Capitol Hill Round-Up: Following the Bank Failures
March 20, 2023
Silicon Valley Bank’s (SVB) and Signature Bank’s failure has roiled lawmakers and reignited conversations on how banks should be regulated.
Why it matters: Policymakers don’t fully agree on what led to the run on bank deposits or if regulation, supervision, or bank management was to blame. But if Congress finds common ground on a culprit, legislation could come swiftly. Regardless, we expect federal regulators to take action.
Key Themes: Oversight hearings are being scheduled and a few themes will likely morph into legislation. Treasury Secretary Yellen faced the Senate Finance Committee last Thursday, where senators peppered her with questions about the bank failures.
- Lax Regulation: Sen. Elizabeth Warren (D-MA) has been trumpeting the lack of regulation as a key factor for the large regional bank demise and distress. She and other progressives point to the bipartisan 2018 law S. 2155 that, among other things, exempted smaller banks from certain capital and liquidity requirements. Supporters of S. 2155 have pushed back on these claims.
- Lax Supervision: Some Republicans have blamed federal regulators, particularly the San Francisco Fed for SVB, for not flagging problems and taking action within their supervisory powers. House Financial Services Chairman Patrick McHenry (R-NC) and Senate Banking Ranking Member Tim Scott (R-SC) have demanded a review of two years worth of regulatory activities regarding both banks.
- Bank Management: Bipartisan criticism is focused on SVB’s business mix and asset/liability mismatch: high concentration of uninsured short-term tech deposits and long-term hold-to-maturity bonds. Signature has come under criticism for its crypto holdings, though most of the political ire has focused on SVB.
- Deposit Insurance: There may be a bipartisan consensus on increasing deposit insurance. But some lawmakers characterize the after-the-fact coverage of SVB deposits as a bailout for the tech and venture capital industries, who they say received sweetheart deals for banking with SVB.
- Social Media Frenzy: Technology now allows bank news and deposit activity to move rapidly. While the root causes of the downturn in investor and depositor confidence in these institutions is still being debated, the chatter on social media fed the deposit exits and eventual collapse. Customers’ ability to move large amounts of money at the sign of trouble is a new reality for banks.
- Woke: A handful of commentators have blamed the collapses on ESG priorities. Sen. Ted Cruz announced an oversight investigation and framed the action as “Biden’s Big Tech Bailout”.
What’s next: Legislative proposals and hearings are in the works.
- Bank Exec Penalties: On Friday, President Biden proposed legislation that would target executives of failed banks by making it easier to claw back compensation, hold them legally liable, and banning them from future bank jobs. While there could be some bipartisan appetite to increase punishment on executives, it is unclear if the bill will gain bipartisan traction.
- Deposit Insurance for All? Republicans have floated raising deposit insurance amount as a stabilizing factor. Public statements range from $500,000 on an individual basis, separate levels for business accounts, and even unlimited insurance. Rep. Blaine Luetkemeyer (R-MO) said temporary, unlimited insurance is necessary to prevent a flight of deposits from community banks. But the House Freedom Caucus has condemned universal deposit insurance. While the details will be important, more robust deposit insurance could be a likely legislative outcome.
- S. 2155 Repeal: Sen. Warren and others have proposed a bill to undo the reforms in S. 2155 (passed in May 2018). Passage is unlikely given original legislation was broadly bipartisan (67-31 in the Senate) and the scope was more limited. Additionally, commentators have argued the regulations rolled back under S. 2155 would not have prevented SVB or Signature Bank failures.
- Hearings Galore: Congressional committees are lining up to begin their investigations. The House Financial Services Committee announced it will hold a hearing on March 29 featuring FDIC Chair Martin Gruenberg and Fed Vice Chair for Supervision Michael Barr. Senate Banking will hold a hearing on the week of March 27th, likely with regulators and bank executives. Other committees may conduct oversight hearings, including Senate Commerce.
The bottom line: Congress is moving quickly to investigate and address the bank failures, but the real policy changes will likely come from regulators (more on that below). Contact David McCarthy (firstname.lastname@example.org) with questions.