The President of the United States corrected. On March 13, following the fall of Silicon Valley Bank and Signature Bank, he said he would ask “Congress and regulators” to tighten regulation so other similar cases wouldn’t happen again. This Thursday, he specified the list of tasks he deems necessary, but with one important nuance: Congress is exiting the equation. “Each of these points can be achieved under current law,” the White House has admitted. In other words, the rule he is defending fits into legislation that Congress reformed during Donald Trump’s tenure as president.
Biden’s inquiries are now being directed “in consultation with the Treasury Department” to the Federal Reserve, i.e. to an independent body in consultation with its own administration. Despite this, the White House has decided to use the fall of these two banks politically to blame former President Donald Trump, albeit with some confusion over the powers that correspond to each bank.
Recent appearances in Congress by the Vice President for Oversight of the Federal Reserve, the President of the Federal Deposit Insurance Corporation (FDIC) and an Undersecretary of the Treasury Department have made it clear that the current legislation allows for more stringent oversight than the one carried out by the central bank becomes. And that despite the regulation in place, it recognized the problems in 2021 and urged managers to take corrective action, but would not have done so until March 2023. “It doesn’t sound like a very urgent oversight process to me,” said Rep. French Hill, an Arkansas Republican. And fellow Republican Blaine Luetkemeyer, a Missouri congressman, insisted: “How about we enforce the ones we already have before we announce tough new rules for banks?”
Nevertheless, the spokeswoman for the White House, Karine Jean-Pierre, assured this Tuesday that the collapse of the two banks was due to the regulatory changes of the Trump era, according to “experts”. A 2018 change in legislation passed by Congress, which was supported not only by Republicans but also by numerous Democratic congressmen, gave the Federal Reserve more flexibility in gradually overseeing mid-sized banks with assets of $100,000 to $250,000 million.
The new law exempted Silicon Valley Bank from certain liquidity requirements and as such weakened its position, but the bank’s decline was largely due to the bank’s particular profile, managerial clumsiness, and an accelerated cash flight. And it also eliminated the need to stress test those banks, but Federal Reserve Vice Chairman Michael Barr assured the Senate that those tests, as designed, didn’t help the Silicon Valley bank fall impede.
In any case, the law passed in 2018 gave the central bank the opportunity to become more sophisticated in regulation and supervision. Biden knows he wouldn’t have enough support, even among his congressmen, to change that. So the to-do list the White House is now unfolding are primarily duties for Trump-appointed Jerome Powell, who is now in office after being confirmed for a second term by Biden and the Senate under Democratic control.
The White House’s recommendations are consistent with those that congressmen solicited from authorities at their Capitol appearances this week and admitted were necessary. The Federal Reserve itself has launched an internal investigation and is awaiting its conclusions to formulate proposals to improve regulation and oversight, but the White House has chosen to go ahead.
liquidity and capital
Biden calls for more liquidity requirements and stress tests. “Silicon Valley Bank’s liquidity stress contributed to its failure and was quickly passed on to other banks. Banking regulators are encouraged to consider reintroducing these requirements and conducting rigorous liquidity stress tests that take into account the risks of rapid withdrawals in an always-on online environment,” the White House said.
Another requirement is stress tests for solvency. “When Silicon Valley Bank failed, it was never subjected to a comprehensive capital stress test despite having more than $200 billion in assets. Concerns about the bank’s capitalization contributed to the loss of confidence and the withdrawal of deposits,” the Biden administration said, although that concern had little to do with the results of some tests.
Regulators also removed the requirement that bank holding companies in the $100 billion to $250 billion size range, like parent Silicon Valley Bank, submit comprehensive resolution plans (also known as “living wills”) during Trump’s tenure. ) and declared that the bankruptcy of these banks would not threaten the financial system. “But the failures of Silicon Valley Bank and Signature Bank have clearly shown that bank failures of this magnitude can pose systemic risk. Therefore, banks and holding companies of this size should have plans outlining how they could be liquidated without spreading stress to the rest of the banking system,” Biden said.
The White House is also calling for sufficient capital buffers to absorb possible losses in stressful situations such as those suffered by the Silicon Valley Bank. “There is still a lot to be done to fully implement the capital regulations after the financial crisis,” he admits.
Biden shifts some more oversight and endowment responsibilities to the Deposit Insurance Fund, making it clear that Trump-era legislation can do all of this. Still, he concludes, “It is important to put in place sound safeguards to reverse the Trump administration’s damaging weakening of bank safeguards and oversight, and to ensure that local and regional banks remain resilient and continue to support small businesses, businesses and support jobs.
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