(Bloomberg) — Eight years ago, Greg Baker delivered a clear message to lawmakers in Washington: The bank he ran was not like Wall Street.
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As chief executive officer of SVB Financial Group, he urged Congress to pass legislation that would allow his firm’s employees to avoid the thousands of hours they spend each year undergoing stress testing and preparing resolution plans. His was a simple lender, not like the global systemically important banks that regulators should focus on.
“The evidence is clear that the Dodd-Frank Act framework for G-SIBs is not appropriate for SVB and our peers,” Baker said in comments to the powerful Senate Banking Committee. “The cost is high, not only for us, but also for our customers.”
Baker was hardly alone. Groups of executives from other small and medium-sized banks, known collectively as regional lenders, were making a similar case. Eventually, they all got their wish.
In 2018 – a decade after a crisis that nearly brought down the global financial system – then-President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law. This freed medium-sized firms like SVB from some of the tighter post-crisis regulations and cut their compliance costs.
“One size fits all – those rules don’t work,” Trump said at the White House, calling for the “crippling” rules to be removed. “They shouldn’t be regulated like big complex financial institutions, and that’s what happened and they were being put out of business one by one.”
More than a dozen Democratic senators joined Republicans in supporting the measure.
Fast-forward five years: Three regional banks, including SVB’s Silicon Valley bank, have collapsed in the past week and some are arguing that Baker’s so badly light touch actually hastened their demise.
an argument breaks out
The collapse of the Silicon Valley bank on Friday was the biggest US bank failure in more than a decade. It sent shock waves around the world. Until regulators stepped in two days later to say that all depositors would be made full, quiet fear, and to take over Signature Bank, another regional lender, critics of the 2018 rollback were waiting to pounce.
“We’ve known since 2008 that stronger regulations are needed to prevent this type of crisis,” said Democratic Representative Ro Khanna, who represents a district in California that includes parts of Silicon Valley. “Congress must come together to reverse the policies put in place under Trump to prevent future instability.”
Trump spokesman Steven Cheung said in a statement that Democratic critics were trying to blame the former president for “his failures with desperate lies” on a range of issues. “This is nothing more than a sadistic attempt to gaslight the public to avoid responsibility,” he said.
President Joe Biden said Monday he would seek tougher rules. He told reporters that he would ask lawmakers and federal watchdogs to “strengthen regulations for banks to make it less likely that such a bank failure will happen again, and to protect American jobs and small businesses.” For.”
The Wall Street giant dwarfs lenders such as SVB, Signature and Silvergate Capital Corp., which said it was voluntarily liquidating last week. But, collectively, regional lenders have grown rapidly and now count trillions of dollars in assets. They play a vital role in the American economy, providing funding for industries ranging from wineries to technology startups.
Following the collapse of SVB, Federal Reserve regulators – in private consultations with top industry executives – are taking stock of the 2018 regulatory pullback.
The biggest banks are trying to turn that argument on its head, which Baker and other regional bank executives have successfully done over the past decade. Rather than crack down even more on Wall Street giants with tougher stress tests, they argue, regulators should spend more time on smaller firms, which they have largely ignored in recent years, according to sources familiar with the discussions. According to people
Some officials are pointing to Fed vice chair for oversight Michael Barr’s comments last week that the regulator is handling the smallest lenders, known as community banks, with a “too light-hearted approach.” To be sure, the Silicon Valley bank was the 16th largest US lender before its failure and would not be considered a community bank.
A representative for the Fed declined to comment.
Rate of interest
In their private discussions with executives, big bank executives have pointed to moves by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in 2019 — when they allowed banks with less than $700 billion in assets to exit. To recognize swings in so-called accumulated other comprehensive income in their regulatory capital.
This was meant to make the key capital ratio less volatile, but may have helped make smaller lenders more comfortable taking on the risk in their bond portfolios, as losses would be less likely to immediately threaten stock buybacks and dividends.
It definitely played out in SVB. In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds, according to documents seen by Bloomberg. This change will reduce the risk of large losses if interest rates rise sharply. But it will have a cost: an estimated $18 million shortfall in revenue, with another $36 million hit from there.
The officers laughed. Instead, the company continued to pour cash into high-yielding assets. This helped propel profits to a record 52% in 2021 and helped propel the firm’s valuation to over $40 billion. But as rates rise in 2022, the firm has taken more than $16 billion in unrealized losses on its bond holdings.
During the past year, some employees requested to convert the company’s balance sheet into shorter-term bonds. Repeated requests were turned down, according to a person familiar with the talks. The firm began making some rescues and selling assets late last year, but the moves proved too late.
Neither Baker nor an SVB representative responded to requests for comment.
“I have no doubt that if this bank were subject to much tighter regulation, they would not be allowed to buy long-term Treasuries and long-term debt instruments insured by the federal government — basically, mortgage-backed securities, Brad Sherman, a Democratic congressman from California, said on Sunday. “They would have been induced to buy short-term equipment and we would not have had that conversation,” he said.
Big losses weren’t unique to SVBs: At the end of last year, US banks recorded $620 billion in unrealized losses on available-for-sale and held-to-maturity portfolios, according to filings with the FDIC. But SVB’s investment portfolio had grown to 57% of its total assets. No other competitor had more than 42% among the 74 major US banks.
And some banks saw it coming. JPMorgan Chase & Co initially faced pressure from investors when it did not immediately deploy additional deposits into securities, but firm executives said they would have more cash on hand if necessary.
JPMorgan had the credibility to make such a call, partly because its $48 billion investment in 2021 was the most profitable year for any US bank in history. And it spoke to a concern that sparked some regulatory rollbacks: Consumers were flocking to digital banking, and with JPMorgan and its giant rivals spending tens of billions each year on the technology, there was a fear that smaller firms simply wouldn’t. Can keep Reducing their compliance costs, the thinking went, at least gave them a better shot at running.
After last week’s fiasco, the FDIC is still figuring out what to do with SVB. The regulator tried to arrange the sale of the bank and solicited bids from potential buyers. But regulators felt the timetable was too tight before markets opened on Monday, and they instead invoked a so-called systemic-risk exception, allowing the FDIC to back SVB’s uninsured deposits. The move mitigated market shocks and the agency may still consider options to sell all or part of SVB.
There was a feeling that if a 17th bank the size of JP Morgan went down, it would not be catastrophic. But the turmoil in the tech industry and fears of contagion are calling into question that logic.
In December 2022, more than 12 years after the Dodd-Frank Act became law, SVB filed its first resolution plan with the FDIC. No one knew they would use it weeks later.
– With assistance from Craig Torres, Alison Versprill, Ed Ludlow and Mark Nickett.
(Update with comment from Biden in 12th paragraph.)
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