Heidi Heitkamp is a former Democratic senator from North Dakota, and currently serves as director of the University of Chicago’s Institute of Politics. She can be the founding father of the One Country Project, a corporation dedicated to advancing rural America, and a CNBC contributor.
Inside hours of the Silicon Valley Bank collapse, political spin machines on each the left and right got cranking. Before all of the facts were in and any solid evaluation could happen, the “never let a superb crisis go to waste” mentality of Washington, D.C., kicked in. Pointing fingers as an alternative of protecting American consumers took center stage.
The best blamed woke capitalism and ESG (environmental, social and governance policy) investing. Florida Gov. Ron DeSantis announced, without proof, that the bank’s concentrate on ESGs diverted “focus from (the bank’s) core mission.” Rep. James Comer, R-Ky., current chair of the House Oversight Committee, stated SVB was “one among the most woke banks of their quest for the ESG-type policy and investing.”
Implying that SVB’s ESG policies caused the collapse might make sense if SVB was invested primarily in green energy. However the bank was largely invested in classically conservative Treasury bonds and mortgage-backed securities. As Dean Baker, a senior economist on the Center for Economic and Policy Research, said in response to the claims, “Perhaps government bonds are actually woke, (but) that’s what got them into trouble.”
Some on the left pointed fingers at deregulation. Immediately after the collapse, Rep. Katie Porter, D-Calif., and Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., were quick to say that each one of this could possibly be prevented if only a 2018 bill that amended the Dodd-Frank Act had never passed.
I used to be one among the Democrats on the Senate Banking Committee who negotiated that laws, which granted regulatory relief to small community and mid-sized regional banks. It was designed to course-correct the bank consolidation that followed the passage of Dodd-Frank. In only 4 years after the bill passed, the dimensions of enormous banks increased by 6.3% while 14% of small banks disappeared and their share of domestic deposits and banking assets shrank by 6.5% and a couple of.7%, respectively.
Dodd-Frank, created to stop financial institutions from becoming “too big to fail,” was having the other result. Under the burden of increased regulation, smaller institutions and lots of regional banks were struggling to remain competitive. Unlike the mega-banks which enjoyed huge “economies of scale,” smaller banks couldn’t absorb the regulatory costs.
I’m willing to be persuaded that we made a mistake after we took that step, and that if we had not, Silicon Valley Bank and Signature Bank would still be operational. But to be honest, I actually have yet to see a sound argument that the collapses were attributable to our laws.
While it exempted banks with assets between $50 billion and $100 billion from the mandatory application of the improved regulation requirements of Dodd-Frank, those banks were still subject to supervisory stress tests, and the Fed still retained the power to use other prudent standards to ensure a sound bank and sound banking system. On the time of passage, the Federal Reserve had already recognized that not all banks need the identical level of regulation, and consequently the Fed was “tailoring” its application of the regulations. Our bill simply drew a brilliant line for when that “tailoring” can be conducted; the Fed actually still had the ability to offer enhanced regulation to SVB based on its risk profile.
The law didn’t require changes to the liquidity-coverage ratio for banks of SVB’s size, within the range of $100 billion to $250 billion in assets. Regulators used their very own discretion to make those changes.
Also, quarterly liquidity stress tests were still mandated by the law. Apparently, those tests weren’t conducted at SVB. In the event that they were, they didn’t appropriately discover the rate of interest risk. (By the best way, no bank in America could pass a “run on the bank” stress test. If all of the bank depositors withdrew their deposits on the identical day, any bank would fail no matter liquidity or bank capitalization.)
The 2018 law didn’t alter bank regulators’ powers to resolve failing banks and address financial instability. It didn’t prevent the Fed from imposing an increased level of supervision. The Fed had the authority to reinforce the present level of regional bank supervision, a step the central bank is considering within the wake of the SVB failure.
Contrary to the present political spin on each the precise and left, no shareholder or bank executive is getting “bailed out.” Once the smoke clears, the U.S. government is not going to have spent a dime of taxpayer dollars to guard depositors whose deposits exceeded $250,000.
Early indications are that the capital of the failing banks will likely be greater than adequate to cover any costs. The truth is, to ensure that the Federal Deposit Insurance Corp. would have adequate resources to cover deposits in excess of $250,000, the FDIC withdrew $40 billion from the U.S. Treasury on March 10. That cash was redeposited just 4 days later.
The Biden administration appropriately intervened to shore up confidence within the American banking system. The FDIC has guaranteed deposits beyond $250,000 to stop the contagion of further bank runs. The Fed is reviewing its own supervisory actions, which should include an assessment of whether every other regional bank has the identical rate of interest risk and is being appropriately supervised. The Justice Department is investigating insider trading allegations.
More facts will emerge in the approaching weeks and months. We’d like to take a look at the facts and ignore the spin machines. Sadly, I fear the unintended consequence of the political finger pointing will prompt individuals and businesses to maneuver deposits to the 4 biggest banks, institutions that are truly too big to fail.
That consolidation is strictly the trend that the 2018 laws sought to stop.