Financial Regulators Too Focused on ‘Climate Risks’ While Ignoring Silicon Valley Bank, Lawmakers Say

Silicon Valley Bank logo and decreasing stock graph are seen in this illustration taken on March 19, 2023. (Dado Ruvic/Reuters)

Financial regulators came under scrutiny over what congressional members see as misplaced priorities ahead of the collapse of Silicon Valley Bank (SVB). In a March 29 hearing, House Financial Services Committee chair Patrick McHenry (R-N.C.) chastised Michael Barr, Federal Reserve vice chair for supervision, for making time “to start a review of climate risks in banking” while ignoring red flags at SVB.

In mid-January, the Fed commissioned large banks to conduct reports on the impacts of hypothetical climate emergency scenarios—such as hurricanes, wildfires, and sea-level rise—on the banks’ business models, including how these events would affect real estate portfolios, the frequency of loan defaults, and changes in investment-grade ratings.

The banks were also asked to run similar scenarios on the financial impact of the green “transition,” the Fed demanding the reports by July.

“The Fed has narrow, but important, responsibilities regarding climate-related financial risks—to ensure that banks understand and manage their material risks, including the financial risks from climate change,” Barr said in a statement at the time. “The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks.”

McHenry questioned Barr’s competence, having prioritized such efforts amid rising interest rates and with SVB having no chief risk officer for several months leading up to the crash, a fact Barr acknowledged the Fed was aware of prior to the crisis.

“Vice Chair for Supervision Barr, you’ve been on the job for less than a year. You came to the job well qualified,” McHenry said. “However, you made time to start a review of climate risks in banking and review of capital standards for larger banks, with no mention of changes to bank supervision or liquidity provisions to matters at issue with this bank failure.”

Michael Barr testifies at the Senate Banking, Housing, and Urban Affairs at the U.S. Capitol in Washington, on May 19, 2022. (Tasos Katopodis/Getty Images)

Fed Chair Jerome Powell has previously stated that the regulatory agency wouldn’t become a “climate policymaker.”

Saying the Fed had ample information to foresee SVB’s collapse, Rep. Ann Wagner (R-Mo.) also criticized the vice chair.

“Despite U.S. regulators having clear knowledge of insufficient risk management, it seems that the examiners and your supervisors were asleep at the wheel,” she said. “While signs that Silicon Valley Bank was heading toward a collapse, we’re staring them right in the face for many, many months.”

More Regulation?

The House committee’s ranking member, Rep. Maxine Waters (D-Calif.), defended Barr and said the narrative that “woke” policies affected the bank’s financial success was part of an “extreme MAGA Republican narrative.” She instead blamed deregulation by the Trump administration and SVB’s imprudent handling of capital.

“Silicon Valley Bank collapsed because of management failures and possible regulatory weaknesses, not because there was one black man on the board,” Waters said. The congresswoman advocated for additional regulations to prevent another crisis.

Rep. Rashida Tlaib (D-Mich.) pointed to the millions collected by SVB insiders who sold shares in the weeks leading to the crash as a rationale for stricter crackdowns on financial institutions.

Rep. Rashida Tlaib (D-Mich.) questions then-U.S. Secretary of Treasury Steven Mnuchin as he testifies during a House Committee on Financial Services hearing on Capitol Hill in Washington on May 22, 2019. (Saul Loeb/AFP via Getty Images)

Other members of Congress argued that regulation, done improperly, could hurt smaller institutions.

“We need to preserve the diversity of the financial ecosystem,” said Rep. Andy Barr (R-Ky.). “Reimposing a one-size-fits-all regulatory regime on community and regional banks—especially regional banks under distress right now—would result in fewer of those institutions, more consolidation, and less competition for too-big-to-fail banks.”

While most members of the committee were in favor of some form of new legislation, Chairman McHenry questioned the idea.

“I’ve never heard you say to Congress that you didn’t have the tools to do your job,” he said, speaking to the financial regulators. “We need competent financial supervisors, but Congress can’t legislate competence.”

Congressional Theater

During his March 28 podcast, economist Peter Schiff argued that banking laws are overly complicated and that even with new legislation, regulators would be too slow to prevent crises from occurring.

“In typical congressional fashion, they want to close the doors after the last horse has left the barn,” he said. “They’re having these hearings just so they can blame somebody for what happened.”

Economist Peter Schiff. (Courtesy of Peter Schiff)

Schiff, founder of Euro Pacific Asset Management, blamed regulators for encouraging financial institutions to place all their assets in U.S. Treasury bonds—many of which were down more than 10 percent in 2022 as the Fed hiked rates. Current laws elevate the status of these assets, incentivizing banks to own them in large quantities and prioritize their acceptance as collateral.

Schiff thinks the U.S. financial system would be far more resilient without the interference of regulators, but that depositors would need to employ a level of due diligence in assessing where to place their money.