House Committee Members Clash Over Who to Blame for Bank Failure

Politicians trade shots across the aisle via statements and proposed legislation.

Republicans and Democrats on the House Financial Services Committee agree that poor management at Silicon Valley Bank was a major cause for the institution’s failure.

That’s where the agreement ends.

For Republicans, regulatory agencies charged with overseeing the bank were asleep at the wheel.

For Democrats, Trump-era legislation that GOP members claimed provided “regulatory relief” actually allowed the bank’s poor state to slip through the cracks.

In statements and proposed legislation, the two sides have spent the past couple of weeks taking shots at each other.

That follows reports from the FDIC and the Fed that said S. 2155, as the bill is known, contributed to lax oversight. The officials releasing those two reports are Democrats appointed by President Biden.

Backstory and Context

S. 2155, which did garner some bipartisan support, amended the Federal Deposit Insurance Act to boost the asset level for which certain depository institutions are eligible for an 18-month—opposed to 12-month—examination cycle. It also increased the threshold at which certain prudential standards are enforced from $50 billion to $250 billion. In addition, it increased the threshold at which company-run stress tests are required from $10 billion to $250 billion.

“Proponents of the legislation assert it provides targeted financial regulatory relief that eliminates a number of unduly burdensome regulations, fosters economic growth, and strengthens consumer protections,” the Congressional Research Service said, in an analysis of the bill. “Opponents of the legislation argue it needlessly pares back important Dodd-Frank safeguards and protections to the benefit of large and profitable banks.” 

That’s exactly what happened, the FDIC said, in its review of Silicon Valley.

“Had these changes not been made to the framework, [Silicon Valley] would have been subject to enhanced liquidity risk management requirements, full standardized liquidity requirements, enhanced capital requirements, company-run stress testing, supervisory stress testing at an earlier date, and tailored resolution planning requirements,” the report reads.

Divided Political Response

Republicans were disturbed by that evaluation.

“Unfortunately, as you will hear in testimony today, regulators in Washington are attempting to paint a different picture,” House Financial Services Oversight and Investigations Subcommittee Chairman Bill Huizenga, R-Mich., said as he opened a hearing on a Government Accountability Office report on the recent bank failures. “But the facts are clear.”

He added, “The collapse of SVB and Signature Bank were the result of risky business strategies and years of failed supervisory action,” concluding that, “As the Biden Administration and the Federal Reserve attempt to shift the narrative, the GAO’s report provides no evidence the failure of SVB or Signature Bank were a result of relaxed regulations.” 

Not entirely, responded subcommittee ranking Democrat Al Green of Texas. He said that the focus should be on bank mismanagement, “in tandem with the Trump-era de-regulation that allowed this mismanagement to fester.”

Financial Services Committee ranking Democrat Rep. Maxine Waters of California agreed.

“We now need to hold banks and their executives accountable, reverse Trump-era deregulation, enhance supervision of banks, and reform deposit insurance,” she said.

Earlier last week, the House Financial Institutions and Monetary Policy held a hearing that included academics and attorneys.

“Following the failures of Silicon Valley Bank and Signature Bank that were caused by bank runs, key regulators decided to issue their own self-referential reports on those failures to set a narrative,” subcommittee Chairman Rep. Andy Barr, R-Ky., said, as the hearing began.

Barr concluded that, “In the face of a need to inform Congress and respond to multiple requests from the Financial Services Committee for timely information, the Fed and FDIC decided to devote resources to hasty self-serving reviews of supervisory failures to set a narrative.”

What Comes Next?

At that hearing, Republicans listed several draft bills they are considering.

One would require the head of each banking agency—including the NCUA—to testify twice each year before the House and Senate committees with jurisdiction over them. Under current law, only the Fed’s vice chair for supervision has a testimony requirement.

Other bills would enhance transparency about activities of the Financial Stability Oversight Council and subject the council to the appropriations process, as well as require that the Fed vice chair of supervision have experience working in or supervising banking organizations.

The blame game may heat up even more this week, as the House committee hears from financial regulators—including NCUA Chairman Todd Harper—on Tuesday and the Senate Banking Committee hears from the regulators on Thursday.