President Joe Biden’s call on Monday for Congress to toughen rules on banks after the collapse of Silicon Valley Bank doesn’t appear to be gaining enough traction to enact a new law, with even members of his own party suggesting regulators were asleep at the wheel.
Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., were quick to follow Biden’s lead, saying Tuesday that 16 Democratic senators and 31 Democratic House members supported their draft legislation that would repeal the 2018 law that eased regulations on some banks, including Santa Clara, Calif.-based SVB.
But of the 16 Senate and 33 House Democrats who voted for the 2018 law, none of those still in office signed on to Warren and Porter’s bill, including Senate Banking members Mark Warner of Virginia or Jon Tester of Montana.
House Republicans, in the majority for the 118th Congress, said adequate safeguards were in place to prevent the run on SVB. They blamed lax regulators and monetary policy for the problem.
Senate Banking Chairman Sherrod Brown, D-Ohio, said Wednesday he saw no chance of repealing the 2018 law in the current Congress.
“Bank lobbyists, they won’t let Republicans do any of this. That’s why we need a Fed that will look out for consumers, that will look out for the tax-paying public,” said Brown, who opposed the 2018 law but isn’t listed as a backer of the Warren-Porter draft bill.
Brown said in an interview Tuesday there’s an appetite for tougher bank rules among regulators, citing conversations with Fed Vice Chair for Supervision Michael S. Barr and former Fed Vice Chair Lael Brainard, now director of the National Economic Council at the White House.
“I’ll be talking to the White House, talking to the administration, the regulators. I think they see that’s their responsibility. I’m encouraged by what I see,” he said. “There is real interest in toughening capital standards and liquidity, and stress tests. It’s what we need to do.”
Federal regulators took over SVB last week and said Sunday they would guarantee customers’ deposits, including those above the $250,000 cap on deposit insurance. They also guaranteed deposits at New York City-based Signature Bank, shuttered Sunday by state regulators.
SVB collapsed because it didn’t have the liquidity to meet depositors’ demands for their money, in part because the bank had put much of that money into longer-term government bonds that declined in value as the Fed raised interest rates in 2022.
House Republicans say the 2018 law wasn’t the problem.
“They had the tools that they needed,” Rep. John W. Rose, R-Tenn., said of regulators. “Based on all of my conversations with the community bankers in Tennessee, had they been doing what Silicon Valley Bank was doing, they insist that the regulators would have been very much on top of them.”
“The job that’s on our plate now is to dig into that and find out why the regulators were not waving a red flag at Silicon Valley Bank, and encouraging them or forcing them to take steps to mitigate the risks,” Rose, a member of the House Financial Services Committee, said in an interview.
The Federal Reserve Board said Monday that Barr would review the supervision and regulation of SVB and that his report would be released by May 1.
“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” Barr said in a statement.
Among the questions from the SVB case is whether the Fed’s 2019 decision to ease liquidity requirements for banks with less than $700 billion in assets played any role in its collapse. Brainard, the Fed’s only Democrat at the time, criticized the rule, saying it went beyond the law’s mandate and would weaken safeguards in the banking system.
Barr said in December that the Fed was looking at higher capital requirements and revamping stress tests. He also noted that the Fed was examining whether its stress tests encompass a wide enough range of risks.
Progressive push for repeal
Progressive Democrats say the 2018 law easing capital requirements for banks like SVB is to blame.
“In 2018, I rang the alarm bell about what would happen if Congress rolled back critical Dodd-Frank protections: banks would load up on risk to boost their profits and collapse, threatening our entire economy — and that is precisely what happened,” Warren said in a statement.
The 2018 law raised the threshold at which a bank would be considered too big to fail from $50 billion to $250 billion, though it left the Fed discretion to apply a more rigorous standard to those banks, if needed.
Banks considered systemically important under the 2010 financial overhaul law were required to keep more capital on hand, undergo stress tests and produce a “living will” that would provide for their orderly dissolution.
With $209 billion in assets at the end of last year, according to the FDIC, SVB would have been subject to the enhanced requirements before passage of the 2018 law. But the regulators nevertheless cited systemic risk as giving them authority to take Sunday’s actions.
Rep. Brad Sherman, D-Calif., who isn’t an original co-sponsor of the Warren-Porter bill but said he would support reversing the 2018 law, said some blame falls to the Fed but that regulators would have been more likely to catch the balance sheet risk at SVB had it been subject to the stricter rules established in the wake of the 2008 financial crisis.
“Look, some blame goes to the Fed on this. They were the primary regulator, and had they picked this bank as being a problem, they were of a size where they could have said, ‘Ah, we’re putting you back in the tough regulation,’” Sherman said in an interview. “But if you don’t do the tough regulation, you don’t know who needs the tough regulation. If you’re not inspecting, you don’t need to know who needs an inspection.”
The Warren-Porter draft bill would repeal the 2018 law but spell out no other requirements for regulators.
Republicans see a distraction
“I think President Biden and others who made that criticism are simply trying to distract from the fact that it was the inflation that their policies created that is probably the biggest culprit to driving the run on the bank,” Rep. Bryan Steil, R-Wis., a House Financial Services Committee member, said in an interview.
Rep. Mike Flood, R-Neb., a newcomer to the committee, said he would be open to legislation if that’s where the facts lead, but first the panel must determine whether regulators did their jobs properly.
“Is this a matter that we need a law [for], or do we need to test competency of the regulators? Was this handled the right way?” he said in an interview. “If that’s the case, then no law is going to fix anything. We have to make sure that the regulators are doing what they’re supposed to be doing.”
Others pointed to the Treasurys that SVB held, which are usually considered relatively safe assets, as the reason higher capital or liquidity requirements would have made little difference.
“It’s not like they absconded with the money. They put it in fixed assets that had set dates that they had to keep it in there without having a penalty,” Financial Services member Ralph Norman, R-S.C., said in an interview. “You don’t outlaw what they invested in. I don’t understand where the administration is coming from. I mean, what regulation are you going to put in place that would stop this?”
Even some progressives who opposed the 2018 law and support its repeal were skeptical that it made a difference at SVB, given the bank’s reliance on Treasurys.
Robert Hockett, a professor at Cornell Law School, said higher capital requirements likely wouldn’t have caught SVB’s vulnerability to rising interest rates.
“Even if we impose higher capital requirements on SVB, which of course we would have been doing probably had the 2018 thing not happened, it wouldn’t have made a whole lot of difference, because the problem is even under the risk-weighting formula, the Treasurys do not count for anything,” he said in an interview. “They don’t amount to risk.”
It’s possible that under enhanced supervision, a regulator would have noticed the bank hadn’t hedged against interest rate risk, but that’s not a guarantee, Hockett said.
Senate Democrats who backed the 2018 legislation have stepped forward to defend it, knee-capping the prospects of a repeal even where the party has the majority.
“It appears that the leading causes of the failure of Silicon Valley Bank were managers who maintained a woefully under-diversified asset sheet, and a small group of investors who sparked a panic that led depositors to withdraw money at a rate that would be unsustainable for any bank,” Sen. Chris Coons, D-Del., said in a statement. “SVB was subject to federal and state supervision, and it’s not clear what additional regulatory requirements might have yielded a different outcome.”
Sen. Joe Manchin III, D-W.Va., blamed the bank’s failure on the Federal Reserve.
“The Federal Reserve could and should have done more. The Fed retains full authority over banks like Silicon Valley Bank and Signature Bank,” he said in a statement. “When the industries that propped up these banks were publicly flailing, alarm bells should have rung at the Fed and additional oversight should have been performed. No law prevented the Fed from acting.”
Ellyn Ferguson contributed to this report.