Signature and Silicon Valley Bank collapse under soft regulation

In the spring of 2018, President Donald J. Trump signed the law that eased the landmark regulatory reform law his predecessor enacted in the wake of the global financial crisis. The changes have won surprising support: former Liberal congressman Barney Frank.

Frank is the principal architect of the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. But since retiring in 2013, he has repeatedly voiced support for relaxing one of the key issues of the law: that any bank with more than $50 billion in assets must face particularly strict federal supervision.

The next correction – raising the threshold to $250 billion – was great consequences. Among other things, the scores of very large banks will escape, at least initially, the annual “stress test” of the Federal Reserve and enjoy easy financial safety requirements. easier.

One beneficiary of the change is Signature Bank, a New York lender with a board of directors including Mr. Frank.

Now Signature is dead – the victim of a fast-moving crisis has revealed the extent to which the banking industry and other opponents of government surveillance have circumvented strong legal protections was erected after the 2008 financial crisis.

On Sunday, the regulator turn off signature, fearing that the sudden mass withdrawal of deposits had put it in jeopardy. It failed just 48 hours after collapse of Silicon Valley Bank, whose executives have successfully pushed with Mr. Frank to raise the $50 billion threshold.

The series of bank failures have worried investors, customers and regulators, stoking fears of a repeat of the 2008 crisis that collapsed hundreds of banks. resulting in massive taxpayer-funded bailouts and sending the economy into a tailspin.

federal regulatory agency scramble to defuse the situation, vowed to protect all Silicon Valley and Signature deposits, and announced an emergency loan program for other struggling banks. Even so, shares of regional banks fell on Monday, with some more than halved as some customers rushed to withdraw their deposits.

Much of that regulatory infrastructure remains in place, and most accounts show the industry is on a much stronger financial footing than it was 15 years ago.

In an interview on Monday, Frank, who joined Signature’s board two years after he began calling for a change in the law, argued that the revocation of the regulation did not set the stage for lawsuits. recent collapse or a broader banking crisis.

However, some of the banks currently facing a crisis of confidence are the same banks that in recent years have told lawmakers and others that they are safe enough and that they are not. should be the focus of enthusiastic federal scrutiny.

Many of those banks argue that complicated federal regulations make it difficult for them to be alternatives to giants like Bank of America, JPMorgan Chase and Wells Fargo. However, those giants are now likely to receive large amounts of deposits as cautious customers rush to seek safety.

And while regional banks tried to convince lawmakers they were not systemically important in 2018, regulators seem to have concluded the opposite in recent days. They agreed to rescue depositors at Signature Bank and Silicon Valley for the sake of protecting the broader financial system – a powerful reminder of fear for some banks, even Even if they’re not the biggest banks in America, they can quickly infect the entire industry.

President Barack Obama signed the Dodd-Frank Act in July 2010. At a signing ceremony near the White House, Mr Thank you very much Frank and his co-sponsor, Senator Christopher Dodd, for working “day and night to bring about this reform.”

This law is a direct response to the devastating crisis that has just ended. But it is also a rejection of the laissez-faire legal approach that has become popular in the United States and other countries in previous decades. Bank executives and lobbyists have convinced policymakers that years of lucrative profits are proof that they know how to manage their companies safely.

When that argument was debunked, Dodd-Frank imposed various measures to control the banking industry. There is a ban on certain types of risky transactions. There are tougher requirements to ensure that banks are able to absorb unexpected losses and withstand sudden migration of depositors. And there are regular health checks to ensure that banks can withstand the worst economic scenarios.

Since the law came into effect, the banking industry has sought to cancel or at least relax. Its argument is that strict regulations have limited the industry’s ability to lend money to trusted customers.

The debate was ignored by Mr. Obama at the White House. Mr. Trump was more receptive. Less than a week after taking office, he called Dodd-Frank “a disaster” and told reporters that “we will make a large number of” laws.

His top officials, many of whom had worked in or near the banking industry, began loosen the reins. Sometimes that means tweaking the rules; other times it means simply being kinder to regulated banks.

On-site assessors are encouraged less confrontation and to give banks positive feedback, not just criticism. Mr. Trump’s money controller, one of the top federal financial regulators, has described banks as his agency’s “customers”.

“Changing supervision is probably going to be really the biggest part of what I do,” Randal K. Quarlesperson in charge of banking regulation at the Federal Reserve, said in 2017.

That year, Republican lawmakers drafted bills to loosen Dodd-Frank. One focus is a provision that forces any bank with more than $50 billion in assets to undergo stress tests, to maintain larger financial reserves, and to lay out plans for how the bank can may close during a crisis.

The legislation comes after years of pressure from banking executives and lobbyists, including Greg Becker, who until Friday ran Silicon Valley Bank.

“Without such changes, SVB will likely have to shift important resources from providing finance to companies that create jobs in the innovation economy,” said Mr. Becker. warn legislators in 2015.

Harris Simmons, executive director of Zions Bancorporation in Utah, is another trying to escape what he sees as tough federal scrutiny. He said that regional banks like his pose little threat to financial stability and that tough regulations are limiting their ability to serve customers.

“If regulations on regional banks are relaxed, those banks will have more capital — about $4 billion a year — to lend,” said Simmons. Written in American Banker magazine 2017. To strengthen his case, Mr. quote by Mr. Frank support the $50 billion threshold.

Zions, which has more than 100 branches in three states, is now among the banks bombarded by nervous investors. Its shares fell about 25 percent on Monday. A Zions spokesman did not respond to a request for comment.

Supporters of the 2018 changes say they still make sense, even as a new crisis unfolds. Senator Mark Warner, Democrat of Virginia, said: speak on ABC News on Sunday.

In Monday’s interview, Mr. Frank said the goal of the law was to focus on the country’s biggest banks and not burden smaller institutions with strict rules or oversight.

If the $50 billion threshold remains in place, Signatures will need to stop expanding or be subject to Federal Reserve stress tests and other requirements designed to limit risk taking. ro strong and secure it.

Instead, thanks to 2018’s change, Signature was able to freely grow exponentially. It went from about 47 billion USD in assets at time 110 billion USD last year. It expanded into six states.

One recent source of growth is cryptocurrencies; Starting in 2018, the bank is one of the few lenders to accept deposits as crypto assets. By Friday, concerns about bank exposure to cryptocurrencies had caused a dramatic drop in bank deposits.

Mr. Frank, who received more than $2.4 million in cash and stock from Signature during his more than seven years on the board, left his job on Sunday when managers disbanded. administrative Council. He said on Monday that the bank was the victim of overzealous regulators. “We are the ones who got shot by them to encourage others to stay away from crypto,” he said.

He added that although Signature has received less federal scrutiny than it has otherwise, state regulators in New York are still at the top of the bank.

“I don’t see any reduction in surveillance that we are getting,” Mr. Frank said. “There has been a lot of scrutiny.”