Federal Reserve Chairman Jerome Powell took heat from lawmakers in both parties days before the collapse of Silicon Valley Bank because of worries about a proposed plan to raise capital requirements for banks.
At a hearing of the House Financial Services Committee last week, lawmakers asked Mr. Powell repeatedly why the Fed was considering raising the level of easily sold assets that certain banks must have. Rep. Ann Wagner, Missouri Republican and chair of the subcommittee on capital markets, noted that Mr. Powell had served with the Fed for more than 10 years since Congress imposed tighter financial rules on banks after the 2008-2009 collapse.
The lawmaker demanded of Mr. Powell, “Have you seen any real-world evidence that America’s banks are undercapitalized?”
Two days later, the nation’s 16th-largest bank became insolvent.
Ms. Wagner said Monday that the SVB collapse “is not a systemic issue, and I have confidence in our banking and financial systems.”
“My staff and I have spoken directly with all relevant regulators, the Missouri Bankers Association, local small and mid-size banks, and we continue to gather information so we have a complete understanding of the situation,” she said in a statement. “Congress has no plans to use taxpayer dollars to bail out banks.”
SEE ALSO: Biden defends ‘safe’ banking system amid biggest collapses since 2008
She wasn’t the only lawmaker raising doubts last week about the Fed’s plans for boosting bank capital. The committee chairman, Rep. Patrick McHenry of North Carolina, said Republicans were interested in what he called “concerning developments” at the Fed.
“Are we to read into this that we’re not adequately capitalized and there’s a high level of risk in the system that we’re unaware of at this point?” Mr. McHenry asked the Fed chair.
After the SVB collapse, Mr. McHenry called it “the first Twitter-fueled bank run.”
“It is important to remain levelheaded and look at the facts — not speculation — when assessing the right path forward,” he said in a statement. “I have confidence in our financial regulators and the protections already in place to ensure the safety and soundness of our financial system.”
Rep. David Scott, Georgia Democrat, also pressed Mr. Powell about new capital requirements before the collapse. “I want you to reverse this,” he said.
“If you all go along with this, it could put many of our regional banks and small community banks out of business,” Mr. Scott said.
SEE ALSO: Sen. Elizabeth Warren blames Congress for Silicon Valley Bank failure, says it weakened oversight
Mr. Powell received a letter this month from 10 Republicans on the Senate Banking Committee who similarly pushed back on the Fed’s plans to increase the amount of money that banks are required to hold to absorb losses. Commercial banks have donated $5.8 million to the campaigns of Republicans and Democrats on the committee since the start of the 2018 election cycle, according to OpenSecrets.org.
The leader in those campaign donations is Sen. Raphael G. Warnock, Georgia Democrat, with more than $804,000.
The Fed, the Treasury Department and the Federal Deposit Insurance Corp. have announced that all deposits at Silicon Valley Bank and Signature Bank in New York will be guaranteed beyond the $250,000 limit. President Biden said individuals and entities with deposits had access to their money starting Monday and taxpayers wouldn’t be on the hook for any losses from SVB’s failure.
Yet the rescue program is backstopped by the Treasury Department, which is funded by taxpayers.
Signature Bank has among its board of directors former Rep. Barney Frank, a Massachusetts Democrat who co-authored the Dodd-Frank bank regulations of 2010. Now 82, Mr. Frank partly blamed cryptocurrency for the bank’s collapse.
“Digital currency was the new element entered into our system,” Mr. Frank told Bloomberg on Sunday. “A new and destabilizing — potentially destabilizing — element is introduced into the financial system. What we get are three failures.”
A third entity, crypto-friendly Silvergate Bank, last week announced it would “voluntarily liquidate” its assets and wind down operations.
Mr. Biden blamed the Trump administration for the bank failures. He said Republicans rolled back some of the Dodd-Frank regulations in 2018.
Conservatives say the fault belongs with the Fed for raising interest rates rapidly in the past year to curb inflation. Republicans say inflation was worsened by Democrats’ massive spending over the past two years.
“The Biden bank bailout is a result of Biden’s failed economic policies,” said Club for Growth President David McIntosh. “And it will make things worse — other banks and their customers will pay the price, all Americans will suffer, mass inflation will start back up again. Organizations that can’t manage risk should be allowed to fail, and taxpayers should not be forced to bail out the well-connected and wealthy because a bank prioritized woke causes above smart investing. Changing the rules after the crash to prop-up liberal investors at the expense of taxpayers is pure crony capitalism.”
Some critics have cited the bank’s focus on climate change and other political issues as part of its investment strategy — the environmental, social, corporate governance, or ESG, philosophy.
The bank’s website said its policies “serve those creating positive environmental change,” including alternative energy solutions and agricultural “breakthroughs.”
Mr. McIntosh said additional regulations proposed by Mr. Biden “would only make the situation worse and further consolidate power among the big banks and hurt regional banks that small businesses rely on.”
Alfredo Ortiz, president and CEO of the conservative Job Creators Network, said the Fed’s interest rate hikes “have destroyed the value of the Treasurys held on banks’ balance sheets, making them financially vulnerable.”
“This banking crisis demonstrates that Biden’s regulators and past financial regulations, including the destructive Dodd-Frank legislation, are no match for the economic reality that Biden and Democrats continually ignore,” he said.
Fed Vice Chair Michael Barr said in December that the central bank had plans to beef up capital requirements for big banks by conducting a broad review. He said current requirements were “toward the low end of the range described in most of the research literature.”
Mr. Powell testified to Congress last week that no decisions had been made and that any move by the Fed would be tailored to the relative size and risks taken on by banks. He said any decision would not affect smaller, regional banks.
Republicans repeatedly warned Mr. Powell that raising the requirements would harm economic growth by reducing the amount of capital available for lending.
“In the past, you’ve stated that banks were well-capitalized,” Rep. Roger Williams, Texas Republican, told Mr. Powell. “Numerous economic studies have found that raising capital requirements for banks will increase borrowing costs for their consumer and commercial customers. So do you believe that raising capital requirements would raise the cost of borrowing and add cost to our economy and Main Street America?”
Mr. Powell said higher levels of capital allow banks to keep lending in bad times, but too much capital “probably” limits credit availability.
“It’s always a trade-off,” Mr. Powell said. “We’re trying to strike that balance, always.”
Sen. Elizabeth Warren, Massachusetts Democrat and champion of stricter oversight of the financial sector, blamed the chaos on the Trump-era measure that rolled back protections of the Dodd-Frank Act.
“No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Ms. Warren wrote in a New York Times opinion piece. “In 2018, the big banks won. With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank.”
She said the SVB collapse could have been avoided if Congress hadn’t weakened oversight of liquidity rules and capital requirements. Under the 2018 law, banks with less than $250 billion in assets were exempted from Fed stress tests.
SVB had about $200 billion in assets, making it a large institution but under the threshold.
“They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses,” Ms. Warren wrote. “But because those requirements were repealed, when an old-fashioned bank run hit SVB, the bank couldn’t withstand the pressure — and Signature’s collapse was close behind.”
• Tom Howell Jr. contributed to this report.