By Ryan Morgan and Steve Lance | March 14, 2023 | NTD News
Congressman Mike Flood (R-Neb.) is pushing back on calls for new regulations after the sudden collapse of the Silicon Valley Bank (SVB) last week, saying lawmakers first need a better understanding of what led to the bank’s failure.
“We have to find out what was happening in Silicon Valley Bank; we need to find out what the regulators were doing,” Flood told NTD News on Tuesday, March 14.
In a White House address on Monday, President Joe Biden said the American banking system is safe. SVB depositors would be repaid through the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation (FDIC). Biden then called on Congress and banking regulators to strengthen regulations on banks and financial institutions.
Flood said the immediate call for new rules on banks could become “another round of regulation for regulation’s sake” and called for a greater understanding of how SVB failed before Congress takes any action.
Flood noted that SVB had seen a dramatic financial expansion in the last few years. According to data compiled by Macrotrends, the bank was valued at about $51 billion at the start of 2018 and grew to $220 billion by March 2022. Flood said SVB’s “meteoric rise” led him to question what existing regulators were doing before the bank collapsed.
“Let’s find out who didn’t do their job and why this bank was growing so fast, and what was contributing to it before we start to put the thumb down of the federal government on all the folks that are just trying to earn a living and relying on banks that are financially and fiscally sound,” Flood said.
Biden Blames SVB Collapse on Trump De-Regulations
In his White House remarks on Monday, Biden asserted that President Donald Trump and Republicans were to blame for SVB’s collapse because they supported deregulation.
“During the Obama-Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank, including the Dodd-Frank Law, to make sure the crisis we saw in 2008 would not happen again,” Biden said on Monday. “Unfortunately, the last administration rolled back some of these requirements.”
In 2018, Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law. The act effectively curtailed some components of the 2010 Dodd-Frank act, including the regulations on small and medium-sized banks.
Under Dodd-Frank, banks worth $50 billion or more in assets are considered systemically important financial institutions (SIFIs) or banks colloquially referred to as “too big to fail.” Out of concern that the failure of a SIFI would cause widespread economic harm, these “too big to fail” banks were subjected to enhanced supervision and regulatory standards. The Trump-era change in regulations changed the threshold for a SIFI from $50 billion in assets to $250 billion in assets but left it up to the discretion of the Federal Reserve Board (FRB) to determine what enhanced standards it would apply to banks with $100 billion or more in assets.
Some economists have disputed Trump’s share of the blame.
Thomas Hogan, a senior fellow at the American Institute for Economic Research and the former chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs, told Epoch Times that rising costs to comply with new regulations encourage banks to take riskier investments, increasing their likelihood of failures. In a 2021 study, Hogan wrote that risk-based capital (RBC) regulations led banks to invest in other financial instruments like mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), which exposed those banks to a higher probability of failure during the 2008 financial crisis.
Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, also argued that government banking regulations incentivized financial institutions to purchase long-term Treasurys and mortgage-backed securities.
“The government blames #SVB’s failure on management’s foolish decision to load up on long-term U.S. Treasurys and MBS [mortgage-backed securities]. But government banking regulations encouraged those purchases with favorable accounting terms; no haircuts or mark-to-market, despite high-interest rate risk,” Schiff tweeted on Monday. “All the #banks that were dumb enough to buy long-term Treasurys and MBS when yields were at record lows have now been bailed out by the #Fed. What about pension funds, insurance companies, and private investors who made the same mistake? Why don’t they get bailed out?”
Not a Typical Bank
SVB began in 1983 and advertised its services to businesses, ranging from startup and venture funding to later stages in a business’s life cycle.
“This by no means is a community bank,” Flood said of SVB.
“There’s a big difference between a bank like this, and the banks that we use every single day across the United States, the banks that I rely on here in Nebraska, that we know are safe,” Flood added.
In addition to noting the dramatic increase in SVB’s total value of assets in recent years, Flood also indicated that about 90 percent of depositors at SVB had deposited over $250,000.
The standard deposit amount insured by the FDIC is $250,000 per depositor at an insured bank for each account ownership category.
To replenish all SVB depositors, the FDIC will replenish the fund through a special assessment levied on its member banks. The evaluation serves as a sort of special insurance premium for the banks after these recent failures, enabling the FDIC to respond to future bank failures.
“Do we now send the message that every single bank that has a failure, we’re not going to set ourselves at $250,000? We’re gonna go up to make people absolutely whole?” Flood asked. “People have to understand that there’s a limit of [$250,000] for a reason.”
From NTD News