What to do about SVB?

The collapse of Silicon Valley Bank (SVB) and problems with Signature Bank have lawmakers and policymakers scrambling for answers. There is little consensus on what lawmakers can do in response – if anything.

They just want to be on the right side of this issue – whatever side that is.

For Democrats, they are defending the Biden administration’s moves.

Meanwhile, Republicans want to make sure President Biden is held accountable.

Or, at least make some political hay about it. That’s why several Republicans are sure to accuse SVB of being “woke” – even if it has nothing to do with the balance sheet.

No one wants people to be distracted from their savings. However, moves by President Biden and the administration to reassure depositors have opened the door for Republicans to begin suggesting this is a “bailout.”

“I’m concerned about the precedent of bailing out all deposits and the market’s expectations moving forward,” said Sen. Michael Crapo, R-Idaho, the top GOPer on the Finance Committee and former chairman of the Banking Committee.

Democrats disagreed.

“The banks already pay for this federal deposit insurance to secure these accounts. The banks will pay a little bit more. The taxpayers are not on the hook, period. We would never have it. There would be no support for it,” said Banking Committee Chairman Sherrod Brown, D-Ohio.

Everyone remembers how toxic the word “bailout” was in 2008, when the economy hit the brink. No legislator wanted to screw up the economy. But lawmakers also weren’t keen on passing a $700 billion bailout package to help save jobs and banks. So, after some tossing and turning, Congress finally passed TARP, short for Troubled Asset Relief Program.

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This experience is instructive in how politics and other considerations come into the equation.

There is concern that there could be a “run on the banks”. Especially in the age of social media.

“This will become the first web-based program in history,” said Sen. Mark Warner, D-Va.

And Treasury Secretary Janet Yellen questioned how much the federal government could do if a “bank” goes viral.

The jury remains out nearly 15 years later on whether TARP was good or bad. But it saved the economy and probably millions of jobs. Otherwise, things might have been worse than in 1929.

But one wonders in today’s volatile political climate whether Congress would ever be able to muster the votes to pass any other emergency measure if a similar economic collapse were to befall the nation but in 2008.

Fortunately, Congress doesn’t have to act on this — yet. But lawmakers are considering tighter lending rules and studying exactly what went wrong with SVB.

“How did they sleep on the switch?” asked Senate Minority Whip John Thune, RS.D., about bank regulators.

Senate Majority Leader Chuck Schumer, D-N.Y., sidestepped questions about whether members were spooked by the 2008 exercise.

“I have confidence in President Biden, Treasury Secretary (Janet) Yellen and the Federal Reserve,” Schumer said. “They have all hands on deck to manage this and keep our economy healthy.”

The Federal Reserve and regulators are now investigating SVB. The report is expected in early May.

“The events surrounding Silicon Valley Bank require a thorough, transparent and expeditious review by the Federal Reserve,” Fed Chairman Jerome Powell said.

Imagine the questions Powell might have had from lawmakers if the SVB collapsed just before he appeared on Capitol Hill last week.

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System testifies before the Senate Banking, Housing and Urban Affairs Committee on June 22, 2022, in Washington, DC. Powell testified at the Semiannual Monetary Policy Report to Congress during the hearing. (Photo by Win McNamee/Getty Images)

Sen. Elizabeth Warren, D-Mass., opposed Powell’s re-election as Fed Chairman. She has used the SVB crisis to highlight her problems with Powell.

“I opposed (Powell) specifically because he was too light on regulations,” Warren said. “I thought it was dangerous to have someone like Powell who was willing to deregulate the banks as the head of the Fed. And I think some of that danger has now emerged.”

Warren is proposing legislation to tighten regulations.

One thing that needs to be reviewed is whether there are adequate backstops and oversight through the Dodd-Frank banking overhaul law from 2010. Democrats have criticized the Trump administration for rolling back some Dodd-Frank requirements that they believe contributed to problems with SVB. Keep in mind that many Republicans opposed Dodd-Frank in response to the 2008 financial meltdown.

That’s why questions of “too big to fail” still resonate 15 years after the 2008 disaster. A 2018 law raised the “too big to fail” asset threshold from $50 billion to $250 billion dollars. It is still unclear what scrutiny SVB should have drawn from federal regulators, regardless of its assets and liquidity needs.

But some Republicans aren’t digging back into the 2018 legislation.

“The call for more regulation is a distraction that will not solve failed, basic oversight,” Crapo said. “This event was a basic supervisory failure of poor financial risk management strategies.”

Warren said “repealing” the 2018 law should “be an immediate priority for Congress.” Warren says the 2018 measure “weakened the rules for banks like SVB.”

The bottom line is that SVB was increasingly investing in US securities. As interest rates rose, these holdings became more problematic for SVB.

It is unclear what other institutions may have invested in US Treasuries and what the impact may be as interest rates have risen. There are also questions about the Fed and whether it can keep raising rates for now.

Powell testified last week before the Senate Banking Committee – predicting additional rate hikes.

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“The latest economic data is stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected,” Powell testified. “If the totality of the data indicated that faster tightening was needed, we would be prepared to increase the pace of rate hikes.”

Fed watchers believed Powell could raise interest rates to 5.5 to 5.75 percent.

If the Fed continues to raise interest rates, it could expose the volatility of banks that invest in bonds and mortgage-backed securities. However, the Fed introduced another lending program – available on a contingency basis – to provide cash to institutions at risk due to interest-rate holdings. Bank bailouts could give the Fed more flexibility to keep raising interest rates as a tool to fight inflation. And so far, raising interest rates seems to be the only tool the Fed can really use to reduce inflation.

A customer stands outside the headquarters of Silicon Valley Bank (SVB) on March 10, 2023, in Santa Clara, California. Silicon Valley Bank was shut down Friday morning by California regulators and placed under the control of the US Federal Deposit Insurance Corporation. (Justin Sullivan/Getty Images)

The Fed wants to make sure investors have access to their cash while also dealing with inflation.

But don’t expect any movement right away from Congress unless this turns deeper into a crisis. Any future action is months away — and certainly delayed until the Federal Reserve completes its review in six weeks.

That doesn’t mean there won’t be jaw dropping.

“The government just had to step in this weekend to prevent bank failures because the bank lobbyists have too much power in this town,” Brown said. “It’s the same story that’s happened over and over again. It’s happening in the railroads. It’s happening in the drug industry. It’s happening in the oil companies, and Congress pays more attention to their contributors and their friends in the lobbying community than to the workers in the House .”

One school of thought is that inspectors may have missed it because SVB was so technology-oriented. Note that Signature Bank, which also collapsed, was 20 percent leveraged in cryptocurrencies.

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“The one thing that nobody here understands,” said Sen. Michael Bennet, D-Colo.

Another theory is that regulators pushed financial institutions into the funds.

But perhaps the saving grace is that this is not a crisis requiring immediate congressional action, but in 2008.

That’s because lawmakers will have a hard time dragging anything past the finish line.