Bank failures: Congress angry but divided over response

Bills have been introduced, hearings have been scheduled, and blame has been placed as Congress reacts last week to the sudden failure of two banks. A look at what lawmakers are saying and planning as the aftermath of the collapse of Silicon Valley Bank and Signature Bank continues.

QUICK LEGISLATIVE CORRECTIONS UNLIKELY

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

Some congressional leaders are skeptical that a deeply divided Congress will act.

“There are people who are going to choose IOUs, but I can’t imagine that, with the hold that banks have on Republican members of Congress, we can pass anything meaningful,” said Senator Sherrod Brown, D-Ohio, Senate Speaker Banking, Housing and Urban Affairs Commission.

Republicans say the laws already in place would have been enough to prevent bank failures, if only regulators had done their job by identifying obvious problems and directing banks to take steps that reduce their risk.

“If there are ideas out there that people have, you know, at some point, we’d be willing to consider them, but I think it would be premature to start talking about solutions before fully defining the problem and eventually getting answers from the authority of regulation about why they were sleeping on the job,” said Sen. John Thune of South Dakota, the Republican second-ranking.

SO, WHAT’S NEXT?

– Announcement –

The House Financial Services Committee announced its first hearing for March 29, with at least two witnesses: Martin Gruenberg, chairman of the board of Federal Deposit Insurance Corp., and Michael Barr, vice chairman for oversight of the board of the Governors Federal Reserve. “We will conduct this hearing without fear or favor to get the answers the American people deserve,” the 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 is likely to focus on summoning witnesses responsible for regulating failed banks. The Fed’s board was the lead regulator for Silicon Valley Bank in California, while the FDIC was the lead federal regulator for Signature Bank in New York.

Brown explained some of the questions lawmakers are likely to have for regulators in a letter Thursday asking them to undertake a comprehensive review of what went wrong. What role did social media-led coordination play between clients? What role did the large percentage of uninsured deposits play at Silicon Valley Bank? Were there regulatory gaps in capital, liquidity and stress testing that played a role in the bankruptcies?

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 shares remaining bank last weekend.

– Announcement –

Sen. Cynthia Lummis, R-Wyo., said she wanted to know if regulators plan to use the Signature Bank failure to further crack down on cryptocurrency. She has been a vocal supporter of 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 has been a benchmark bank for the cryptocurrency industry.

Sen. John Kennedy, R-La., said he wanted to know how private equity analysts had warned about Silicon Valley investing, but regulators didn’t seem to be aware of any potential problems.

CONGRESS ACTION

Democrats in both houses rallied around two legislative proposals. The first, by Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., would repeal the 2018 rollback of some aspects of the Dodd-Frank Act enacted after the financial crisis a decade earlier.

The Dodd-Frank Act subjected all banks with assets of $50 billion or more to heightened regulation, such as annual stress tests 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 the cost of compliance, Congress raised the threshold for meeting all Dodd-Frank Act requirements to $250 billion.

Banks with assets under $100 billion were automatically exempt from enhanced regulation. The Fed was given the discretion to apply enhanced supervision for banks between the $100 billion and $250 billion level on a case-by-case basis. 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 on the Senate floor Thursday.

But Republicans countered that the tiered oversight they instituted in 2018 with the support of several Democrats in both houses gave federal regulators all the tools they needed to spot problems in Silicon Valley and Signature sooner. that they become fatal.

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

With that philosophical divide, the Warren and Porter bill is unlikely to advance in 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 made in the 60 days before a bank fails.

Republicans have also directed considerable ire at failed bank executives this week.

“I think all of that should be made up,” 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 force the restitution of compensation paid to executives at a wider range of banks in the event of bankruptcy, and to lower the threshold for the regulator to impose fines and ban executives to work in another bank.

POINTING FINGERS TOWARDS THE OTHER PART

Recent bank failures create an opportunity to shape the political narrative for next year’s elections.

While Republicans say regulators were “asleep in the ride,” they’re also trying to tie Biden and Democrats to the turmoil by blaming them on higher inflation, which is leading to higher interest rates and reduced the value of silicon investments. Valley Banks.

“A bank failure, a failure with the regulators and, without a doubt, a failure at the top,” Sen. Tim Scott, RS.C., said in reference to Biden.

Democrats attribute the failures to Republican-led changes in reducing Dodd-Frank requirements for some banks, saying it’s an example of Washington targeting powerful interest groups rather than average voters.

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

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