Janet Yellen Leaves The Door Open On Reviving Depression-Era Bank Law

Last week internet-active open at Silicon Valley Bank could give a boost to lawmakers who want to revive Great Depression-era laws that have kept the banking system safe, if somewhat underserved, for more than six decades.

The idea of ​​revitalizing the most important part of the law, named Glass-Steagall after its congressional sponsor, was not on the radar before the unexpected failure of the $209 billion Silicon Valley Bank.

But in an example of how many fall SVB has made some questions Washington priors, Treasury Secretary Janet Yellen asked about reviving Glass-Steagall was in the hearing of the Senate committee and he did not take the idea down immediately.

“I think it will take a lot of time [when] it would be appropriate to see what happened and consider whether or not regulatory changes or supervision is necessary. I look forward to working with you as we discuss what has happened and what response is appropriate,” Yellen told Sen. Maria Cantwell (D-Wash.).

“But now, I want to see confidence restored in the United States,” he said.

Glass-Steagall was passed in 1933 as a response to the banking crisis caused by the Great Depression. It set up the Federal Deposit Insurance Corporation, which insures bank deposits up to $250,000 per bank per account. But Silicon Valley Bank depositors were guaranteed money that is above the limit of $250,000 in law after the bank is identified by the regulator as important to the entire banking system.

Glass-Steagall, however, is primarily known for separating out commercial banking – checking accounts, CDs, personal and small business loans offered by Main Street banks – from investment banking, where Wall Street firms are known to trade stocks, bonds and other securities. , underwrite the company’s initial public offering of mergers and acquisitions of stock and finance complex.

In 1999, the Republican Congress and President Bill Clinton repealed the most important part of the law that prevented banks from offering securities or selling insurance in addition to banking. The change comes after years of intense lobbying by the financial services industry and is partly a reaction to market changes and the march of technology, which appears to make one-stop shopping for banking, securities and insurance easier.

Reviving Glass-Steagall has come up before, after the accounting scandals of the early 2000s including Enron and WorldCom and after the 2008 financial crisis, but it never gained much traction.

On Thursday, Cantwell, whose state includes the tech-rich Seattle area that is home to Microsoft, wondered if Glass-Steagall would stop SVB from failing. He also said he’s not convinced the current system is the best way to maintain access to capital.

“I want great access to capital formation. I don’t want to see banking that knows startups disappear,” he said. But it’s about the current system, he said. “I’m not sure how we get access to capital. Or at least we don’t have a system that protects us.

Sen. Ron Wyden (D-Ore.), Chairman of the Senate Finance Committee, said “I happen to share Sen. Cantwell’s views on this.”

Reinstating Glass-Steagall, or some version of it, would require major overhauls of the banking system and would likely make the consumer experience of buying financial services more complicated. It would also lend support to one of the industry’s toughest and most well-funded lobbying efforts in Washington.

Also, as Yellen pointed out to Cantwell, Silicon Valley is not an investment bank and thus does not do the sort of business commingling Cantwell is worried about.

But the speed at which the SVB collapsed clearly unsettled MPs, leaving some defend his voice in a separate bank statement in 2018, blame the bank itself and wondered what had changed. Sen. Mark Warner (D-Va.), who made a fortune in the telecommunications industry, said that when Washington Mutual, a savings and loan, failed in 2008, it took 10 days for depositors to withdraw $16 billion.

“I’m not sure what regulatory system, anywhere, no matter how much capital and how many stress tests, will protect any institution from a $42 billion bank in one day. Literally, at that time, there were 25 cents on the dollar on the dollar that’s saved,” he said.

These concerns are not unique to Democrats. Sen. Josh Hawley (R-Mo.), a high-profile conservative, told HuffPost Wednesday that Steagall should be revisited.

“We used to separate commercial banks and investment banks and, you know, the FDIC only supervises and guarantees only commercial banks,” he said. “I think we should bring back the rules.”

Hawley said he was worried about the greater concentration in the financial services industry because of how SVB was handled.

“We’re going to have three banks in this country. I think it’s bad, bad, bad.”

Arthur Delaney contributed to this story.