Bank failures in 2023: Congressional proposals, what’s next?

Democrats have rallied around two bills, but one stands a better chance than the other.

WASHINGTON — Bills have been filed, hearings scheduled and finger-pointing made as Congress responded to the sudden collapse of two banks last week. A look at what lawmakers are saying and planning as the fallout from the collapse of Silicon Valley Bank and Signature Bank continues.

Rapid legal corrections unlikely

While President Joe Biden on Monday urged Congress to tighten rules on banks to prevent future defaults, lawmakers are divided on whether legislation is needed.

Some congressional leaders are skeptical that a tightly divided congress will act at all.

“There are people who are going to pick bills, but I don’t think we can do anything significant with banks’ hold on Republican congressmen,” said Senator Sherrod Brown, D-Ohio, chair of the Senate Banking Committee Housing and Urban Affairs.

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

“If there are ideas out there that people have, you know, at some point we would be willing to consider them, but I think it would be premature to talk about solutions before we fully define the problem and ultimately get answers from regulators about that.” why they slept at work,” said Sen. John Thune of South Dakota, the second-ranking Republican.

What’s next?

The House Financial Services Committee has announced its first hearing for March 29 with at least two witnesses: Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., and Michael Barr, vice chairman for oversight on the Federal Reserve Board of Governors. “We will conduct this hearing without fear or favoritism to get the answers the American people deserve,” the lawmaker said.

On the Senate side, Brown said his committee will soon hold a hearing to help lawmakers assess what went wrong. He said the first hearing will likely focus on bringing in witnesses responsible for regulating the failed banks. The Fed Board was the primary regulator for Silicon Valley Bank in California, while the FDIC was the primary federal regulator for Signature Bank in New York.

Brown articulated some of the questions lawmakers are likely to ask regulators a letter Thursday Ask them to do a full review of what went wrong. What role did social media-led coordination between customers play? What role did Silicon Valley Bank’s high proportion of uninsured deposits play? Were there regulatory gaps related to capital, liquidity and stress testing that played a role in the defaults?

Sen. Bill Hagerty, R-Tenn., said he wanted to know why regulators didn’t respond to detailed reports of a liquidity risk at Silicon Valley Bank and why the FDIC didn’t auction the remaining portions of the bank last weekend.

Sen. Cynthia Lummis, R-Wyo., said she wants to know if regulators intend to use Signature Bank’s failure to further crack down on cryptocurrency. She has been a strong advocate for cryptocurrency development and is investing in Bitcoin. Signature was the first FDIC-insured bank to offer a blockchain-based digital payments platform in 2019 and has been a go-to place for the crypto industry.

Sen. John Kennedy, R-La., said he wanted to know how private equity analysts had warned about Silicon Valley’s investments, but regulators seemed ignorant of potential problems.

Action of Congress

Democrats in both chambers have rallied around two bills. The first, by Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., would reverse the repeal of certain aspects of the Dodd-Frank Act of 2018 that had been enacted a decade earlier following the financial crisis.

The Dodd-Frank Act subjected all banks with assets of $50 billion or more to increased regulation, such as B. annual stress tests and the submission of resolution plans or “living wills” in the event of insolvency.

But after years of complaints from community and regional banks about the cost of compliance, Congress raised the threshold for meeting all of the Dodd-Frank Act’s requirements to $250 billion.

Banks with less than $100 billion in assets were automatically exempted from expanded regulation. The Fed was given discretion to apply enhanced supervision to banks between $100 billion and $250 billion on a case-by-case basis. Both Silicon Valley Bank and Signature Bank fell into this category.

“President Trump’s rollback paved the way for the collapse of the SVB,” Sen. Dick Durbin, D-Ill., said in the Senate Thursday.

But Republicans have countered that the tiered oversight they established in 2018, with the support of several Democrats in both houses, gave federal regulators all the tools they needed to spot the problems in Silicon Valley and Signature before they did became fatal.

“I think the issue here is liquidity, and there are liquidity stress tests that regulators have put in place for the banks,” Sen. Mike Crapo, R-Idaho, and the author of the 2018 amendments, told Dodd-Frank. “If they need to tighten these up, they have the authority to do so.”

Given this philosophical divide, Warren and Porter’s bill is unlikely to advance in Congress.

A second bill might 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 gains bank executives received from stock sales made in the 60 days before a bank went bust.

Republicans also directed significant anger this week at the executives of the failed banks.

“I think all of that should be reclaimed,” Kennedy said of bonuses. “And this time I hope someone goes to jail.”

On Friday, Biden called Congress grant the FDIC the power to enforce the repayment of compensation paid to executives at a broader range of banks should they fail, and lower the threshold for the regulator to fine and ban executives from working at one exclude another bank.

Pointing the finger at the other party

The recent bank failures offer an opportunity to shape the political narrative for next year’s elections.

While Republicans say regulators “slept at the counter,” they’re also trying to tie Biden and the Democrats to the turmoil by blaming them for higher inflation, which is driving higher interest rates and lowering the value of people’s investments Silicon Valley Banks decreased .

“A failure by the bank, a failure by regulators and, without question, a failure at the top,” said Senator Tim Scott, RS.C., referring to Biden.

Democrats attribute the failures to changes Republicans have cited in reducing Dodd Frank requirements for certain banks, saying it’s an example of Washington serving powerful interest groups rather than average voters.

“The 2018 rollbacks allowed banks to take on more risk to increase their profits,” Warren said. “So what did you do? They took more risks, increased their profits, gave their executives big bonuses and salaries, and then blew the banks.” Bank failures in 2023: Congressional proposals, what’s next?

Laura Coffey

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