Rapid and forceful public intervention has so far prevented the fall of Silicon Valley Bank, as well as those of Signature Bank and SilverGate, from becoming a major crisis in the United States. What happened, however, has already placed the country’s economic authorities and regulators facing the mirror of its deficiencies in the controls and supervision of the banking sector and is leading them to rethink now regulations and standards. And they do it at the same time that one is free intense political war between Democrats and Republicans, with crossed accusations about the causes and responsibilities of the current turmoil.
The Federal Reserve, that it has already launched a review of its own supervisory performance against Silicon Valley Bank with which it has said that it hopes to “learn lessons & rdquor ;, is studying andTighten capital and liquidity requirements for medium-sized entities as was the Californian bank, according to ‘The Wall Street Journal’.
In addition, the Fed is considering taking steps to expand stress testing to banks that have between 100,000 and 250,000 million dollars in assets. In this way, it would considerably lower the threshold that since 2018 limited these tests only to those that exceeded 250,000 million, a handful of entities that were considered systemically vital, those that after the 2008 and 2009 crisis fell into that category popularly known as “too big to fall”
change of step
It’s a change of pace for the Fedwhose president, Jerome Powell, advocated reducing regulations for the medium-sized banks that had been imposed with the Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank Act, approved under the mandate of Barack Obama in 2010, which in addition to imposing stricter federal supervision to any bank with more than 50,000 million in assets established financial security requirementsthe veto some risky operations either tougher warranty requirements that they could absorb unexpected losses or leakage of deposits.
Powell took that position in 2017, when he was undergoing a confirmation hearing in the Senate after being appointed by Donald Trump to chair the Federal Reserve and taking over from Janet Yellen, an advocate of strong regulation. And he supported this relaxation of controls also in 2018 in his first appearance before Congress, already at the helm of the US central bank. Although the nonpartisan Congressional Budget Office wrote that the Dodd-Frank lowering bill “will increase the likelihood that a large financial firm with assets between $100 billion and $250 billion will go under,” the rule passed the Houses, with majority republican support but also from democrats (17 in the Senate and 33 in the House of Representatives), and after intense lobbying by regional and medium-sized entities such as Silicon Valley Bank itself.
The 2018 law and the political war
There is divided opinions about whether what happened in the last few days can be directly linked to the relaxation of controls of the Dodd Frank law with the law of 2018. Some do think so, such as progressive senators Bernie Sanders and Elizabeth Warren. The latter also has asked Powell to recuse himself from the Fed’s internal review (at the head of which the vice president of supervision, Michael Barr, has been placed) ensuring that “His actions directly contributed” to the collapse of the banks of the last week.
Others, like Dennis Kelleher, director of the financial reform organization Better Markets, think the 2018 law may have had a “modest impact & rdquor;. Even so, Kelleher has pointed out in statements to CNN acTrump-appointed Fed aggressors who relaxed bank supervision and they did not even take advantage of powers that the norm gave them. In the case of Silicon Valley Bank, for example, they could have urged the entity to draw up plans to counteract weaknesses, such as the high percentage of deposits that exceeded $250,000 and therefore were not insured by the Federal Deposit Insurance Corporation (FDIC) or concentration in a particular area and industry (California technology).
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Most of the republicans they have preferred to point to other factors as causes of what happened. Florida Governor and potential 2024 Republican presidential candidate Ron DeSantiswho as a congressman voted in favor of the 2018 law, leads a campaign that the collapse is due to the supposed wave “woke & rdquor; on the bankswhich includes both the criteria of diversity, equality and inclusion (DEI) as well as the environmental, social and good governance (ESG in English, ASG in Spanish). In addition, it is blamed on Joe Biden’s spending policies, to which the rise in inflation is attributed, to which the Fed has responded with aggressive rate hike policies that affected SVB’s bond investments.
Although the blocks are not unitary and there are divisions between both Democrats and Republicans, the two striking faults venture difficult for anything to be approved in a divided Congress where each party controls one of the Chambers.