WASHINGTON – Congress helped set the stage for the collapse of Silicon Valley Bank, according to a recent analysis by the Federal Reserve, but the lawmakers responsible for relaxing bank rules aren’t sorry.
At a Senate Banking Committee hearing this week, Sen. Tim Scott (R-S.C.), the panel’s top Republican, lamented that bank executives, regulators and President Joe Biden weren’t owning up to their failures.
“We’re supposed to be talking about holding executives accountable after the recent bank failures, but from where I sit, all I see is finger-pointing,” Scott said. “I don’t see anyone from the bank executives to the regulators to the Biden administration taking meaningful accountability for their actions that played a role in the recent bank failures.”
Silicon Valley Bank failed in March when depositors withdrew their money in a panic after they learned about the bank’s balance sheet problems. The panic contributed to the collapse of Signature Bank in New York and an ongoing crisis of confidence among investors in other mid-sized financial institutions.
In its report on the root causes of the collapse, the Federal Reserve ― which sets monetary policy and serves as one of the federal government’s main bank regulators ―actually did blame itself for failing to act on warning signs about Silicon Valley Bank’s balance sheet. And it accused the bank’s executives of prizing short-term profits.
But the Fed’s report also emphasized “a shift in the stance of supervisory policy” following a 2018 law, cosponsored by a bipartisan Senate group that included Scott, that made strict regulation optional for banks with less than $250 billion in assets. The previous threshold, set by the Wall Street reform law of 2010, had been $50 billion. (Silicon Valley Bank said it had $212 billion in assets at the end of last year.)
If the old rules had been in place, Silicon Valley Bank would have been subject to stricter capital and liquidity requirements. One is called the liquidity coverage ratio, or LCR ― a periodic test to see if a financial institution has enough cash to cover withdrawals during a 30-day “stress period.” Among its findings, the Fed said Silicon Valley Bank would have faced a 9% shortfall in high-quality liquid assets in December 2022 and a 17% shortfall in February if it had had to comply with the LCR.
As the Fed put it, if the stricter rules had been in place, Silicon Valley Bank “may have more proactively managed its liquidity and capital positions or maintained a different balance sheet composition.”
Sens. Mark Warner (D-Va.) and Mike Crapo (R-Idaho) ― the lead Democratic and Republican authors of the 2018 rollback ― seemed unfamiliar with the Fed’s finding this week.
“My understanding was SVB would have actually passed the LCR test,” Warner told HuffPost on Thursday.
“There have been a number of different analyses, and those analyses had said that they would have passed the LCR,” Crapo said.
The senators were likely both thinking of a March report by the Bank Policy Institute, an industry lobbying group, that said Silicon Valley Bank would have passed the LCR. This week the group acknowledged the Fed’s finding of an LCR shortfall but said the firm would have easily come into compliance and still failed anyway.
Stricter supervision or not, Warner said the bank’s balance sheet problems, caused by rising interest rates and falling asset values, should have been clear enough to regulators.
“My feeling is this should have been caught,” Warner said. “Where was the bank management? Where was the board? I think this should have been spotted if it had been a $50 billion bank, let alone $200 billion.”
Crapo took issue with the Fed report highlighting a “culture” of accommodation for banks, allegedly fostered by Randy Quarles, the former Federal Reserve vice chair for bank supervision and a Donald Trump appointee whom Biden replaced with Michael Barr last year.
“The current Fed leadership, including Governor Barr himself, had been there for the better part of the eight months or more, and if there was some cultural problem in terms of the enforcement, they maybe should have owned that rather than trying to blame it on previous members of the Fed,” Crapo said.
The 2018 law did not prohibit regulators from imposing stricter standards on banks on a case-by-case basis, a policy known as “tailoring” the regulations to meet the actual systemic risks posed by different institutions. As Crapo, Warner and others have insisted, the Fed could have made Silicon Valley Bank pass the LCR if it wanted.
But Todd Phillips, a fellow at the Roosevelt Institute with expertise in bank regulation, had argued that Congress set a huge “vibe shift” in motion when it passed S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” relaxing Dodd-Frank. Some experts warned the law would increase the risk of a mid-sized bank failure, but its proponents insisted that strict regulations stifled lending to Main Street businesses.
“Congress told the regulators in passing 2155 to go easier on the midsize banks,” Phillips said. “And lo and behold, regulators went easier on the midsize banks.”
It may seem like a small-time debate, whether one of the lesser-known laws of the Trump era precipitated the failure of a random bank in California, but the stakes are potentially high. A third regional bank, the First Republic in New York, failed this week, and more could follow, with a greater impact on the U.S. economy. According to one analysis, 10% of banks have a larger share of unrealized losses on their balance sheets than Silicon Valley Bank.
In a worst-case scenario, the fallout could be legacy-defining for either Trump, who signed the law, or Biden. As one recent Fox News headline said, “Biden has presided over three of four worst bank failures in US history.”