New laws, and new investigations, often follow bank crises.
And after the collapse of three banks in five days, calls are growing both for a tightening of banking regulations and investigations into the executives at the helm of the three failed institutions: Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank.
This, as both the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are reportedly investigating SVB’s collapse, while lawmakers are revisiting the existing laws on the books and the Federal Reserve is weighing tougher rules for midsize banks.
The probes by the DOJ and SEC are separate and still in their preliminary phases, and it is impossible to predict whether anything substantial will be unearthed by their efforts.
What is more likely is that the current, comparatively lighter stress tests and capital and liquidity strictures for lenders with less than $250 billion in assets may be sunset or revamped in favor of stricter regulatory and supervisory oversight for banking institutions that are large but not large enough to be considered globally systemic under current regulations.
SVB had $212 billion in assets when it failed, below the existing threshold of $250 billion, yet the Treasury Department and the Fed still took extraordinary measures last weekend (March 12) to backstop SVB’s collapse and fully protect its depositors.
Industry observers believe these actions prove that any designation of banks with less than $250 billion as not being “systematically important” has, in effect, failed its own real-life stress test.
The oversight threshold for tighter supervision of banks by the Federal Reserve was at one point set much lower at $50 billion, but in 2018 — as part of a bipartisan effort — that checkpoint was raised to $250 billion, meaning smaller banks below that level were no longer required to go through the same extensive tests of their financial health that larger “systematically important” institutions did.
“Right decision,” Sen. Mitt Romney, R-Utah, tweeted in response to Sunday’s news of the government’s action.
What Lawmakers Are Saying
Tuesday (March 14), Sen. Elizabeth Warren, D-Mass., alongside other Democratic peers, introduced new legislation to repeal the 2018 deregulations they allege allowed for SVB’s dramatic collapse and the closure of Signature Bank.
The name of the proposed bill is the “Secure Viable Banking Act,” or the “SVB Act.”
SEC Chair Gary Gensler on Wednesday (March 15) said that SVB’s dramatic implosion was “a reminder of the importance of these resiliency projects for everyday Americans,” and called for a strengthening of “the guardrails of finance.”
Speaking in advance of his agency’s issuance of regulatory proposals around cybersecurity and data protection, Gensler added, “Lest we forget, 8 million Americans lost their jobs, millions of families lost their homes, and small businesses across the country folded as a result of the financial crisis of 2008. To that end, I think the SEC has a responsibility to help protect for financial stability.”
A class-action lawsuit has been filed against SVB’s parent company, SVB Financial Group, alongside both the company’s CEO and CFO, who sold portions of their company stock before SVB’s collapse.
Gensler on Sunday (March said that, “without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”
Rep. Patrick McHenry, R-N.C., chair of the House Financial Services Committee, called SVB’s collapse the “the first Twitter-fueled bank run.”
Sen. Tim Scott, R-S.C., a member of the Senate Banking Committee, said in a statement that, “Building a culture of government intervention does nothing to stop future institutions from relying on the government to swoop in after taking excessive risks.”
“The proximate cause, of course, was the failure of bank management, but also a failure of bank supervision and a failure of government policy as the underlying cause, overspending by the Democrats which fueled inflation,” said Rep. Andy Barr, R-Ky., who chairs the Financial Services Subcommittee, which oversees the Federal Deposit Insurance Corporation (FDIC), among other regulatory bodies.
The Fed is leading a review of the supervision and regulation of Silicon Valley Bank, in light of its failure, the results of which will be published by May 1.