In the spring of 2018, President Donald Trump signed a law that watered down the landmark regulatory reform act that his predecessor had enacted following the global financial crisis. The changes won a surprising supporter: liberal former congressman Barney Frank.
Frank was a primary architect of the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. But since his retirement in 2013, he had repeatedly voiced support for softening one of the law’s key planks: that any bank with more than $50 billion in assets should face especially intensive federal supervision.
The ensuing tweak — lifting the threshold to $250 billion — had big consequences. Among other things, scores of very large banks would escape, at least initially, the Federal Reserve’s annual “stress tests” and enjoy easier financial-safety requirements.
One beneficiary of the change was Signature Bank, a New York lender whose board of directors included Frank.
Now Signature is dead — a victim of a fast-moving crisis that has revealed the extent to which the banking industry and other opponents of government oversight have chipped away at the robust regulatory protections that were erected after the 2008 financial meltdown.
On Sunday, regulators shut down Signature, fearing that sudden mass withdrawals of deposits had left it on dangerous footing. Its failure came barely 48 hours after the collapse of Silicon Valley Bank, whose executives had joined Frank in successfully pushing to lift the $50 billion threshold.
The back-to-back bank failures have unnerved investors, customers and regulators, kindling fears of a repeat of the 2008 crisis that toppled hundreds of banks, led to enormous taxpayer-financed bailouts and sent the economy into a tailspin.
Federal regulators scrambled to defuse the situation, vowing to protect all deposits at Silicon Valley and Signature, and announcing an emergency lending program for other struggling banks. Even so, shares of regional banks were decimated Monday, with some falling by more than half as some customers rushed to withdraw deposits.
Much of the post-2008 regulatory infrastructure remains in place, and the industry is by most accounts on much sounder financial footing than it was 15 years ago.
In an interview Monday, Frank, who joined Signature’s board two years after he began calling for changes to the law, argued that the regulatory rollback did not set the stage for the recent collapses or a broader banking crisis.
Yet some of the banks now facing crises of confidence are the same ones that in recent years were telling lawmakers and others that they were sufficiently safe and that they should not be the focus of zealous federal supervision.
Many of those banks argued that onerous federal regulations would make it harder for them to serve as alternatives to giants like Bank of America, JPMorgan Chase and Wells Fargo. Yet those behemoths are now likely to see an influx of deposits as skittish customers rush for safety.
And while regional banks managed to convince lawmakers that they were not systemically important back in 2018, regulators have apparently concluded otherwise in recent days. They agreed to rescue depositors at Signature and Silicon Valley Bank for the sake of safeguarding the broader financial system — a powerful reminder of how fears about a couple of banks, even if they are not America’s largest, can quickly infect an entire industry.
President Barack Obama signed the Dodd-Frank law in July 2010. At the signing ceremony near the White House, he effusively thanked Frank and his co-sponsor, Sen. Christopher Dodd, for having worked “day and night to bring about this reform.”
The law was a direct response to the brutal crisis that had just ended. But it was also a repudiation of the laissez-faire regulatory approach that had become ascendant in the United States and other countries over the preceding decades. Bank executives and lobbyists had persuaded policymakers that years of fat profits were proof that they knew how to manage their companies safely.
With that argument debunked, Dodd-Frank imposed a variety of measures to hem in the banking industry. There was a ban on certain types of risky trading. There were tougher requirements to guarantee that banks had the capacity to absorb unexpected losses and to withstand sudden depositor exoduses. And there were regular health checks to ensure that banks could withstand worst-case economic scenarios.
From the moment the law went into effect, the banking industry sought to rescind or at least relax it. Its argument was that onerous regulations constrained the industry’s ability to lend money to creditworthy customers.
The argument fell on deaf ears with Obama in the White House. Trump was more receptive. Barely a week after taking office, he called Dodd-Frank “a disaster” and told reporters that “we’re going to be doing a big number on” the law.
His top officials, many of whom had worked in or adjacent to the banking industry, began loosening the reins. Sometimes that meant tweaking rules; other times it meant simply being nicer to regulated banks.
On-the-ground examiners were urged to be less confrontational and to provide banks with positive feedback, not just criticisms. Trump’s comptroller of the currency, one of the top federal financial regulators, described banks as his agency’s “customers.”
“Changing the tenor of supervision will probably actually be the biggest part of what it is that I do,” Randal K. Quarles, who was in charge of bank regulation at the Federal Reserve, said in 2017.
That year, Republican lawmakers crafted bills to relax Dodd-Frank. One focus was the provision that subjected any bank with more than $50 billion in assets to undergo stress tests, to maintain greater financial reserves and to come up with plans for how the bank could be shut down in a crisis.
The legislation followed years of pressure from bank executives and lobbyists, including Greg Becker, who until Friday ran Silicon Valley Bank.
“Without such changes, SVB likely will need to divert significant resources from providing financing to job-creating companies in the innovation economy,” Becker warned lawmakers in 2015.
Harris Simmons, the CEO of Zions Bancorporation in Utah, was another trying to get out from under what he viewed as onerous federal supervision. He said that regional banks like his posed little, if any, threat to financial stability and that tough regulations were crimping their ability to serve customers.
“If regulations on regional banks were eased, those banks would have additional capital — as much as $4 billion each year — to lend,” Simmons wrote in American Banker magazine in 2017. To bolster his case, he cited Frank’s support of raising the $50 billion threshold.
Zions, which has more than 100 branches in three states, is now among the banks being pummeled by anxious investors. Its shares sank about 25% on Monday. A Zions spokesperson did not respond to a request for comment.
Supporters of the 2018 changes said they still made sense, even as a new crisis unfolded. “These mid-sized banks needed some regulatory relief,” Sen. Mark Warner, D-Va., said on ABC News on Sunday.
In the interview Monday, Frank said the legislation’s goal had been to focus on the country’s very largest banks and not to saddle smaller institutions with stringent rules or oversight.
If the $50 billion threshold had remained in place, Signature would have either needed to stop expanding or been subject to the Federal Reserve’s stress tests and other requirements designed to curb aggressive risk-taking and ensure its safety.
Instead, thanks to the 2018 change, Signature was free to have a growth spurt. It went from about $47 billion in assets at the time to $110 billion last year. It expanded into six states.
One recent source of growth was cryptocurrencies; starting in 2018, the bank had been among the few lenders to accept deposits in the form of crypto assets. By Friday, concerns about the bank’s exposure to cryptocurrencies had set off a deadly run on its deposits.
Frank, who received more than $2.4 million in cash and stock from Signature during his seven-plus years on the board, left the job Sunday as regulators dissolved the board. He said Monday that the bank was the victim of overzealous regulators. “We were the ones who they shot to encourage others to stay away from crypto,” he said.
He added that even though Signature had received less federal scrutiny than it otherwise would have, state regulators in New York had still been on top of the bank.
“I didn’t see any diminution of the supervision we were getting,” Frank said. “There was a lot of scrutiny.”