Bank Failures and Congressional Oversight

Bank Failures and Congressional Oversight

July 21, 2023
Bank Failures and Congressional Oversight
The failures of three large banks in spring 2023—Silicon
to give congressional requests for information greater
Valley Bank (SVB), Signature, and First Republic—has
priority and provide congressional access to specific
resulted in congressional attention on how the federal
confidential information for oversight purposes. Such
banking agencies—the Federal Reserve (the Fed), Federal
access could risk the improper exposure of confidential
Deposit Insurance Corporation (FDIC), and Office of the
information. To address similar concerns, Congress has
Comptroller of the Currency (OCC)—supervise, resolve,
created guardrails surrounding congressional access to other
and provide banks with assistance during financial turmoil.
types of sensitive information (e.g., classified intelligence).
Some Members have asserted that because supervisory
information is confidential, there is insufficient
Oversight of Supervision
transparency, and that hampers effective oversight.
Regulators supervise banks to verify compliance with
regulatory and legal requirements, including that they
The Senate and House committees of jurisdiction have
operate in a safe and sound manner. (For background on
already conducted hearings with the regulators that brought
supervisory terms and concepts discussed in this section,
to light new information about the supervision and failures
see CRS Report R46648, Bank Supervision by Federal
of SVB and Signature. On May 24, 2023, the House
Regulators: Overview and Policy Issues.) They require
Financial Services Committee ordered H.R. 3556 to be
banks to periodically report extensive data on their financial
reported in the nature of a substitute. It includes provisions
conditions in call reports, which are publicly released. If a
that would enhance reporting requirements, testimony
bank is publicly listed—as was the case with the three
requirements, and transparency for the banking agencies.
banks that failed—it must disclose more information in its
On June 22, 2023, the Senate Banking Committee reported
public filings about its operations and material risks. Some
S. 2190, which would, among other things, enhance
of the factors that led to the banks’ failures, such as
reporting requirements and inspector general (IG) oversight
unrealized losses on their assets, were reported in these call
of large bank failures and supervision. This In Focus
reports, while others could have been gleaned only from
examines current practices and discusses policy options.
more detailed information that only regulators could have
accessed. That information is confidential under FOIA due
Background
to its sensitive nature. For example, publicizing information
Despite the banking agencies’ relative independence,
about a bank’s operations could affect its financial viability
Congress seeks to conduct effective oversight to determine
or make the banking system less stable. (Some confidential
whether the agencies are accomplishing their statutory
information can be released after the bank’s failure, as the
mandates. Some say too much congressional involvement
bank is no longer an ongoing concern.) Supervisory
and disclosure could undermine regulators’ independence
decisions about a bank’s financial health—such as its exam
and effectiveness, however. Oversight can take the form of
ratings (called CAMELS ratings), prompt corrective action
hearings, investigations, and reporting requirements.
(PCA) status, and whether matters requiring attention
Congress also relies on investigations by the agencies’ IGs
(MRAs) have been issued—are not public. The need for
and the Government Accountability Office (GAO) to assist
sensitive information to be confidential is balanced against
with oversight. Effective oversight depends on agency
the desire for transparency and effective oversight of
transparency, which can take the form of public or
supervision. Without access to this information, it is
congressional access to relevant agency and company
difficult for an outside observer to judge whether
information. The Freedom of Information Act (FOIA; 5
supervisors erred and a failure was preventable.
U.S.C. §552) ensures that agencies make information
accessible to the public but allows agencies to keep records
The agencies publish limited aggregate data on supervisory
confidential if they meet any of the statutory exemptions to
actions. The FDIC reports the number of “problem” banks
public disclosure.
and their assets quarterly. In its annual report, the FDIC
reports how many banks have poor CAMELS ratings and
Congressional oversight has focused on two aspects of the
the number of MRAs by subject. The Fed sometimes—but
2023 bank failures: (1) what caused the failures and (2)
not consistently—provides data on supervisory ratings and
what emergency actions regulators took in response to the
MRAs in its semi-annual regulation report, but it did not
failures. Oversight can shed light on whether regulators’
provide any such data in May 2023. The OCC semi-
authority was insufficient, supervision was inadequate, and
annually identifies the share of MRAs by subject but not the
the banks violated any laws or regulatory requirements.
total number. Formal enforcement actions, which contain
penalties and/or requirements for remedial actions, are
Legislative proposals have included extending FOIA to the
made public when issued.
Federal Reserve regional banks. (The Board is already
covered.) Congress has also proposed requiring regulators
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Bank Failures and Congressional Oversight
The Fed and FDIC have voluntarily published previously
issue semi-annual reports reviewing all bank failures. GAO
confidential supervisory and other information about the
may review MLRs at its discretion but does not appear to
failures of SVB and Signature. But this does not provide
do so regularly. In a 1995 report, GAO stated that
forward-looking transparency about supervision or risks in
“Congress should consider repealing our mandate to review
the banking industry. Up to a point, more aggregate data on
MLRs on an annual basis.”
supervisory actions could be published without
undermining confidentiality to enhance transparency and
Congress has also asked the IGs and GAO to study specific
oversight. For example, the regulators could periodically
issues raised by the recent failures. GAO published a report
provide standardized aggregate data on how many banks
requested by the chair and ranking member of the House
receive each CAMELS rating and are in each PCA category
Financial Services Committee on April 28, 2023, and had
and how many MRAs are outstanding and for how long.
access to confidential supervisory information to perform
Some of this information was previously required by P.L.
its evaluation. The chair and majority members of the
101-73—before it was repealed in 1996 by P.L. 104-208—
Senate Banking Committee also have a pending request for
which required bank (and other) regulators to annually
GAO to “re-examine the supervisory practices of bank
report to Congress data on formal and informal supervisory,
regulators” in light of SVB’s and Signature’s failures.
administrative, and enforcement actions; civil monetary
penalties; and criminal referrals, investigations, and
Oversight of Emergency Assistance
prosecutions. H.R. 3556 would require the regulators to
The Fed and FDIC have emergency powers to provide
disclose more aggregate data and information on
financial support to firms to prevent crises, and
supervisory findings.
congressional oversight ensures that those powers are used
as intended. Use of these powers has attracted
Title 12, Section 247b, of the U.S. Code requires the Fed’s
congressional scrutiny. Similar to the DIF, emergency
vice chair of supervision to testify semi-annually on
assistance is ultimately backed by the taxpayers, and if
supervision and regulation, and the Fed voluntary prepares
financial firms expect assistance, it could potentially
a semi-annual report on those topics. H.R. 3556 and S. 2190
increase systemic risk. Statute requires the agencies to
would make that report mandatory, and H.R. 3556 would
report on their use of those powers. In the case of the
extend reporting and testimony requirements to the other
FDIC’s systemic risk exception, which guaranteed
banking regulators. Congress has also considered requiring
uninsured deposits at SVB and Signature, the statute (12
them to confidentially provide the committees with the
U.S.C. §1823(c)(4)(G)) is not detailed: Within three days,
identity of banks with less than satisfactory ratings and
the Treasury Secretary must send the committees of
active formal or informal enforcement actions.
jurisdiction a letter describing the basis for the
determination, and GAO is required to review the decision.
Oversight of Failures and Resolution
(See CRS In Focus IF12378, Bank Failures: The FDIC’s
Failing banks are taken into FDIC resolution. Congressional
Systemic Risk Exception.)
interest in bank failures is due to their potential effects on
financial stability and the FDIC’s Deposit Insurance Fund
The statutory reporting requirements for the Fed under its
(DIF), which is ultimately backed by the taxpayers. The
emergency authority found in Section 13(3) of the Federal
FDIC publishes information on the outcome of all
Reserve Act (12 U.S.C. §343)—which authorized the Bank
resolutions but little information on how that outcome was
Term Funding Program in 2023—are more detailed and
determined. The FDIC must generally choose the least-cost
could provide a model for other emergency programs. (See
resolution option, but it does not publicly disclose how
CRS Insight IN12134, Bank Term Funding Program
much the selected option would cost compared to the
(BTFP) and Other Federal Reserve Support to Banking
alternatives and what assumptions went into that estimate.
System in Turmoil.) Within seven days, the Fed must report
Only the winning bid is made public. (See CRS In Focus
to the committees of jurisdiction the justification for the
IF10055, Bank Failures and the FDIC.)
action; the identity of the recipients; and the date, amount,
and terms of the assistance. While assistance is outstanding,
The Fed and FDIC conducted their own internal reviews of
the Fed must report every 30 days the value of collateral
SVB’s and Signature’s respective failures, which were
backing the facility, the amount of interest and fees
released in April. S. 2190 would require the regulators to do
received, and the expected cost to taxpayers. The Fed has
so any time a large bank fails. Outside evaluations may
made these reports publicly available without information
provide a more critical perspective on the agencies’ actions,
identifying borrowers. In addition, the Fed must publicly
however. Under Title 12, Section 1831o(k), of the U.S.
disclose borrowers and borrowing terms under any 13(3)
Code, the IGs and GAO have formal oversight
facility one year after the facility has been terminated. (The
responsibilities when a bank failure causes a material loss
Fed has also disclosed the total amount of loans it made to
to the DIF, as is the case with the three failures. The IG of
the FDIC bridge banks during the resolution but not the
the failed bank’s primary regulator must conduct a
loans’ terms, authority, or rationale.)
“material loss review” (MLR) for each such failure, and a
version of the MLR omitting confidential information must
H.R. 3556 would require policymakers to provide the
be publicly released. The report must explain why there was
committees of jurisdiction any documentation related to use
a material loss and make recommendations to avoid future
of these various emergency authorities while allowing the
losses. (S. 2190 would require a similar IG review for any
agency to request that the committees keep the information
large bank resolution.) Typically, MLRs are released
confidential, as is currently the case under Section 13(3).
several months after a failure. The IGs are also required to
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Bank Failures and Congressional Oversight

IF12454
Marc Labonte, Specialist in Macroeconomic Policy

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