In the wake of high-profile bank failures, the White House is calling on financial regulators to reverse rules established during the last administration that eased capital and stress testing requirements for midsize banks.
The failure this month of Silicon Valley Bank of Santa Clara, Calif., and Signature Bank of New York City has sparked a debate in Washington over whether policy changes contributed to the collapses and over proposals to prevent a repeat. The White House on Thursday outlined regulatory changes that would toughen requirements and oversight of midsize banks without relying on Congress to take action.
“The president believes that the weakening of commonsense bank safeguards and supervision during the Trump administration for large, regional banks should be reversed in order to strengthen the banking system and protect American jobs and small businesses,” a White House official said on a press call. The official spoke anonymously as a condition of the call.
Unlike earlier policy changes called for by President Joe Biden, including fining and confiscating the pay of executives at failed banks, the proposals outlined by the White House wouldn’t require action by Congress. The decisions would be made by independent banking regulators.
The White House asked the regulators to unwind the regulatory rollbacks undertaken during the Trump administration that eased capital requirements, reduced stress testing and eliminated the need to establish “living wills” for banks with $100 billion to $250 billion in assets.
The changes followed a bipartisan 2018 law that eased some Dodd-Frank financial overhaul requirements for banks with less than $250 billion in assets. Both SVB and Signature Bank fell within that category.
Fed Vice Chair for Supervision Michael S. Barr told congressional panels this week that the 2018 law left the regulator significant discretion in setting requirements for banks with $100 billion to $250 billion in assets. The Fed will look into whether changes need to be made to the 2019 rule that implemented that law, Barr said at House and Senate hearings.
Barr said Tuesday at a Senate Banking Committee hearing that he expects to increase capital and liquidity requirements for banks with more than $100 billion in assets.
House Financial Services Chairman Patrick T. McHenry, R-N.C., said the administration was politicizing the failures by blaming regulations when the regulators were at fault.
“There is no evidence that the original Dodd-Frank would have prevented these bank runs. Additionally, no recent stress test has considered the current economic conditions — most notably the Fed’s rapid rate increases to combat Democrat-induced inflation — that contributed to the fall of these institutions,” he said in a statement. “Instead of giving more authority to regulators who were asleep at the wheel before these bank failures, we should hold them accountable for their inability to utilize their existing supervisory tools.”
The White House also pushed regulators to apply stricter standards to banks more quickly as they grow. SVB crossed the asset threshold that would have required it to undergo more frequent stress testing in 2021 but wouldn’t have been subject to a stress test until 2024 because of transition rules, Barr told the House Financial Services Committee on Wednesday.
The president also asked regulators to test banks for the ability to withstand stress caused by high interest rates. Stress scenarios often test poor economic conditions typically accompanied by low interest rates, but SVB fell prey to rising interest rates that drove down the value of long-term Treasury bonds the bank held in reserve.
The White House proposals drew a swift rebuke from the banking industry.
“It would be unfortunate if the response to bad management and delinquent supervision at SVB were additional regulation on all banks that would impose meaningful costs on the U.S. economy going forward. The Fed has barely begun its promised review,” Bank Policy Institute President Greg Baer said in a statement. “This has a strong feeling of ready, fire, aim.”
The White House also weighed in on the fee the FDIC will charge banks to replenish losses to its deposit insurance fund incurred by covering uninsured deposits at the two banks, saying the assessment should exempt community banks. Members of Congress, particularly Republicans, have criticized the prospect of community banks bearing the cost of the SVB and Signature failures.
The Federal Deposit Insurance Corporation estimated covering deposits at both banks would result in a $22.5 billion hit to the deposit insurance fund.
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