WASHINGTON — Senate Republicans insist the bank deregulation bill signed by Donald Trump five years ago had nothing to do with the bank failures that hit regulators this month.
Instead, Republicans blame regulators for failing to spot problems on the balance sheets of Silicon Valley Bank in California and Signature Bank in New York.
“Where were the regulators?” Sen. John Kennedy (R-La.) said on the Senate floor. “This whole disaster could have been avoided if the regulators had just done their job and stepped in and said, ‘Silicon Valley Bank, what you’re doing is stupid and you can’t do it anymore.’
Kennedy omitted a key detail from his remarks. He and other members of the Senate Banking Committee — including several of the committee’s Democrats — authored a bill in 2018 that would have told regulators they could relax scrutiny of institutions like Silicon Valley Bank. (BuzzFeed, the parent company of HuffPost, which works with SVB.)
The Dodd-Frank Wall Street Reform bill 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, the bipartisan banking bill raised the threshold for these prudential standards so that they were required only for banks with $250 billion in assets.
The Congressional Budget Office and some banking experts warned that the bill would increase the risk of a financial crisis. CBO specifically warned that the bill increased the risk of failure of a medium-sized financial institution. And that’s what happened in the case of the Silicon Valley bank.
Democrats who supported the measure told HuffPost this week they didn’t regret why regional banks needed regulatory relief.
Republicans focused more on the fact that the bill still allowed regulators like the Federal Reserve to impose stricter standards on institutions with less than $250 billion in assets if they thought it would be a good idea.
“The legislation we passed did not eliminate extreme liquidity tests,” Kennedy told HuffPost. “It didn’t deregulate all banks in that range.”
Kennedy is right — the law made enhanced prudential regulation optional rather than mandatory for mid-sized banks. But it was no mystery what regulators would do. Jerome Powell and Randy Quarles, the chairman and former top bank regulator at the Federal Reserve, told lawmakers during hearings on the legislation in 2018 that it would be a good idea to rein in regional banks a bit.
But Republicans on the Banking Committee insisted the Fed should have maintained tighter oversight in the case of Silicon Valley Bank.
“They had the tools available,” Sen. Mike Rounds (RS.D.) told HuffPost. “The question is why didn’t they use the tools?”
“It was a choice,” said Sen. Thom Tillis (RN.C.). “And if they chose not to, it’s going to be a very good question based on the activities of Silicon Valley.”
Sen. Kevin Cramer (RN.D.) said it was unclear whether Silicon Valley Bank would have failed to meet the higher standards under Dodd-Frank. Meanwhile, Sen. Mark Warner (D-Va.), the top Democrat behind the 2018 rollback, said Wednesday that routine banking oversight could have caught the problems.
The Federal Reserve said it would conduct an investigation into its oversight of the bank and report back by May.
Sen. Mike Crapo (R-Idaho), who chaired the Senate Banking Committee in 2018 and was the primary author of the Dodd-Frank rollback, said Wednesday that the bill had nothing to do with the bank collapse.
“The fact is that this is not a capital issue. This is a liquidity issue,” Crapo said. “It’s a whole different set of issues.”
Silicon Valley Bank failed and was taken over by federal regulators this week after depositors began withdrawing their money in a panic and the bank lacked the liquidity — assets that are easy to turn into cash — to continue meeting demands. withdrawal requests. The federal government then stepped in to guarantee the deposits, a dramatic move designed to prevent panic from spreading to other banks.
But that kind of intervention — which Kennedy and others derided as a “bailout” of Silicon Valley’s fancy clients — wasn’t supposed to be necessary. Enhanced prudential standards under Dodd-Frank include liquidity requirements that would have automatically covered Silicon Valley Bank if Congress had not relaxed the law in 2018.
“He should have been reporting it to regulators every month and the signs would have been spotted earlier,” Mike Konczal, an economist and director of the Roosevelt Institute’s macroeconomic analysis group, told HuffPost.
Sen. Elizabeth Warren (D-Mass.), a leading critic of the changes Congress made in 2018, said it was clear the rollback resulted in the failure of Silicon Valley Bank — even though the Federal Reserve still had the option to maintain stricter supervision.
“If we hadn’t allowed regulators the discretion to weaken banking regulations, then regulations wouldn’t have been weakened,” Warren said. “And if the regulations hadn’t been weakened, there would have been tough stress tests on these banks. And we would have caught the problems at SVB”.