In a second day of Capitol Hill hearings into the failures of U.S. banks this year, former First Republic Bank CEO Mark Roffler testified Wednesday in a joint House subcommittee hearing that reinforced many of the same themes already voiced by elected officials.
Republicans in the hearing frequently pointed out possible missteps by regulators in not doing more to prevent the failures, while Democrats threatened legislation to claw back payments to CEOs of failed banks. Members of both parties also flagged management failures at the banks as a major factor.
Like the former CEOs of Silicon Valley Bank and Signature Bank, Greg Becker and Scott Shay, Roffler deflected criticism about management failures, saying First Republic had been swept up in investor and depositor panic when the federal government took over Silicon Valley Bank on March 10.
The CEOs did not stray far from their prepared remarks, which mostly blamed the failures on unprecedented events stoked by social media and on panicked clients who pulled their deposits out of the banks.
All three banks were formerly components of the S&P 500
First Republic and Silicon Valley Bank now rank as the second- and third-largest bank failures in U.S. history, after Washington Mutual in 2008.
Heading into the events that shook the banking sector this spring, First Republic was in a strong financial position, with strong debt ratings in line with other banks and with 2022 as its most profitable year ever, Roffler said.
First Republic was transparent starting in late 2022 about interest-rate risks and knew 2023 would be challenging, he said.
“No one at First Republic could predict the collapse or speed of what happened,” Roffler said. “We could not have anticipated that Silicon Valley Bank and Signature Bank would fail, or that the failure of those banks would trigger substantial deposit outflows at our bank.”
First Republic was “contaminated overnight by the contagion that spread from the unprecedented failures of two regional banks,” Roffler said.
Asked what the government could do to prevent future problems, Roffler said the Federal Deposit Insurance Corp. has been studying ways to expand insurance for depositors. That process is “worth looking at” to help prevent issues in the future, he said.
Rep. Patrick McHenry, a Republican from North Carolina, told Roffler, Becker and Shay that they each bear responsibility as captains of their respective ships.
“There was a storm brewing and you failed to batten down the hatches,” McHenry said.
McHenry said the bankers also made the mistake of believing “bureaucrats” at the U.S. Federal Reserve and other government agencies who said the banks were healthy.
The Fed was wrong when it said inflation was transitory last year and then made a series of quick interest-rate hikes after higher prices persisted, he said.
Rep. Bill Huizenga, a Republican from Michigan and the chair of the House Oversight and Investigations Subcommittee, asked Becker what he would have done differently.
“I’ve thought about that a lot,” Becker said. “When you look back with hindsight at what could have been done differently, it’s very challenging. You have to go back and look at the facts that you had … I made the best decisions I could with the information that I had.”
Huizenga also blasted the Federal Reserve for overheating the economy with stimulus money and then being late to pump the brakes.
“No one had the courage to take the punch bowl away from the party,” he said.
Signature Bank’s Shay said that at the time of the collapse of Silicon Valley Bank, his bank’s clients didn’t listen when he told them the bank had a strong balance sheet.
“The customers didn’t want to hear what I said,” he said. “Instead, they said, ‘I need to get my money to a too-big-to fail-bank.’”
Rep. Al Green, a Democrat from Texas, pushed back on the Republican narrative that the bank failures were stoked by missteps by regulators.
“Republicans … seem to believe that failure to sufficiently punish you is a cause of the bank’s failure,” Green said. “They ‘ve been alluding to this for days or perhaps weeks. Are you contending that regulators didn’t punish you properly and so your bank failed?”
Green asked the question several times before Becker provided an answer.
“Regulators did the best they could with the information they had,” Becker said.
Green concluded that the regulators “are not at fault” and that “the bank failure lies with the banks at the end of the day.”
The hearing on Wednesday was led by the House Subcommittee on Financial Institutions and Monetary Policy and the Subcommittee on Oversight and Investigations.
All three of the failed banks have since been sold. Silicon Valley Bank will be owned by First Citizens Bancshares Inc.
while New York Community Bancorp Inc.
is purchasing Signature Bank and JPMorgan Chase & Co.
is purchasing First Republic Bank.
This story originally appeared on Marketwatch