Banking Turmoil Caused by SVB Mismanagement, Not Trump-Era Rollbacks: FDIC Official
Banking Turmoil Caused by SVB Mismanagement, Not Trump-Era Rollbacks: FDIC Official

By Andrew Moran

Former President Donald Trump’s loosening of rules in the banking sector in 2018 “had nothing to do with” the failure of Silicon Valley Bank and Signature Bank, according to Federal Deposit Insurance Corporation (FDIC) Vice Chairman Travis Hill.

Since the collapse of SVB and Signature Bank, a chorus of Democrats have asserted that the former president’s signing of the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act contributed to the banking turmoil last month.

Five years ago, the legislation, which gained support of Republicans and moderate Democrats, reversed some of the requirements in the landmark Dodd-Frank bill that was enacted following the financial crisis more than a decade ago. The Great Recession-era bill mandated banks with more than $50 billion in assets to go through an annual stress tests by the Federal Reserve. The Trump-era legislative pursuit—S. 2155—raised the threshold to $250 billion.

Hill disagrees with some Democratic lawmakers’ charges, saying that S. 2155 “had nothing to do with” the recent regional banking failures.

“We have people searching under the couch cushions, under the carpets, under the mattress, in the storage closet, trying to find something, somewhere to tie the SVB failure to that law and its implementing rules,” Hill said during a speech at the Bipartisan Policy Center. “I think it’s quite obvious that S. 2155 had nothing to do with it.”

The Federal Deposit Insurance Corp (FDIC) logo at the headquarters in Washington on Feb. 23, 2011. (Jason Reed/Reuters)

The Trump-era rollback did not alter capital standards for banks like SVB, Hill noted. Instead, the stress tests failed to account for rising interest rates, which many say caused SVB to face the challenges it did, particularly as the financial institution invested in government bonds as the central bank tightened monetary policy.

If SVB had undergone rigorous stress tests, industry observers believe that the company would have passed anyway since these mechanisms determine how a financial institution would manage an environment of falling GDP, rising unemployment, and tighter credit.

“The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them,” he stated.

“When it comes to something like this, I encourage people to first look at the facts, and then arrive at conclusions, rather than starting with a conclusion you hope to be true, and grasping around for facts in support. And I urge policymakers to propose policy changes based on where we find evident holes in our framework, rather than just trying to undo policies of the past. ”

He does believe there are “holes” in the current regulatory framework that requires “a need for tailoring.”

Hill purported in his speech that proposals to toughen regulation and impose restrictions on medium-sized banks comparable to their larger counterparts are not the issue. According to the FDIC official, it is instead about approaching interest rate risk correctly.

Despite the banks’ mismanagement, Hill agreed with the actions taken by the FDIC, the Treasury Department, and the Federal Reserve, conceding that he worried about the uninsured depositors who may have been saving for a home. He acknowledged that there were plenty of “unknowns about how far it may have spread” and a pressing need among officials to mitigate a contagion event.

“Ultimately … it was really just about trying to stop what looked like a wave of bank failures,” he said.

Moving forward, supervisors will be researching and reviewing what happened, and how these types of risks can be avoided in the future.

Fed Vice Chair for Supervision Michael S. Barr confirmed in testimony to Congress that he would spearhead a review to assess a broad array of issues that emanated from the banking crisis, including the issues of business concentration, digital bank runs, social media, and interest rate risk.

Meanwhile, the FDIC is poised to announce a plan next month requiring the U.S. banking sector to pay for the billions of dollars gone from the Deposit Insurance Fund (DIF).

FDIC Chair Martin Gruenberg said in prepared remarks at a Senate Banking Committee hearing last month that the failures of SVB and Signature cost the insurance fund approximately $23 billion.

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