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Mar 21, 2023
Congress Is Slow-Walking a Fix for US Banks Despite Failures
(Bloomberg) -- Speaker Kevin McCarthy and Senate Majority Leader Chuck Schumer don’t agree on much, but neither party leader in the US Congress is in a rush to push legislation addressing the failures of Silicon Valley Bank and Signature Bank.
Political divisions among Democrats and Republicans’ hardening stance against a legislative response diminish the chances that Congress will heed mid-size banks’ calls to increase the Federal Deposit Insurance Corp. cap or toughen supervision. In the coming weeks, the House and Senate will instead focus on hearings exploring the root causes of the collapses.
McCarthy and other Republicans blame regulators — rather than a lack of regulations — for the failures and the troubles at First Republic Bank. They also point the finger at the rippling effects of inflation, which they say occurred on the Democrats’ watch, as well as spiked interest rates, weakening the banks’ long-term securities holdings.
A number of moderate Senate Democrats voted for an 2018 easing of regulations and so far aren’t saying they were wrong to do so.
Progressive Democrats want to impose stress tests and tighter liquidity and capitalization standards on mid-size banks. But Schumer, once known as “the senator from Wall Street” and the No. 2 Senate recipient of funds from commercial bank employees and their political action committees, wants to find a bipartisan solution — not an easy task in the current political climate.
“They have done a good job on stopping the contagion but there is more to do and we are going to look at a lot of different things,” Schumer said Tuesday, explaining his approach.
Here is a state of play on the various options before Congress:
Raising the FDIC Cap
Mid-size banks want to eliminate the $250,000 limit on FDIC deposit insurance for two years, and administration officials are weighing whether they have authority to do so on a temporary basis. A major run on the banks could force Congress to take up such a bill, if the administration can’t act by fiat. Deposits were guaranteed at SVB and Signature under existing executive power because the banks had already failed.
The House Freedom Caucus, a powerful group of conservatives that has McCarthy’s ear, has argued that congressional action to raise the cap would encourage excessive risk-taking. Others, like Missouri Representative Blaine Luetkemeyer, a senior member of the House Financial Services Committee, said they could agree to lifting the cap, but only temporarily and if it’s actually needed.
The idea has some support in the Senate, where some Republicans like Thom Tillis and Mike Rounds are weighing it. Democratic senators Elizabeth Warren and Mark Warner also said they are open to the idea, but Warren said the level of the new cap requires study. House Democrat Ro Khanna said his staff have reached out to Utah Republican Mitt Romney’s office to discuss adding premiums for large depositors to cover the additional costs.
President Joe Biden has urged Congress to approve tougher punishments including taking back compensation from executives whose actions contributed to the failure of their institutions, saying current laws limit the ability to hold executives accountable.
Senator Richard Blumenthal, a Connecticut Democrat, has proposed legislation that would specifically target Silicon Valley Bank’s executives, after reports that Chief Executive Officer Greg Becker sold millions of dollars in SVB stock shortly before the collapse and that some bank employees got bonuses hours before the government closed the bank.
The legislation would impose a 90% tax on executive compensation bonuses and a 100% tax on profits earned from stock sales within 60 days prior to the bank’s collapse. Similar legislation was introduced in the House by two Democratic California lawmakers, Adam Schiff and Mike Levin.
Changing Fed Boards
Senator Bernie Sanders, a Vermont independent, is introducing a bill to ban bank executives from serving on the boards of Federal Reserve banks that oversee them.
“One of the most absurd aspects of the Silicon Valley bank failure is that its CEO was a director of the same body in charge of regulating it: the San Francisco Fed,” Sanders said Saturday on Twitter.
This is the kind of low-hanging fruit that could pass Congress with relative ease, especially paired with a clawback of bonuses.
Reinstating Stress Tests
Progressive Democrats Warren and Representative Katie Porter of California want to reinstate “stress tests” for mid-size banks. These detailed bank-capital evaluations were put in place in the 2010 Dodd-Frank law but then rolled back by Congress eight years later in the 2018 legislation that drew support from some Democrats.
The Warren/Porter measure would require these bank-run tests for institutions with $10 billion or more in assets, rather than $250 billion threshold in the 2018 bank deregulation law. The legislation also would reset the threshold for other standards associated with risk-taking by banks.
House Republicans are against it, but some elements of increased supervision could make their way into a bipartisan bill should the crisis worsen. Compromises could be found by putting the asset level closer to $250 billion than $10 billion.
Warren said Tuesday any FDIC cap change should be tied to tighter regulations.
(Updates with reference to 2018 legislation, starting in fourth paragraph.)
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