Days after the failure of two regional banks rocked the financial industry, senators on Capitol Hill say they want answers but disagree on what steps to take and how quickly to act.
Many Americans are concerned about the possible ripple effect of the collapse of Silicon Valley Bank in California and Signature Bank of New York on the banking industry, technology and their own wallets.
Biden administration officials are now calling for calm and looking to find out what went wrong.
In the face of criticism, Federal Reserve Chairman Jerome Powell said this week that the agency’s vice president will conduct a review of his supervision and regulation of Silicon Valley Bank, due to be published on May 1.
Meanwhile, some lawmakers offer their own explanations for what happened, though they vary.
Some Democrats blame a bipartisan rollback of landmark Dodd-Frank banking regulations during the Trump administration, while others say it’s not clear that would have made a difference. And lawmakers have conflicting ideas about what Congress should do now.
Republican Senator Mike Rounds of South Dakota, a member of the Senate Banking Committee, said morning editionSteve Inskeep’s on Thursday that it’s still unclear when Silicon Valley Bank underwent its latest stress test: a health assessment that the Fed conducts annually for the largest banks and periodically for somewhat smaller banks like Silicon Valley. .
Although the bank’s assets quadrupled from just over $51 billion in early 2018 to just under $212 billion last year, Rounds says regulators probably didn’t think stress-testing the company was a priority.
“They may very well have been in a position where regulators said, ‘We’ll catch it on a different date,’ or ‘We’re not concerned about it yet,'” Rounds adds. “The real question for us is: does the Fed think the regulatory environment it has set for the bank was accurate, was it the right one?”
A review of the collapse of the Silicon Valley Bank
Silicon Valley Bank, the 16th-largest bank in the country and a favorite of powerful technology investors, collapsed on Friday, becoming the largest US bank to fail in more than a decade.
Signature Bank of New York followed suit days later, and both banks are now under the control of federal regulators.
The Biden administration has tried to reassure Americans that the banking system is safe, even as the chaos has reverberated throughout the financial industry.
Some panicked customers are moving their money from regional banks to the biggest lenders, which could reshape the banking landscape in the long run.
Shares fell on Wednesday amid fears the turmoil would turn global, as European bank Credit Suisse grappled with its own financial woes (its shares rose on Thursday after announcing it would borrow billions from Switzerland’s central bank). ).
And the Federal Reserve, which is due to meet next week to decide on another possible interest rate hike, now faces scrutiny for what critics call a lack of bank supervision.
Critics say the Fed, which was the bank’s top federal overseer, missed clear red flags about its financial health. Some also blame a 2018 law, signed by then-President Donald Trump, that struck down regulations on banks the size of Silicon Valley Bank.
Congress loosened restrictions a decade after the 2008 crisis
Lawmakers took action after the country’s 2008 crisis by passing the Dodd-Frank Act in 2010, which set new rules for banks and lending practices.
Among them, he increased supervision of large banking institutions, which he defined as those with more than $50 billion in assets.
The banks lobbied against the regulations, pushing to change that threshold to $250 billion. It also faced heavy criticism from Republicans, including Trump, who promised in 2016 that he would dismantle it and took steps in that direction during his time in the White House.
In 2018, Congress voted to reduce some regulations on small and midsize banks.
Lawmakers from both parties argued that the strict rules set by the Dodd-Frank Act were forcing local and community banks to close.
Still, those setbacks were not without their critics.
Democratic Sen. Elizabeth Warren warned at the time that easing restrictions could put the banking industry on a slippery slope.
He drew an even more direct line in on Wednesday, when he spoke out against “a crisis that was created when Donald Trump and the Republicans, with some help from Democrats, rolled back basic banking protections.”
Warren, along with dozens of Democrats, including Rep. Katie Porter, D-Calif., and Sen. Bernie Sanders, I-Vt., introduced legislation this week to repeal the 2018 law.
“If we hadn’t allowed regulators the discretion to loosen banking regulations, then regulations wouldn’t have been loosened,” Warren said. “We need strong stress tests in place. It was a mistake to remove them. We have to put them back.”
Lawmakers disagree on how to proceed
But other lawmakers warned against quick action.
Sen. Tim Kaine, D-Va., who voted in favor of the 2018 Dodd-Frank review, would prefer to wait for the results of the Fed’s investigation into what happened to Silicon Valley Bank.
“So I think we should look at that and then decide what are the appropriate things for Congress or the administration to do,” he said.
Kaine said addressing the situation would require “putting the Fed under the microscope as well.”
“Did they have regulatory power that they didn’t use? That must be a question,” he said Wednesday.
Sen. Kevin Cramer, a Republican on the banking committee, said “We need to learn a lot more before we implement some sweeping and sweeping reforms,” adding that House and Senate committees would likely hold hearings on the matter, in addition to Justice Department investigations and a Federal Reserve review.
Moving too fast or too wide, he said, could fuel panic rather than alleviate it.
“The tendency to rush could backfire,” he said. “At the same time… we have to somehow create calm where calm doesn’t exist, particularly if it’s unwarranted alarm.”
Rounds is also in favor of gathering “all the facts first,” noting Thursday that only a week has passed since the crash and the Fed is just beginning its investigation.
Still, he is open to reviewing the 2018 legislation, noting that “there is no such thing as a perfect law.” The same is also true for the Fed, he adds.
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