maybe a significant intervention?
    Mr. Michaud. My view on that is that they are the lender of 
last resort and the market needed that moment, and it brought 
stability. We can figure out all of these things if the market 
is stable and orderly. It wasn't, and I think that facility 
helped bring stability so we could have this conversation.
    Ms. Judge. I would just note that Dodd-Frank did make very 
significant changes to the systemic risk exception and to 
Section 13(3). I think those changes helped, but I think this 
was an episode of actually both instruments being used very 
prudently by regulators to help maintain a stable and healthy 
financial system in the face of significant bank failures.
    Mr. Foster. Okay. Any further thoughts you have, we are 
going to have to be pondering this for a while, and I really 
appreciate your thoughtful comments. Thank you. I yield back.
    Chairman Barr. The gentleman yields back. And I would like 
to thank our witnesses for your testimony today on this very 
illuminating and timely topic.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 10, 2023

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