What to do at SVB?

The collapse of Silicon Valley Bank (SVB) and the problems with Signature Bank have lawmakers and politicians searching for answers. There is little consensus on what lawmakers might do in response – if anything.

They just want to be on the right side of the issue – whichever side that ends up on.

For the Democrats, they defend moves by the Biden administration.

Meanwhile, Republicans want to make sure President Biden takes the blame.

Or at least make some political hay with it. That’s why some Republicans castigate the SVB as “bright” – even if that has little to do with the balance sheet.

No one wants people getting hosed for their life savings. But moves by President Biden and the administration to reassure depositors opened the door for Republicans to begin proposing it was a “bailout.”

“I’m concerned about the precedent for guaranteeing all deposits and market expectations going forward,” said Sen. Michael Crapo, R-Idaho, chief GOPer on the Treasury Committee and past chair of the Banking Committee.

The Democrats disagreed.

“The banks are already paying for this federal deposit insurance to secure these accounts. The banks will pay a little more. Taxpayers aren’t on the hook, period. We would never have that. There would be no support for that,” said Banking Committee Chair Sherrod Brown, D-Ohio.

Everyone remembers how toxic the word “bailout” was in 2008 when the economy was on the brink. No legislator wanted to heat up the economy. But lawmakers weren’t too keen on the passage of a $700 billion bailout package to save jobs and banks, either. After a few scary fits and starts, Congress finally approved TARP, short for the Troubled Asset Relief Program.

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This experience is instructive on how politics and other considerations enter the equation.

There is concern that there could be a “run on banks”. Especially in the social media age.

“This will go down in history as the first internet-powered run,” said Sen. Mark Warner, D-Va.

And Treasury Secretary Janet Yellen questioned how much the federal government might do if a “bank run” goes viral.

The jury remains open almost 15 years later as to whether TARP was a good thing or a bad thing. But it saved the economy and probably millions of jobs. Otherwise it might have been worse than 1929.

But one wonders, in today’s volatile political climate, if Congress could ever muster the votes to pass another contingency measure if a similar financial collapse swept the nation, ala 2008.

Fortunately, Congress doesn’t have to respond to such a thing — yet. However, lawmakers are considering tightening lending rules and looking closely at what went wrong at the SVB.

“How come you fell asleep at the counter?” asked Senate Minority Whip John Thune, RS.D., about banking regulators.

Senate Majority Leader Chuck Schumer, DN.Y., dodged questions about whether members were spooked by the 2008 exercise.

“I have faith in President Biden, (Treasury) Secretary (Janet) Yellen and the Federal Reserve,” Schumer said. “They have all hands on deck to handle this and keep our economy healthy.”

The Federal Reserve and regulators are now investigating the SVB. A report is due in early May.

“The events surrounding the Silicon Valley bank require a thorough, transparent and timely review by the Federal Reserve,” said Fed Chair Jerome Powell.

Imagine the questions Powell might have asked of lawmakers if SVB had imploded just before it appeared on Capitol Hill last week.

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, testifies before the Senate Committee on Banking, Housing and Urban Affairs on June 22, 2022 in Washington, DC. Powell testified during the hearing on the semi-annual monetary policy report to Congress. (Photo by Win McNamee/Getty Images)

Sen. Elizabeth Warren, D-Mass., opposed Powell’s reappointment as Fed Chair. She has used the SVB crisis to highlight her issues with Powell.

“I was against[Powell]precisely because he was too casual about regulations,” Warren said. “I thought it was dangerous to have someone like Powell, who was willing to deregulate the banks, at the helm of the Fed. And I think part of that danger has shown itself now.”

Warren proposes legislation to tighten regulations.

One of the things to consider is whether the Dodd-Frank Bank Overhaul Act of 2010 provides adequate backstops and oversight. Democrats are criticizing the Trump administration for rolling back some of Dodd-Frank’s requests that they believe contributed to problems with SVB. Keep in mind that many Republicans rejected Dodd-Frank in response to the 2008 financial collapse.

That’s why, 15 years after the 2008 disaster, questions like “too big to fail” still ring. A 2018 law raised the “too big to fail” threshold for assets from $50 billion to $250 billion. Still, it’s unclear what scrutiny the SVB should have obtained from federal authorities, regardless of assets and liquidity needs.

But some Republicans aren’t digging into the 2018 legislation.

“The call for more regulation is a distraction that is not a solution to a failed basic surveillance,” Crapo said. “This event was a fundamental regulatory oversight failure of poor financial risk management strategies.”

Warren said that “repealing” the 2018 law “should be an immediate priority for Congress.” Warren says the 2018 measure “weakened the rules for banks like SVB”.

The bottom line is that the SVB invested more in US securities. As interest rates rose, these holdings became more problematic for the SVB.

It’s unclear what other institutions may have invested in US Treasuries and what the impact of higher interest rates might be. There are also questions about the Fed and whether it will be allowed to continue raising rates for now.

Powell testified before the Senate Banking Committee last week – and predicted more rate hikes.

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“Recent economic data is stronger than expected, suggesting that the final interest rate level is likely to be higher than previously expected,” Powell testified. “If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes.”

Fed watchers believed Powell could hike rates to 5.5 to 5.75 percent.

If the Fed continues to hike rates, it could reveal volatility from banks investing in Treasuries and mortgage-backed securities. However, the Fed has launched another lending program, available on an emergency basis, to provide cash to institutions at risk from interest-bearing inventories. Bank takeovers could give the Fed more flexibility to continue raising interest rates as a tool to fight inflation. And so far, rising rates seem to be the only tool the Fed can really use to curb inflation.

A customer stands outside a closed Silicon Valley Bank (SVB) headquarters in Santa Clara, California, March 10, 2023. Silicon Valley Bank was shut down by California regulators on Friday morning and placed under the US Federal Deposit Insurance Corporation. (Justin Sullivan/Getty Images)

The Fed wants to make sure investors have access to their cash while also dealing with inflation.

But don’t expect immediate movement from Congress unless it leads to a deeper crisis. Any prospective action is months away — and certainly delayed until the Federal Reserve completes its review in six weeks.

That’s not to say there won’t be jawboning.

“The government just had to step in this weekend to stop bank runs because bank lobbyists have too much power in this city,” Brown said. “It’s the same story that happened over and over again. It happens on railroads. It happens in the pharmaceutical industry. It happens at oil companies, and Congress pays more attention to their contributors and their friends in the lobbying community than it does to the workers back home.”

One school of thought is that because the SVB was so technology-oriented, inspectors may have overlooked this. Note that the signature bank, which also imploded, was 20 percent leveraged into cryptocurrency.

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“The only thing nobody here understands at all,” grumbled Sen. Michael Bennet, D-Colo.

Another theory is that regulators have pushed financial institutions into Treasuries.

But perhaps the saving grace is that this is not a crisis requiring immediate action from Congress, ala 2008.

That’s because lawmakers would struggle to pull anything across the finish line.