Sen. Cynthia Lummis: Fed regulators were ‘asleep at the switch’ amid SVB mismanagement

Sen. Cynthia Lummis (R-Wy.) joins Yahoo Finance Live to discuss the recent Senate banking committee hearing on the collapse of SVB.

Video Transcript

- Banking regulators facing a grilling on Capitol Hill earlier today. Lawmakers wanted answers after two bank failures at Silicon Valley Bank and Signature Bank earlier this month. One of the senators on the Banking Committee is Wyoming Republican Cynthia Lummis.

Now, we asked Senator Lummis if there should be stricter banking regulations earlier today. And here's what she had to say.

CYNTHIA LUMMIS: When I look at the statutes and the rules that exist today, it looks to me like they have plenty of authority to supervise banks. And they don't have to just look at interest rate risk. They can look at how many deposits are uninsured. They can look at qualifications of the board members. They can look at a myriad of risk factors that were apparent with Silicon Valley Bank.

So I just think they have plenty of authority to do what they need to do to regulate these financial institutions. So there were two things, as I see it, going wrong here. The bank was mismanaged and the Fed was asleep at the switch.

- That, then, begs the question, what can we do? What needs to be done to assure that this doesn't happen again?

CYNTHIA LUMMIS: Yeah, great question. I think that we need more transparency, for one thing, between the Fed and Congress so we can make sure that they are conducting these bank examinations using the full authority that they have under statute and under rule. I also think that instead of looking at the notion of increasing the depository insurance levels from $250,000 per account, that we should make sure that the onus is on the individual depositor.

If they want insurance over and above $250,000, they should buy insurance through the private market and not rely on the system as a whole to bail them out during a crisis such as this. One of the things that I learned at today's hearing that did encourage me is that there's some options within the FDIC to carve out some financial institutions from having to participate in the costs of bailing out SVB and other financial institutions, such as SVB. So that's good news.

And I'm going to be watching that closely because I just don't believe Wyoming community banks and other small community banks should have to participate in this bailout.

- Sure. And to that point, there are many questions about whether or not we should have backstop regulators should have backstopped SVB. And that question was put to the FDIC chairman as to what might have happened had we not. I want you to listen.

MARTIN GRIENBERG: The evidence suggested from the sequential failures of, first, Silicon Valley, and then Signature, that there was a significant risk of contagion to other institutions.

- You're saying the actions taken were the least bad option for small businesses and banks across the nation. If you hadn't acted that way, you think there would have been a contagion?

MARTIN GRIENBERG: I think there would have been a contagion. And I think we would be in a worse situation today.

- And we have seen some contagion, if not some ripple effects around the globe and the banking system. What do you believe the reaction would have been, the contagion, if we had not backstopped SVB?

CYNTHIA LUMMIS: I think we have to let some of the moral hazard associated with mismanagement like this exist and let these banks fail. I don't buy the notion that every time a bank fails, especially one like this that was mostly venture capital, risky capital, that we should bail them out. We did that during the 2008 financial crisis.

Perhaps, it was worth doing then. But I certainly don't think it's worth doing now.

- Well, Senator, what happens though if they didn't act. Would we have seen more bank failures?

CYNTHIA LUMMIS: Nobody knows. And we'll never know, because they backstopped it. And so there is no moral hazard. The message to banks is the government's going to bail you out. So if you're an important enough bank, or you have an important enough board, or you might make the right political contributions to the right people, we're going to bail you out. And that's not the way this system should work.

I think that they should have been allowed to fail and we should have taken a wait and see attitude with regard to other financial institutions.

- And Senator, when it comes to accountability, you mentioned mismanagement there. And that is something that has been talked about time and time again over the last several weeks. What needs to be done to hold these executives accountable? And we heard from Senator Brown today in his testimony, in his opening statement I should say, saying that he's planning legislation that would increase penalties for executives at failed banks, and also ban them from the industry. Is that something that you would support?

CYNTHIA LUMMIS: I think I'd rather look at clawing back their compensation. I sometimes think that the irresponsible actors in any industry are the ones that are inviting over-regulation. So I'd rather see the penalty apply to these particular bankers compensation as opposed to more generalized approaches. Overregulation-- and Dodd-Frank, in my opinion, included a tremendous amount of overregulation really hurts small community banks and makes it difficult for them to survive. We really created a system in 2008-2009 where banks were both too big to fail and too small to succeed.

And if we use this example as a way to once again craft more regulation to contain a small group of bad actors, we're just exacerbating the problem for small community banks that are absolutely necessary in a state such as mine. Literally, there are banks that will not bank people that are having account sizes and business sizes that are the norm in the state of Wyoming. So we need to protect small community banks.

They're more nimble. They're directly related to their communities. And this is the bank that I'm the most worried about.

- Our thanks to Wyoming Republican Senator Cynthia Lummis on today's banking hearing.