Bank failures: anger in Congress, but disagreement over what to do

Democrats rallied around two legislative proposals, but one has a better chance than the other.

WASHINGTON. Bills have been filed, hearings have been scheduled, and blame has been placed as Congress reacted last week to the sudden collapse of two banks. Take a look at what lawmakers are saying and planning as the fallout from the collapse of Silicon Valley Bank and Signature Bank continues.

Quick Legislative Fixes Unlikely

While President Joe Biden called on Congress on Monday to tighten rules on banks to prevent future bankruptcies, lawmakers are divided over whether any legislation is needed.

Some Congressional leaders are skeptical that a heavily divided Congress will even act.

“There are people who will choose bills, but I can’t imagine that with the banks holding Republican members of Congress, we can pass anything substantial,” said Sen. Sherrod Brown, Ohio, chairman of the Senate Banking Service. . , Committee on Housing and Urban Affairs.

Republicans say the laws already passed were enough to prevent bank failures if only regulators were doing their job, identifying obvious problems and directing banks to take actions that would reduce their risk.

“If there are ideas that people have, you know, at some point we would be ready to accept them, but I think it would be premature to start talking about solutions before we fully define the problem and eventually get answers. from regulators about why they slept on the job,” said Senator John Thune of South Dakota, the Republican runner-up.

So what’s next?

The House Financial Services Committee announced its first hearing, scheduled for March 29, with at least two witnesses: Martin Grunberg, Chairman of the Board of Directors of the Federal Deposit Insurance Corporation, and Michael Barr, Vice Chairman of the Federal Reserve Board for Supervision. governors. “We will conduct this hearing without fear or prejudice to get the answers the American people deserve,” the lawmakers said.

On the Senate side, Brown said his committee would also hold a hearing soon to help lawmakers assess what went wrong. He said the first hearing would likely focus on bringing in witnesses responsible for regulating 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.

Brown outlined some of the questions lawmakers are likely to ask regulators in a letter Thursday asking for a comprehensive analysis of what went wrong. What role did customer coordination through social media play? What role did the high percentage of uninsured deposits at Silicon Valley Bank play? Were there regulatory gaps in capital, liquidity and stress testing that played a role in the failures?

Sen. Bill Hagerty, D-Tn, said he wants to know why regulators failed to act on detailed liquidity risk reports at Silicon Valley Bank and why the FDIC was unable to auction the rest of the bank over the weekend.

Sen. Cynthia Lummis, of Wyoming, said she wants to know if regulators intend to use the failure of Signature Bank to further crack down on crypto. She has been a vocal supporter of the development of the cryptocurrency and is an investor in bitcoin. Signature was the first FDIC insured bank to offer a blockchain-based digital payment platform in 2019 and has been a popular bank for the crypto industry.

Sen. John F. Kennedy, R-La., said he’d like to know how private equity analysts warned about Silicon Valley investments, but regulators didn’t seem to be aware of the potential problems.

Congressional action

Democrats in both houses rallied around two legislative proposals. The first, from Senator Elizabeth Warren, D-Mass., and Rep. Kathy Porter, D-California, will repeal the 2018 rollback of some aspects of the Dodd-Frank Act passed in the wake of the financial crisis a decade earlier.

The Dodd-Frank Act subjected all banks with assets of $50 billion or more to increased regulation, such as annual stress testing and the submission of settlement plans or “living wills” in the event of bankruptcy.

But after years of complaints from local and regional banks about the cost of compliance, Congress raised the threshold for meeting all requirements of the Dodd-Frank Act to $250 billion.

Banks with assets of less than $100 billion were automatically exempted from increased regulation. The Fed was given the discretion to apply increased supervision of banks at levels ranging from $100 billion to $250 billion. Both Silicon Valley Bank and Signature Bank fall into this category.

“President Trump’s rollback paved the way for the collapse of the SVB,” Senator Dick Durbin, D-IL, said on the Senate floor Thursday.

But Republicans counter that the layered oversight they installed in 2018, backed by several Democrats in both houses, has given federal regulators all the tools they need to spot problems in Silicon Valley and Signature before they become fatal.

“I think the problem here is liquidity, and regulators have set liquidity stress tests for banks,” said Sen. Mike Crapo, of Idaho, and author of the 2018 changes to Dodd-Frank. “If they need to toughen them up, they have the authority to do so.”

With such philosophical disagreement, it is unlikely that Warren and Porter’s bill will move forward in Congress.

The second account may have a better chance. The bill by Senator Richard Blumenthal, Democrat of Connecticut, and Democratic Representatives Adam Schiff and Mike Levin of California would offset any bonuses and profits that bank executives receive from the sale of shares in the 60 days before the bank went bankrupt.

This week, Republicans have also unleashed anger on bankrupt bankers.

“I think it all needs to be brought back,” Kennedy said of the bonuses. “And this time, I hope someone goes to jail.”

On Friday, Biden called on Congress to give the FDIC the power to enforce compensation paid to executives of a broader range of banks if they fail, and to lower the threshold for the regulator to fine and bar executives from working at other banks. bank.

Pointing finger to the other side

The recent bank failures create 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 link Biden and Democrats to the turmoil by blaming them for higher inflation, which leads to higher interest rates and lowers the cost of investments by Silicon Valley banks. .

“Failure of the bank, failure of the regulators, and without a doubt, failure at the top,” said Sen. Tim Scott, RS.C., referring to Biden.

Democrats attribute the setbacks to changes Republicans made to slash Dodd-Frank requirements for some banks, saying it was an example of how Washington is catering to powerful interest groups rather than ordinary voters.

“The pullback in 2018 allowed banks to take more risk to increase their profits,” Warren said. “So what did they do? They took on more risks, increased their profits, gave their executives bigger bonuses and salaries, and then blew up the banks.”

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