Bills were filed, hearings were scheduled and blame was laid as Congress reacted to the abrupt bankruptcy of two banks last week. A look at what lawmakers are saying and planning as the fallout from the collapse of Silicon Valley Bank and Signature Bank continues.
QUICK LEGAL FIXES LIKELY
As President Joe Biden called on Congress on Monday to strengthen bank regulations to prevent future bankruptcies, lawmakers are divided on whether legislation is needed.
Some congressional leaders are skeptical that a deeply divided congress will act at all.
“There are people going to elect bills, but I can’t imagine with the hold that banks have over Republican members of Congress, we’ll be able to pass anything major,” said Senator Sherrod Brown, D-Ohio, Senate President. Banking. , Committee on Housing and Urban Affairs.
Republicans say the laws already in place were enough to prevent bank failures if only regulators had done their job by spotting obvious problems and directing the banks to take steps that would reduce their risk.
“If there are ideas that people have, you know, at some point we’d like to nurture those, but I think it would be premature to talk about solutions until we’ve fully defined the problem and finally get answers from the regulators about why they slept at work,” said South Dakota Senator John Thune, the second-class Republican.
SO WHAT NOW? The House Financial Services Committee has announced its first hearing for March 29, with at least two witnesses: Martin Gruenberg, chairman of the board of directors of Federal Deposit Insurance Corp., and Michael Barr, vice chairman of oversight on the board of directors of Federal Deposit Insurance Corp. the Federal Reserve. of governors. “We will hold this hearing without fear or favor to get the answers the American people deserve,” lawmakers said.
On the Senate side, Brown said his committee will also hold a hearing soon to help lawmakers assess what went wrong. He said the first hearing will likely focus on bringing in witnesses responsible for regulating the bankrupt banks. The Fed Board was the primary regulator for Silicon Valley Bank in California, while the FDIC was the primary federal regulator for Signature Bank in New York.
In a letter Thursday, Brown outlined some of the questions lawmakers are likely to have for regulators, asking them to conduct a comprehensive investigation into what went wrong. What role did social media-led customer coordination play? What role did the large percentage of uninsured deposits play at Silicon Valley Bank? Were there regulatory gaps related to capital, liquidity and stress testing that played a role in the failures?
Sen. Bill Hagerty, R-Tenn., said he wants to know why regulators failed to act on detailed reports of a liquidity risk at Silicon Valley Bank and why the FDIC failed to auction off the remaining portions of the bank last weekend.
Senator Cynthia Lummis, R-Wyo., said she wants to know if regulators plan to use Signature Bank’s failure to further crack down on cryptocurrency. She has been an outspoken advocate for cryptocurrency development and is an investor in bitcoin. Signature was the first FDIC-insured bank to offer a blockchain-based digital payment platform in 2019 and was a go-to bank for the crypto industry.
Senator John Kennedy, R-La., said he wanted to know how private stock analysts had warned about Silicon Valley investments, but regulators seemed ignorant of potential problems.
ACTION IN THE CONGRESS Democrats in both chambers have united around two legislative proposals. The first, from Sen. Elizabeth Warren, D-Mass., and Representative Katie Porter, D-Calif., would reverse certain aspects of the Dodd-Frank Act that had gone into effect a decade earlier after the financial crisis, in 2018 to withdraw.
The Dodd-Frank Act subjected all banks with $50 billion or more in assets to enhanced regulation, such as annual stress testing and the filing of resolution plans or “living wills” in the event of bankruptcy.
But after years of complaints from community and regional banks about compliance costs, Congress raised the threshold for meeting all requirements of the Dodd-Frank Act to $250 billion.
Banks with assets worth less than $100 billion were automatically exempted from the enhanced regulation. The Fed was given the discretion to apply the enhanced oversight on a case-by-case basis to banks between the $100 billion and $250 billion level. Both Silicon Valley Bank and Signature Bank fell into that category.
“President Trump’s rollback paved the way for the collapse of the SVB,” Sen. Dick Durbin, D-Ill., said in the Senate Thursday.
But Republicans have countered that the layered oversight they instituted in 2018 with the support of several Democrats in both chambers has given federal regulators all the resources they need to deal with the problems in Silicon Valley and Signature before they became fatal. .
“I think the problem here is liquidity and there are liquidity stress tests that regulators have put in place for the banks,” said Sen. Mike Crapo, R-Idaho, and the author of the 2018 amendments to Dodd-Frank. “If they need to tighten that up, they have the authority to do so.”
With that philosophical divide, the Warren and Porter bill is unlikely to make it through Congress.
A second bill may have a better chance. The bill by Sen. Richard Blumenthal, D-Conn., and Democratic Representatives Adam Schiff and Mike Levin of California would recoup all bonuses and profits bank executives receive from stock sales in the 60 days leading up to a bank failure.
Republicans also directed a lot of anger at the executives of the bankrupt banks this week.
“I think all of that needs to be reclaimed,” Kennedy said of bonuses. “And this time I hope someone goes to jail.”
On Friday, Biden called on Congress to grant the FDIC the power to enforce the return of compensation to executives at a wider range of banks if they fail, and to lower the threshold for the regulator to collect fines. and prohibit executives from working at another bank. Bank.
POINTING FINGERS TO THE OTHER PARTY
The recent bank failures provide an opportunity to shape the political narrative for next year’s elections.
While Republicans say regulators are “asleep on the switch,” they are also trying to tie Biden and Democrats into the turmoil by blaming them for higher inflation leading to higher interest rates and reduced value of Silicon Valley Banks investments.
“A failure at the bank, a failure with regulators, and without question a failure at the top,” Sen. Tim Scott, RS.C., said, referring to Biden.
Democrats attribute the failures to changes Republicans made in scaling back Dodd-Frank requirements for certain banks, saying it’s an example of Washington targeting powerful interest groups rather than average voters.
“The rollbacks of 2018 allowed the banks to take on more risk to increase profits,” said Warren. ‘So what have they done? They took more risks, increased their profits, gave their executives big bonuses and salaries, and then blew up the banks.”