WASHINGTON – Senate Republicans insist that the bank deregulation bill that Donald Trump signed into law five years ago has nothing to do with the bank failures that have plagued regulators this month.
Instead, Republicans blamed regulators for failing to find problems on the balance sheets at Silicon Valley Bank in California and Signature Bank in New York.
“Where’s the regulator?” Sen. John Kennedy (R-La.) spoke on the Senate floor. “This whole debacle could have been avoided if the regulator had done its job and stepped in and said, ‘Silicon Valley Bank, what you’re doing is dumb, and you can’t do it anymore.'”
Kennedy omitted key details from his remarks. He and other members of the Senate Banking Committee — including several panel Democrats — wrote a bill in 2018 telling regulators to relax their scrutiny of institutions like Silicon Valley Bank. (BuzzFeed, HuffPost’s parent company, banked with SVB.)
The Dodd-Frank Wall Street Reform Congress passed after the 2008 financial crisis imposed special supervisory rules on banks with more than $50 billion in assets. Ten years later, at the behest of the regional banking industry, a bipartisan bank bill raised the threshold for that prudential standard so that it was only mandatory for banks with assets of $250 billion.
The Congressional Budget Office and some banking experts warned the bill would increase the risk of a financial crisis. CBO specifically warned that the bill increases the risk that mid-sized financial institutions will fail. And that’s what happened to Silicon Valley banks.
Democrats who supported the measure told HuffPost this week they have no regrets that regional banks need regulatory relief.
Republicans are more focused on the fact that the bill still allows regulators like the Federal Reserve to impose strict standards on institutions with less than $250 billion in assets if they think it would be a good idea.
“The legislation that was passed does not eliminate the liquidity stress test,” Kennedy told HuffPost. “It doesn’t deregulate all banks in that range.”
Kennedy is right – the law makes enhanced prudential regulation optional rather than mandatory for mid-sized banks. But it’s no mystery what the regulators will do. Jerome Powell and Randy Quarles, the chairman and former top bank regulator of the Federal Reserve, told lawmakers during a hearing on legislation in 2018 that it would be a good idea to cut regional banks.
However, Republicans on the Banking Committee insisted that the Fed should maintain stricter oversight in the case of Silicon Valley Bank.
“They have the tools available,” Sen. Mike Rounds (RS.D.) told HuffPost. “The question is, why didn’t he use the device?”
“It’s a choice,” said Sen. Thom Tillis (RN.C.). “And if they choose not to do that, that’s going to be a good question based on Silicon Valley activity.”
Sen. Kevin Cramer (RN.D.) said it is unclear whether Silicon Valley Bank will fail to meet the higher standards in Dodd-Frank. Meanwhile, Sen. Mark Warner (D-Va.), the top Democrat behind the 2018 rollback, said Wednesday that regular bank inspections could have caught the problem.
The Federal Reserve said it would conduct an investigation into the bank’s oversight and produce a report in May.
Sen. Mike Crapo (R-Idaho), who chaired the Senate Banking Committee in 2018 and was the lead author of the Dodd-Frank rollback, Wednesday’s bill has nothing to do with banks going belly up.
“The truth is, this is not a capital issue. It’s a liquidity issue,” Crapo said. “It’s a completely different issue.”
Silicon Valley Bank failed and was taken over by federal regulators this week after depositors began withdrawing money in a panic and the bank lacked liquidity — assets that are easy to convert to cash — to continue honoring withdrawal requests. The federal government then stepped in to guarantee deposits, a dramatic move designed to prevent panic from spreading to other banks.
But this kind of intervention — which Kennedy and others have derided as a “bailout” of Silicon Valley’s luxury customers — is probably unnecessary. Enhanced prudential standards in Dodd-Frank include liquidity requirements that will automatically cover Silicon Valley Bank if Congress does not release the law in 2018.
“You have to report to the regulator every month, and the signs are that you’re going to be caught earlier,” Mike Konczal, an economist and director of the Roosevelt Institute’s macroeconomic analysis team, told HuffPost.
Senator Elizabeth Warren (D-Mass.), a top critic of the changes Congress made in 2018, said it was obvious the rollback caused by the failure of Silicon Valley Bank – although the Federal Reserve still has the option to maintain strict supervision.
“If we have not allowed regulatory discretion to weaken bank regulations, then regulations will not be weakened,” Warren said. “And if the regulation is not weakened, there will be a tough stress test on the banks. And we will catch the problem in SVB.