Bank failures: Anger in Congress, but division on what to do

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Quick fixes unlikely

While President Joe Biden called Monday on Congress to strengthen the rules for banks to prevent future failures, lawmakers are divided on whether any legislation is needed.

Some congressional leaders are skeptical that a closely divided Congress will act at all.

"There's people who are going to choose bills, but I cannot imagine that, with the hold banks have on Republican members of Congress, that we can pass anything significant," said Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking, Housing and Urban Affairs Committee.

Republicans say the laws already in place were sufficient to prevent the bank failures, if only regulators had done their job by spotting obvious problems and directing the 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 entertain those, but I think it would be premature to start talking about solutions before we fully define the problem and ultimately get answers from the regulators about why they were asleep at the job," said Sen. John Thune of South Dakota, the second-ranking Republican.

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So what's next?

The House Financial Services Committee has announced its first hearing for March 29, featuring at least two witnesses: Martin Gruenberg, chairman of the Federal Deposit Insurance Corp.'s board of directors, and Michael Barr, vice chair for supervision with the Federal Reserve's board of governors. "We will conduct this hearing without fear or favor to get the answers the American people deserve," lawmakers said.

On the Senate side, Brown said his committee will also hold a hearing soon to help lawmakers assess what went wrong. He said the first hearing is likely to 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 spelled out some of the questions lawmakers probably will have for the regulators in a letter Thursday asking them to undertake a comprehensive review of what went wrong. What role did social media-led coordination among customers play? What role did the large percentage of uninsured deposits at Silicon Valley Bank play? Were there regulatory gaps with respect to capital, liquidity and stress testing that played a role in the failures?

Sen. Bill Hagerty, R-Tenn., said he wants to know why regulators did not act on detailed reports of a liquidity risk at Silicon Valley Bank and why the FDIC failed to auction off the bank's remaining parts last weekend.

Sen. Cynthia Lummis, R-Wyo., said she wants to know if regulators intend to use the failure of Signature Bank to further crack down on cryptocurrency. She has been a vocal advocate for cryptocurrency development and is an investor in bitcoin. Signature was the first FDIC-insured bank to offer a blockchain-based digital payment platform in 2019 and had been a go-to bank for the crypto industry.

Sen. John Kennedy, R-La., said he wanted to know how private stock analysts had warned about Silicon Valley's investments but regulators did not seem to know about potential problems.

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Congressional action

Democrats in both chambers have rallied around two legislative proposals. The first, from Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., would repeal the 2018 rollback of certain aspects of the Dodd-Frank Act enacted after the financial crisis a decade earlier.

The Dodd-Frank Act subjected all banks with $50 billion or more in assets to enhanced regulation, such as annual stress testing and the submission of resolution plans or "living wills" in the event of bankruptcy.

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

Banks with assets valued at less than $100 billion were automatically exempted from the enhanced regulation. The Fed was given the discretion to apply on a case-by-case basis the enhanced oversight for banks between the $100 billion and $250 billion level. Both Silicon Valley Bank and Signature Bank fell in that category.

"President Trump's rollback paved the way for the SVB collapse," Sen. Dick Durbin, D-Ill., said on the Senate floor Thursday.

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

"I think the issue here is liquidity and there are liquidity stress tests that regulators have established for the banks," said Sen. Mike Crapo, R-Idaho, and the author of the 2018 changes to Dodd-Frank. "If they need to tighten those up, they have the authority to do it."

With that philosophical divide, it's unlikely the Warren and Porter bill will advance in Congress.

A second bill might have a better shot. The bill from Sen. Richard Blumenthal, D-Conn., and Democratic Reps. Adam Schiff and Mike Levin of California would recoup any bonuses and profits that bank executives receive from stock sales make in the 60 days before a bank failure.

Republicans also directed considerable ire at the executives of the failed banks this week.

"I think all of that ought to be clawed back," Kennedy said of bonuses. "And this time, I hope somebody goes to jail."

On Friday, Biden called on Congress to grant the FDIC the power to force the return of compensation paid to executives at a broader range of banks should they fail, and to lower the threshold for the regulator to impose fines and bar executives from working at another bank.

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Pointing fingers

The recent bank failures create an opportunity to shape the political narrative for next year's election.

While Republicans are saying that regulators were "asleep at the switch," they are also trying to tie Biden and Democrats to the turmoil by blaming them for higher inflation, which is leading to the higher interest rates and reduced the value of Silicon Valley Banks investments.

"A failure of the bank, a failure with regulators, and without any question, a failure at the top," said Sen. Tim Scott, R-S.C., in reference to Biden.

Democrats are pinning the failures on the changes Republicans led in scaling back Dodd-Frank requirements for certain banks, saying it's an example of how Washington caters to powerful interest groups rather than average voters.

"The 2018 rollbacks permitted the banks to take on more risk in order to boost their profits," Warren said. "So what did they do? They took on more risks, boosted their profits, gave their executives big bonuses and salaries, and then blew the banks up."