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Days after the collapse of two regional banks shook the financial industry, senators on Capitol Hill said they wanted answers but disagreed on what action to take and how quickly to act.
Many Americans are concerned about the potential impact of the collapse of California’s Silicon Valley Bank and New York’s Signature Bank on the banking industry, technology, and their own wallets.
Biden administration officials are now urging calm and trying to figure out what went wrong.
In the face of criticism, Federal Reserve Chair Jerome Powell said this week that the body’s vice chair will conduct a review of its oversight and regulation of Silicon Valley Bank, due to be released by May 1.
Meanwhile, some lawmakers are offering their own explanations for what happened – although they differ.
Some Democrats blame a bipartisan rollback of landmark Dodd-Frank banking regulations during the Trump administration, while others say it’s not clear if those made a difference. And lawmakers have conflicting ideas about what Congress should do now.
Said Republican Senator Mike Rounds of South Dakota, a member of the Senate Banking Committee morning edition‘s Steve Inskeep on Thursday that it’s not yet clear when the Silicon Valley bank completed its final stress test — a health assessment the Fed conducts annually for the largest banks and periodically for slightly smaller banks like Silicon Valley.
Though the bank’s assets quadrupled to just over $51 billion in early 2018 to just under $212 billion last year, regulators probably didn’t see stress testing the company as a priority, according to Rounds.
“They may have been in a position where regulators were either like, ‘We’re going to catch it some other time,’ or ‘We’re not worried yet,'” adds Rounds. “The real question for us is, does the Fed believe the regulatory environment they created for the bank was correct and right?”
A refresher on the collapse of the Silicon Valley bank
Silicon Valley Bank — the country’s 16th-largest bank and a favorite of powerful tech investors — collapsed on Friday, becoming the largest US bank to fail in over a decade.
New York’s Signature Bank followed days later, and both banks are now under the scrutiny of federal regulators.
The Biden administration has sought to reassure Americans that the banking system is safe even as chaos reverberates throughout the financial industry.
Some panicked customers are shifting their money from regional banks to larger lenders, which could change the banking landscape in the long run.
Stocks tumbled on Wednesday amid fears the turmoil would turn global as European bank Credit Suisse grappled with its own financial woes (its shares jumped Thursday after announcing it would borrow billions from the Swiss central bank) .
And the Federal Reserve, which was due to meet as soon as next week to decide on another possible rate hike, is now facing an investigation into a lack of oversight of the bank, critics say.
Critics say the Fed – which was the bank’s primary federal regulator – missed clear red flags about its financial health. Some also blame a 2018 law signed by then-President Donald Trump that rolled back regulations on banks the size of Silicon Valley Bank.
Congress eased restrictions a decade after the 2008 crisis
Lawmakers took action after the country’s 2008 crisis by passing the Dodd-Frank Act in 2010, which introduced new rules for banks and lending practices.
Among other things, it strengthened supervision of large banking institutions, which it defined as those with assets in excess of $50 billion.
Banks lobbied against the regulations, pushing to move that threshold to $250 billion. It has also been heavily criticized by Republicans, including Trump – who vowed to dismantle it in 2016 and took steps in that direction during his time in the White House.
In 2018, Congress voted to scale back some regulations for small and medium-sized banks.
Lawmakers from both parties argued that the strict rules of the Dodd-Frank Act would put local and municipal banks out of business.
Still, these rollbacks were not without their critics.
Democratic Senator Elizabeth Warren warned at the time that easing restrictions could send the banking industry down a wrong path.
She drew an even more direct conclusion On Wednesday, while speaking out against “a crisis that arose when Donald Trump and the Republicans, with some help from Democrats, rolled back basic bank protections.”
Warren this week joined dozens of Democrats, including Rep. Katie Porter, D-Calif., and Sen. Bernie Sanders, I-Vt., to introduce legislation repealing the 2018 law.
“If we hadn’t given regulators the discretion to weaken banking regulation, regulation wouldn’t have been weakened,” Warren said. “We need strong stress tests. It was a mistake to take her away. We have to reset them.”
The legislature is divided on how to proceed
However, other legislators warned against acting quickly.
Sen. Tim Kaine, D-Va., who voted for the 2018 Dodd-Frank revision, would rather await the results of the Fed’s investigation into the Silicon Valley bank incident.
“So I think we should look at that and then decide what are the appropriate things that either Congress or the administration should do,” he said.
Kaine said addressing the situation would require “looking at the Fed as well.”
“Did they have regulatory powers they didn’t use? That has to be a question,” he said on Wednesday.
Sen. Kevin Cramer, a Republican on the Banking Committee, said “We have a lot more to learn before we enact some sweeping, sweeping reforms,” adding that the House and Senate committees would likely hold hearings on the matter, in addition to investigations by the DOJ and a review by the Fed .
Moving too fast or too far, he said, can fuel panic rather than alleviate it.
“The tendency to rush could be counterproductive,” he said. “At the same time…we need to somehow create calm where there isn’t, especially when it’s an unwarranted alarm.”
Rounds also advocates “getting all the facts first,” stressing Thursday that it’s only been a week since the collapse and the Fed is just beginning its investigation.
Still, he is open to re-examining the 2018 legislation, noting that “there is no such thing as a perfect law”. The same goes for the Fed, he adds.