WASHINGTON — Senate Republicans insist that the bank deregulation bill Donald Trump signed into law five years ago had nothing to do with the bank failures that caught regulators off guard this month.
Instead, Republicans blame the regulators for failing to spot problems on balance sheets at 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 debacle 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 dumb, and you can’t do it anymore.’”
Kennedy omitted a key detail from his remarks. He and the other members of the Senate Banking Committee — including several of the panel’s Democrats — wrote a bill in 2018 that told regulators they could relax their scrutiny of institutions like Silicon Valley Bank. (BuzzFeed, HuffPost’s parent company, banked with SVB.)
The Dodd-Frank Wall Street Reform bill Congress passed after the 2008 financial crisis imposed special oversight rules on banks with more than $50 billion in assets. Ten years later, at the behest of the regional banking industry, the bipartisan bank bill raised the threshold for those prudential standards so that they were only mandatory for banks with $250 billion in assets.
The Congressional Budget Office and some banking experts warned the bill would increase the risk of a financial crisis. The CBO specifically warned that the bill increased the risk that a mid-sized financial institution would fail. And that is what happened in the case of Silicon Valley bank.
The Democrats who supported the measure told HuffPost this week they had no regrets because 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 that we passed did not eliminate liquidity stress testing,” Kennedy told HuffPost. “It did not eliminate the regulation at all of banks in that range.”
Kennedy is right — the law made enhanced prudential regulation optional instead of mandatory for mid-sized banks. But it wasn’t a 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 cut regional banks some slack.
Nevertheless, Republicans on the Banking Committee insisted the Fed should have maintained stricter oversight in the case of Silicon Valley Bank.
“They had the tools available,” Sen Mike Rounds (R-S.D.) told HuffPost. “The question is, why didn’t they use the tools?”
“It was an option,” Sen Thom Tillis (R-N.C.) said. “And if they chose not to do it, that’s gonna be a really good question based on the activities of Silicon Valley.”
Sen. Kevin Cramer (R-N.D.) said it’s not clear 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 regular bank oversight could have caught the problems.
The Federal Reserve has said it will conduct an investigation of its oversight of the bank and produce a report by May.
Sen. Mike Crapo (R-Idaho), who chaired the Senate Banking Committee in 2018 and was the lead author of the Dodd-Frank rollback, said Wednesday the bill had nothing to do with banks going belly-up.
“The fact is, this is not a capital issue. This is a liquidity issue,” Crapo said. “It’s an entirely 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 convert to cash — to continue honoring the withdrawal requests. The federal government then stepped in to guarantee the deposits, a dramatic move designed to prevent the panic from spreading to other banks.
But this kind of intervention — which Kennedy and others derided as a “bailout” of Silicon Valley’s fancy customers — was not supposed to be necessary. The enhanced prudential standards under Dodd-Frank include liquidity requirements that would have automatically covered Silicon Valley Bank if Congress hadn’t relaxed the law in 2018.
“It would have had to report it to regulators monthly, and the signs would have been caught earlier,” Mike Konczal, an economist and director of the Roosevelt Institute’s macroeconomic analysis team, told HuffPost.
Sen. Elizabeth Warren (D-Mass.), the top critic of the changes Congress made in 2018, said it’s obvious the rollback resulted in Silicon Valley Bank’s failure — even though the Federal Reserve still had the option to maintain stricter oversight.
“If we hadn’t allowed the regulators the discretion to weaken bank regulations, then the regulations would not have been weakened,” Warren said. “And if the regulations had not been weakened, there would have been tough stress tests on these banks. And we would have caught the problems at SVB.”