WASHINGTON — On Monday, a day after federal regulators stepped in to stem a potential crisis triggered by two sudden bank failures, Senator Elizabeth Warren was seething. After all, she had warned five years ago that this was coming.
“What just happened is the direct result of the change in the laws in 2018 that weakened oversight and invited bank CEOs to take on more risk,” Warren said. “They took on that risk, they boosted their profits and they’ve blown up a couple of banks so far.”
A decade after the 2008 financial crisis, then-President Trump and congressional Republicans pushed to loosen regulations on midsized banks in response to complaints from industry lobbyists. Warren and many Democrats said it was a bad idea.
“This bill will increase the likelihood that American taxpayers will be on the hook for another bailout,” the Massachusetts Democrat said at the time.
But a bipartisan coalition voted to ease some of the tough reforms of the 2010 Dodd-Frank law that were put in place to prevent future bank failures. Among the provisions was one that raised the threshold for banks to undergo strict federal oversight, from $50 billion to $250 billion, a change aimed at helping institutions like Silicon Valley Bank and Signature Bank.
Now after those banks both failed in recent days, opponents of looser regulation are saying “We told you so” while calling for a return to tighter regulation to avoid another rescue like the one the federal government executed Sunday for uninsured depositors.
It was a point made by President Biden during a speech early on Monday as he sought to assure Americans that “our banking system is safe.”
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses,” he said.
Republicans, who just last week were urging even looser bank rules, are unlikely to go along. But some oversight still could be increased by banking regulators at the Federal Reserve with discretion granted under the 2018 law.
Daniel Tarullo, a former Fed governor who led its effort to enact the Dodd-Frank reforms, expects that’s what the central bank’s regulators will do once they get past this problem.
“Do they need changes in regulation? Or is it really just a handful of banks, and then they can have a set of supervisory thresholds that get them to look more closely” at those institutions, said Tarullo, who left the Fed in 2017 and now is a Harvard Law School professor. “I don’t know the answer to that, and I don’t know whether they know the answer to it now, but they certainly are able to get that answer.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress to prevent the extreme risk-taking by banks that led to widespread losses when the housing market collapsed in 2007 and almost caused a financial meltdown. Congress provided $700 billion to bail out the banks and wanted to avoid having to ever do that again.
The reforms included rigorous annual stress tests for banks with more than $50 billion in assets to make sure they could withstand negative shocks. But it just took a few years before banks began chafing at the new rules. Trump’s vow to eliminate regulations, paired with a broad, bipartisan consensus that small community banks should get some relief because their failure would not endanger the entire financial system, opened the door to a limited rollback. But lawmakers were divided on how far the relief should go for larger banks.
Republicans and the banking industry, including Silicon Valley Bank chief executive Greg Becker, pushed for the threshold for stricter oversight be raised to $250 billion. Many Democrats objected.
“This group of bankers lobbied hard to get Washington to treat banks above $50 billion, but below $250 billion, as if they were tiny little community banks that essentially posed no risk,” Warren said Monday. “It was obviously untrue at the time, and we’re just seeing the consequences of Congress buying that argument.”
The nonpartisan Congressional Budget Office said at the time the legislation would cost $671 million over 10 years, in part because it increased the risk a large financial firm would fail and have to be rescued. All but one Republican in Congress supported it. They were joined by 33 Democrats in the House and 16 Democrats and one independent in the Senate. Former Representative Barney Frank, a Massachusetts Democrat who coauthored the 2010 law, was a board member of Signature Bank in 2018 and advocated for lifting the threshold to $125 billion.
Silicon Valley Bank had $209 billion in assets at the end of last year and Signature Bank had $110 billion, so the 2018 changes helped both avoid tougher regulatory scrutiny.
Senator Mark Warner, a Virginia Democrat, voted for the 2018 legislation and said Sunday he did not regret it, blaming Silicon Valley Bank’s failure on bad management not lax federal oversight.
“I think it put in place an appropriate level of regulation on midsized banks,” Warner said on ABC’s “This Week.”
Tarullo said he opposed raising the threshold to $250 billion at the time, preferring instead a $100 billion ceiling.
“Going from 100 to 250, that’s a big chunk of the American banking system and that seemed to me problematic,” said Tarullo, who expressed his concerns in a letter to leaders of the Senate Banking Committee.
But he said Monday he thought the change had “at most a modest” effect on Silicon Valley Bank’s failure for several reasons, including changes the Fed made in its stress tests that might not have identified the bank’s exposure to rising interest rates.
“I’m not at all sure that the stress test would have raised particular concerns about Silicon Valley’s balance sheet,” he said.
Bert Ely, a longtime banking industry consultant, said he didn’t think the 2018 Dodd-Frank changes had any impact on Silicon Valley Bank’s failure and blamed it on incompetent regulators who did not spot what should have been obvious problems.
“All kinds of alarm bells should have been going off about this,” Ely said.
But Warren said the weakened regulatory oversight made it more difficult for regulators to spot risky bank activity that could lead to a failure. That was the same systemic flaw that led to the 2008 financial crisis and that Dodd-Frank was intended to fix.
“Banks want to boost their profits by taking risks,” she said. “The job of the regulators is to stop them from doing that.”
Warren said she will introduce legislation to reverse those 2018 changes as well push Fed officials to toughen the banking oversight using their own authority.
But passing such legislation is unlikely with the House under Republican control. And early this month, 10 Republicans on the Senate Banking Committee wrote to Fed chair Jerome Powell to say they were worried a Fed review that predated the bank failures could lead to requirements for institutions to hold more capital reserves to protect against losses.
They cited the 2018 changes they said were designed “to address the overly broad and overly prescriptive implementation” of the Dodd-Frank reforms and could “have a chilling effect” on the availability of financial services.
Warren said they’ve got it wrong again.
“When Congress intervenes to keep the regulators strong, then the banking system stays strong. But when Congress loosens up, the banking system itself starts taking on more risks,” she said. “Banking should be boring. That was the lesson we should have learned coming out of 2008. And it’s a lesson we need to relearn in 2023.”