Banks that collapsed over the last week were some of the top supporters of a 2018 bill to loosen regulations aimed at preventing another financial meltdown.
Silicon Valley Bank (SVB) and Signature Bank aggressively lobbied for the Economic Growth, Regulatory Relief, and Consumer Protection Act. The 2018 law exempted them from stringent stress testing and capital requirements in the 2010 Dodd-Frank Act that were implemented in response to the financial crisis.
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The bipartisan bill, signed by President Trump, made it so banks with $250 billion or less in assets were not “systemically important” — up from the previous $50 billion threshold — sparing banks from the strictest oversight conducted by the Fed.
Prominent Democrats are blaming the second-largest U.S. bank failure in history on changes made in the 2018 law.
“Unfortunately, the last administration rolled back some of these requirements,” President Biden said in a speech Monday, adding that he will ask Congress and banking regulators to “strengthen the rules.”
Such changes are unlikely to make it out of a GOP-controlled House or clear a Republican filibuster in the Senate, where Democrats have narrow majority limited by key absences.
In pushing for regulatory overhauls, SVB and Signature Bank argued that they weren’t a systemic risk to the economy, and thus shouldn’t be subject to the same rules as big banks.
But when federal regulators intervened on Sunday to ensure that depositors got their money back, they cited systemic risks to the banking system. Meanwhile, shares of top regional banks plummeted on Monday amid fears that depositors could move their money to larger institutions.
Lobbying campaigns helped boost 2018 law
SVB, which had $209 billion in assets at the end of last year, pushed lawmakers to lossen regulations on mid-sized banks to reduce compliance costs.
SVB chief executive Greg Becker told a Senate panel in 2015 that the bank “does not present systemic risks” and downplayed the idea that stricter regulations would reduce the risk of a collapse. He specifically floated the $250 billion cap that Congress would later enact.
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“These new burdens and the related compliance costs and necessary management time and other human resources are significant, and will require us to divert resources and attention from making loans to small and growing businesses that are the job creation engines of our country, even though our risk profile would not change,” Becker wrote in a written statement to lawmakers.
Seventeen Senate Democrats joined Republicans in voting for the bill — despite outcry from progressives — following a banking industry lobbying effort.
Amid debates over the bill, Signature Bank’s donations to Democratic senators spiked.
Sens. Joe Donnelly (D-Ind.) and Heidi Heitkamp (D-N.D.), two of lead Democratic cosponsors of the 2018 bill, received more campaign cash from Signature Bank executives than any other senators in the 2018 election cycle.
The company had been known for its close ties to Trump. Signature Bank was a top lender for the Trump family and once employed Ivanka Trump as a board member.
When asked about political donations, Signature Bank chairman Scott Shay told the Financial Times that it was “ridiculous and unacceptable” that the company would have to face the same regulations as the “mega ‘too big to fail’ banks.”
Sens. Heitkamp, Donnelly and Jon Tester (D-Mont.), another co-sponsor of the Dodd-Frank rollback bill, became the top three Senate recipients of campaign cash from commercial banks in the 2018 cycle, according to nonpartisan research group OpenSecrets. All three were members of the Senate Banking Committee who faced difficult re-election bids as Democratic senators in red states, though only Tester was re-elected.
Tester and other Democrats who ultimately voted for the bill defended their decision by pointing to remarks from former Rep. Barney Frank (D-Mass.), the namesake of Dodd-Frank, that the banking overhaul wouldn’t raise the risk of another financial crisis.
They didn’t mention that Frank was a board member at Signature Bank, a role that earned him over $300,000 in 2022, according to the company’s proxy statement.
SVB wasn’t subject to key regulations
The banking bill made it so that SVB did not have to undergo stress testing that measures the bank’s ability to withstand an economic downturn or other shocks. The Fed’s most recent stress test — which involved 33 large banks — found that all of the banks had the resources to stay afloat.
Under the law, banks with over $250 billion in assets face more stringent capital controls that require them to keep a larger reserve of liquid assets.
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SVB put far more of its depositors’ money into non-liquid investments than large banks that are subject to capital requirements. The bank invested heavily in long-term treasury bonds that lost value when the Federal Reserve hiked interest rates. News of its potential insolvency triggered a bank run that forced regulators to step in.
Progressives who opposed the 2018 bill pointed to a Congressional Budget Office (CBO) analysis finding that it would “increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail” because fewer assets are closely watched by regulators.
Supporters of the bill noted that the CBO analysis predicted a low chance of failure. Banking industry lobbyists argued that a mid-sized bank collapse wouldn’t cause broader risks to the system and that other Dodd-Frank rules were more than enough to keep the system stable.
“We fought hard, but the big banks and their lobbyists won this round,” Warren tweeted after the March 2018 Senate vote.
Banks lobbying against stricter controls
The banking industry is currently lobbying against stricter capital controls being explored by Michael Barr, the Fed’s new vice chair for supervision.
GOP lawmakers, who are often supportive of the industry and opposed to stricter bank rules, have to pressured the Fed against requiring the big banks to hold more cash. Scores of Republicans in the House and Senate questioned Federal Reserve Chairman Jerome Powell on the issue last week, echoing the industry’s argument that stricter requirements hurt banks’ ability to lend, reducing jobs and economic growth.
That sets up a potential clash with regulators, who are eager to prevent yet another bank collapse.
Barr on Monday announced that he will lead a review of how the Fed supervised and regulated SVB, and what the central bank “should learn from this experience.”
“In the aftermath of the recent failures, regulators will feel political pressure to increase both supervision and regulation of the banking industry,” Stiefel chief Washington policy strategist Brian Gardner wrote in a note.