Jeff Stein and Rachel Siegel
Wed, March 29, 2023 at 11:35 AM CDT ·6 min read
The White House is preparing to call for federal banking regulators to impose new rules on midsize banks, prompted by the collapse of Silicon Valley Bank earlier this month, according to two people aware of internal discussions. But it appears unlikely that the administration will ask Congress in the immediate future to undo a deregulation law passed five years ago with bipartisan support.
In the meantime, lawmakers continue to press for answers on how the financial system became so vulnerable to failures of SVB and Signature Bank. On Wednesday, top officials from the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation testified before the House Financial Services Committee, where members grilled the regulators on they knew about a run on SVB before it failed on March 10 - and on officials' responsibility for the failure.
"I think that anytime you have a bank failure like this, bank management clearly failed, supervisors failed and our regulatory system failed," said Michael Barr, the Fed's vice chair for supervision who is running an internal investigation. "We're looking at all of that."
President Biden is expected to seek tougher regulations as part of his response to the crises, which led the administration to backstop billions in deposits that had been uninsured because they were over the $250,000 limit for federal protection. The new oversight measures would need to be implemented separately by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Biden aides will pitch the plan as necessary to prevent similar bank emergencies - and similar federal interventions - in the future, said the people, who spoke on the condition of anonymity to describe plans not yet released.
The exact details of the White House's recommendations are not clear, but they will try to reestablish rules for banks with between $100 billion and $250 billion that were deregulated by Congress and the Fed during the Trump administration, the people said. Among the measures White House aides have discussed include imposing higher capital requirements on the banks, meaning they would need to have a larger share of safe assets relative to their riskier loans; requiring them to have greater stores of immediately available cash; and mandating they formulate plans for an orderly dissolution in the event of a crisis, the people said. The banks would also be required to undergo more frequent "stress tests" from federal regulators that assess their financial health.
The people familiar with the deliberations said discussions were still under flux and could change before the White House's plans are finalized.
A White House spokesperson declined to comment.
The Fed and FDIC are also conducting investigations into this month's financial panic and are expected to announce their own recommendations to strengthen banking rules. Testifying Tuesday before the Senate Banking Committee, Barr, FDIC Chair Martin Gruenberg and Nellie Liang, undersecretary for domestic finance at Treasury, said that banks with more than $100 billion in assets may need tougher oversight. The government will also review the federal insurance program that protects deposits. Barr said that the Fed's investigation will look at the power of social media in fueling online panic, with results to come by May 1.
But lawmakers have raised concerns about regulators' ability to investigate themselves and are practically guaranteed to launch their own probes. Rep. Maxine Waters (D-Calif), the committee's ranking member, said that Wednesday's hearing was "the first of what I expect will be several."
Members of Congress have tried to piece together a timeline of what the Fed knew, and when, about SVB's mismanagement. Supervisors cited SVB repeatedly from the end of 2021 until shortly before its demise. But the bank never did enough to prevent its failure. Rep. Patrick McHenry (R-N.C.), who chairs the committee, said Congress learned March 10 - the day SVB collapsed - about an "idiosyncratic" bank failure, but didn't get much of an update from regulators again until two days later, near the end of a chaotic weekend that thrust the entire financial system into chaos.
Still, Rep. French Hill (R-Ark.) noted that Barr's job sat empty for seven months in 2022 before he was confirmed over the summer. When asked who was responsible for taking over the regulatory portfolio, Barr, who was tapped for the job by Biden, said that he did not know what the technical process was for delegating that authority.
"We had a lack of supervisory urgency here," Hill said.
The emerging proposal reflects the Biden administration's determination to blunt criticisms that its decision to backstop the deposits of large Silicon Valley firms amounted to a bailout for the powerful and politically connected. Biden and Treasury Secretary Janet L. Yellen have repeatedly emphasized that taxpayers won't be on the hook to protect those deposits, because the Federal Deposit Insurance Corporation's insurance fund is paid for by fees charged to banks.
But Republicans have attacked the administration for intervening on behalf of California firms. Democrats, in turn, have sought to highlight the GOP's opposition to tougher rules on banks as a possible factor in the crisis.
The Fed, which is independent of the White House, will have discretion over whether to implement the recommendations.
Biden has also already called for Congress to pass legislation allowing regulators to claw back executive bonuses and stock sale proceeds from SVB's senior executives - a measure that lawmakers appeared open to during a hearing on Tuesday.
"The White House can't tell them what to do, but they can ask very nicely," said Todd Phillips, a fellow at the Roosevelt Institute and a former attorney at the FDIC. "Silicon Valley was not going to be stress-tested until 2024 under the Fed's tailoring provisions - that's just insane for a bank of its size."
But Biden is not expected to call for Congress to repeal the 2018 banking law that rolled back many regulations. That law mandated that the Fed repeal regulations for banks under $100 billion, while giving it discretion over how to handle regulation for banks with between $100 billion and $250 billion in assets. In 2019, the Fed did loosen restrictions on those banks.
Returning to a fight over that bill could splinter the Democratic Party and spark a fight the White House may want to avoid, given many centrist Democrats' support for the 2018 measure. Twelve Democratic senators have also written to the Fed urging it to tighten rules for banks between $100 billion and $250 billion in assets, as well, although their provision would also stop short of repealing the legislation outright.
Republicans are also expected to resist any push to impose more oversight over the midsize banks, arguing the extra scrutiny could slow economic growth.
"I don't think that we're doing the banking industry any service going forward if we talk about, 'Now we just got to rein in the small banks,'" said Sen. Thom Tillis (R-N.C.) at a hearing on Tuesday.
