Tue, March 14, 2023 at 12:27 AM GMT+9·4 min read
The stunning events around Silicon Valley Bank of California and Signature Bank of New York come after years of moves in Washington to ease capital requirements on smaller and regional banks — including one that came just last week.
In a letter dated March 3 to Federal Reserve Chair Jerome Powell, Sen. Tim Scott (R-SC), the ranking member of the Senate Banking Committee, and nine of his GOP colleagues expressed concern that an ongoing Federal Reserve review may go beyond a 2018 law that eased regulations on smaller banks and “may unjustly increase capital requirements and have a chilling effect on market making activities and availability of financial services.”
The letter was timed to coincide with Powell’s testimony last week before Congress and referenced a 2022 speech from Michael Barr, the Fed’s vice chair for supervision, where he discussed the Fed taking a holistic review of capital standards.
The letter pushed back against ideas for increasing the buffer that banks are required to hold in reserve to guard against losses, arguing that banks “seem to have weathered the real-life stress test of the COVID-19 pandemic well.”
Within days, the banking sector saw the second- and third-largest bank failures in history.
A spokesperson for Sen. Scott stood by the letter in a statement to Yahoo Finance on Monday, saying that ”capital must continuously be scrutinized to ensure it is risk based and is tailored to the bank’s size, scope, and activities. What’s happening with Silicon Valley Bank highlights why we cannot have a one-size-fits-all approach.”
The argument was notably an echo of how Greg Becker, then the CEO of Silicon Valley Bank, lobbied for what eventually became the 2018 law, saying in 2015 that tighter rules are “not appropriate for SVB and our peers.” Democrats also immediately jumped on the letter, with Sen. Elizabeth Warren (D-MA) saying the push for easing rules came “at exactly the wrong time.”
In a separate statement Sunday, Scott criticized the actions from the White House, saying “a culture of government intervention does nothing to stop future institutions from relying on the government to swoop in after taking excessive risks.”
‘We’ll do whatever is needed’
Other Republicans urged Washington to move slowly in response to the crisis.
House Financial Services Committee Chairman Patrick McHenry (R-NC) said “it is important to remain levelheaded and look at the facts — not speculation — when assessing the right path forward.”
Others in the GOP focused on the ample examples of mismanagement within the two failed banks and also blamed regulators for missing the warning signs.
“We have a massive federal bureaucracy, and yet they never seem to be able to be there when we need them to be able to prevent something like this,” said likely presidential candidate Gov. Ron Desantis (R-FL) on Fox.
Either way, the mood within Washington may be changing quickly with Isaac Boltansky, managing director and director of policy research at BTIG, predicting in a note that the crisis was shifting the political winds.
“Our sense is that [the crisis] will be used as the key rallying cry to advance more onerous capital and resolution requirements for super regional banks,” he wrote.
Much of the focus from policymakers is already on that 2018 bipartisan law signed by then-President Trump called the Economic Growth, Regulatory Relief and Consumer Protection Act. That bill — one of the largest banking reform efforts since the landmark Dodd–Frank reforms of 2010 — eased some of the regulations imposed by the latter law.
Sen. Bernie Sanders (I-VT) called the 2018 law a direct cause of the current crisis. Biden himself previewed that an effort to reverse those rollbacks was coming.
“Unfortunately, the last administration rolled back some of these requirements. I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again,” Biden said Monday morning.
“We will not stop at this. We’ll do whatever is needed.”
Ben Werschkul is Washington correspondent for Yahoo Finance.
