May 18, 2023
The images of banking industry leaders and federal regulators in Washington answering to Congress on what went wrong with Silicon Valley Bank and Signature Bank made for some can't-miss TV this week. Maybe not quite the NBA playoffs, Succession or American Idol, but you get the picture.
Whether this is just theater or leads to some honest introspection about what happened and how we can all ensure that large banks are able to be resolved in a more orderly fashion remains to be seen. I take a closer look in this week's issue.
My colleague Peter Malyshev also takes a look at a proposed broadening of Federal Energy Regulatory Commission enforcement powers and, in London, Alix Prentice examines the FCA's proposal on revamped remuneration rules. We've also included an important news item from Rachel Rodman and Simon Walsh from our sister publication, Cadwalader Climate, on results of the 2022 Eurosystem Balance Sheet Climate Risk Stress Test.
Any thoughts? You can reach out to me here.
Daniel Meade
Partner and Editor, Cabinet News and Views
This week, the Senate Banking Committee and the House Financial Services Committee held multiple hearings on bank failures that have occurred this year, with each committee holding a hearing with former leaders of the failed banks, as well as hearings with the federal depository institution supervisory agencies and the California and New York banking Supervisors.
The Senate Banking Committee had three hearings on the failures this week. On Tuesday, the hearing focused on former leaders of Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”), with Gregory Becker, former CEO of SVB, Scott Shay, former Chairman of Signature, and Eric Howell, former President of Signature, as the witnesses.
Wednesday’s hearing featured Federal Reserve Board Inspector General Mark Bialek, University of Pennsylvania professor Dr. Peter Conti-Brown, American Enterprise Institute Senior Fellow Paul Kupiec, and MRV Associates banking analyst Mayra Rodriguez Valladares as witnesses discussing lessons and opportunities for reform.
Thursday’s hearing in the Senate Banking Committee focused on oversight of the financial services regulators, with the following regulators as witnesses: Michael Barr, Vice Chair for Supervision, Federal Reserve Board (“FRB”); Martin Gruenberg, Chair, Federal Deposit Insurance Corporation (“FDIC”); Todd Harper, Chair, National Credit Union Administration (“NCUA”); Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency (“OCC”); Adrienne Harris, Superintendent, New York State Department of Financial Services (“NYDFS”); and Clothilde Hewlett, Commissioner, California Department of Financial Protection & Innovation (“CADFPI”).
The House Financial Services Committee held two hearing this week. On Tuesday, it had a hearing with the same four federal financial regulators as the Senate hearing noted above. On Wednesday, the House Financial Services had a two-part hearing that first brought former leaders of the failed banks similar to the Senate hearing, but this time including Michael Roffler, the former President and CEO of First Republic Bank. The second part of the House hearing had the same NYDFS and CADFPI leaders as the Senate hearing noted above.
The hearings including the former leaders of the failed banks may have made the most general news as this represented generally the first public appearances of the former bank executives, and the clips of the respective executives being raked over the proverbial coals tends to make for good TV or newspaper copy. Vice Chair Barr and Chair Gruenberg’s testimony and appearances generally stuck close to the scripts of their respective post-mortem reports on the SVB and Signature failures. Vice Chair Barr’s testimony also noted the FRB’s release of its semiannual Supervision and Regulation Report, which stated that, notwithstanding the stress the system has experienced since March, “[t]he U.S. banking system is sound and resilient with strong capital and liquidity.” Chair Gruenberg’s testimony included some discussion of the recently released Comprehensive Overview of Deposit Insurance System, where the FDIC noted possible legislative options to update deposit insurance, including the recommended approach to have targeted, unlimited insurance for certain business transaction and payroll accounts.
The hearings included NCUA Chair and Acting Comptroller Hsu, even though the recent failures have not included any national banks or thrifts or federal credit unions. Acting Comptroller Hsu noted that the OCC is using the reviews done by the FDIC and FRB “to do a ‘look across’ and evaluate our own supervisory processes to identify any areas that may need adjustment.” He offered four preliminary observations to improve confidence in the banking system: (1) supervisors need support to act in a timely and effective manner; (2) regulations regarding the resilience and resolvability of large banks need to be strengthened; (3) deposit insurance coverage needs to be updated; and (4) the diversity (i.e., having banks of all sizes) of the banking system must be preserved as the industry evolves. Acting Comptroller Hsu noted that this is consistent with a theme that has been highlighted during his tenure at the OCC − guarding against complacency. NCUA Chair Harper noted that “the overall performance of federally insured credit unions and the Share Insurance Fund has remained stable” despite the recent stresses, and noted that if Congress does amend deposit insurance coverage, that parity remain for the Share Insurance Fund.
The Q&A sessions during the various hearing showed that, while there might be some consensus that the root cause of the failures should be laid at the feet of former management, there are varying degrees of views among the members of the Committees for what blame lies with the supervisors and/or tailored regulatory relief that passed Congress in the last administration. What is clear is that the Federal banking agencies do seem to have some level of consensus that they have the flexibility to update both their supervisory approaches and applicable regulations without the need for new legislation, and that they will use that flexibility to implement changes on the supervisory front and propose changes on the regulatory front.
Earlier this month members of Congress jointly introduced the “Energy Consumer Protection Act of 2023,” with the intention of expanding the Federal Energy Regulatory Commission’s (“FERC”) ability to address energy market trading violations under the Federal Power Act and Natural Gas Act. Under the proposed bicameral bill, Section 316A of the Federal Power Act and Section 22 of the Natural Gas Act would be amended to include new suspension penalties for violators, in addition to the existing monetary penalties that were already available to FERC. With this expanded civil penalty authority, the Commission would have the ability to permanently, or for such period of time as the Commission deems appropriate, prohibit any person from engaging in direct or indirect trading of natural gas, electric energy, electric energy products, or transmission services, subject to the jurisdiction of FERC.
Furthermore, the language of the enforcement provisions of each Act, Section 314(d) of the Federal Power Act and Section 20(d) of the Natural Gas Act, would be amended as well to broaden the scope of FERC’s enforcement capabilities by replacing the term “individual” with “person.” Under corporate personhood, the use of the term “person” includes legal entities such as corporations and associations, in addition to individuals. As such, the existing enforcement provisions of each Act would be altered to reflect the same broad suspension penalties for violators that have been proposed for Section 316A and Section 22, respectively.
The proposed bill also adds Section 4B to the Natural Gas Act, which would prohibit persons from willfully and knowingly reporting false information to a federal agency, or private-sector price-reporting agency, concerning the transportation or sale of natural gas (subject to FERC jurisdiction). The new language of Section 4B mirrors the prohibition on filing false information that is already incorporated in Section 221 of the Federal Power Act. As such, the Energy Consumer Protection Act of 2023 seeks to punish the same type of violations in the natural gas trading sector as the Federal Power Act already penalizes for in electric energy trading.
The bill was proposed because members of Congress, particularly in the western United States, were concerned with rising energy costs after reaching record-high natural gas prices in California during the winter in 2022/23. Recent investigations by FERC into skyrocketing natural gas and energy prices in the wake of Winter Storm Uri in Texas (2021) also likely prompted the proposed legislation, as FERC found anomalies in the post-storm market that may have been caused by market manipulation in the region. It is also expected that accelerating climate change will cause greater severity of weather events and potentially destabilize U.S. energy commodity markets.
The purpose of the Energy Consumer Protection Act of 2023 is to expand the enforcement capabilities of FERC to include new suspension penalties for violators of the Federal Power Act and Natural Gas Act, particularly where these violations exacerbate the volatility in energy markets. With this addition to the existing Acts, FERC would have the ability to ban companies from trading in energy markets, whereas before they were only able to assign monetary penalties for corporations engaged in market manipulation or the reporting of false information to applicable agencies.
If enacted, these amendments will further test the bounds of FERC’s and the Commodity Futures Trading Commission’s (“CFTC”) jurisdiction given that both power and natural gas qualify as “commodities” under the Commodity Exchange Act of 1936; as such, the CFTC has the non-exclusive jurisdiction to prosecute fraud and manipulation in trading commodities in the interstate commerce. As was shown several years ago in the Amaranth litigation (U.S. Commodity Futures Trading Commission v. Amaranth Advisors LLC, No. 07 Civ. 6682, (DC) May 21, 2008), sometimes FERC’s and CFTC’s jurisdiction may overlap as it relates to energy commodities.
(The author wishes to thank summer associate William Lewis for his research and contributions to this news item.)