[Bank lobbyists believe the Fed may now be encouraged to press
ahead with tougher rules that it was just beginning to discuss before
SVB’s meltdown.]
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BANKS FOUGHT TO FEND OFF TOUGHER REGULATION. THEN THE MELTDOWN CAME.
 
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Zachary Warmbrodt
March 12, 2023
Politico
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_ Bank lobbyists believe the Fed may now be encouraged to press ahead
with tougher rules that it was just beginning to discuss before
SVB’s meltdown. _

Silicon Valley Bank’s meltdown is scrambling the banking
industry’s Washington playbook and forcing it to rethink how it
engages with Capitol Hill., Mary Altaffer/AP Photo

 

Three days before Silicon Valley Bank’s failure, big bank lobbyists
and executives were triumphant. They had convinced key GOP lawmakers
to publicly warn Federal Reserve Chair Jerome Powell against
tightening regulations on the industry.

Now, the months-long campaign is in jeopardy.

The world’s attention is focused on whether the U.S. banking system
is safe. And bank lobbyists believe the Fed may now be encouraged to
press ahead with tougher rules that it was just beginning to discuss
before the meltdown. Sen. Elizabeth Warren (D-Mass.) warned mere
hours after Silicon Valley Bank’s collapse that “regulators must
not buckle to pressure” in response to the bank lobbying barrage
that had been underway.

“Clearly, Silicon Valley Bank’s failure will embolden people who
see the current regulatory system as insufficient,” said Brookings
Institution senior fellow Aaron Klein, a former Treasury Department
official and Capitol Hill economist.

While the details of how the lender collapsed are still being sorted
out, the political impact of the second-largest bank failure since
2008 “is the equivalent of a lake of water being dumped on the fire
that seemed lit under some Republicans to pressure the Fed,” Klein
said.

It’s one immediate way that Silicon Valley Bank’s meltdown is
scrambling the banking industry’s Washington playbook and forcing it
to rethink how it engages with Capitol Hill.

Bank lobbyists are now hoping the narrative focuses on other elements
of the system that might have failed. At stake for the biggest lenders
is whether they’ll be subject to the most significant strengthening
of rules since the aftermath of the global financial crisis.

“SVB’s stunningly quick collapse should put an end to the nonstop
attempts by banks, lobbyists and their political allies to weaken
capital and other financial regulations that protect depositors,
consumers, investors and financial stability,” said Dennis Kelleher,
who advocates for tougher bank oversight as president and CEO of the
nonprofit Better Markets.

The rules that the big bank lobby was focused on before SVB’s
failure dealt with the capital funding buffers that lenders are
required to maintain so they can absorb losses during downturns and
spare taxpayers from having to bail them out.

The Fed and other bank regulators hiked capital requirements in the
wake of the 2008 crash. In the last few months, a top official
appointed by President Joe Biden — Fed Vice Chair for Supervision
Michael Barr — kicked off a “holistic review” of capital rules
that were put in place over the last decade and suggested lenders
should be subject to higher requirements.

Barr’s review rattled large banks. And so their main trade groups
— the Bank Policy Institute, which counts SVB as a member, the
Financial Services Forum and the Securities Industry and Financial
Markets Association — mounted a campaign to argue that hiking
capital requirements would be a drag on the economy. They churned out
explainers challenging Barr’s assumptions, and executives made
direct pleas to lawmakers who handle oversight of the Fed and other
regulators.

“In response to higher capital requirements, banks have two
choices,” JPMorgan Chase CFO Jeremy Barnum said at a March 1
Washington symposium the Bank Policy Institute held to showcase the
bank capital debate. “We can charge higher prices or we can do less
lending. Both of those choices are ultimately bad for consumers and
businesses.”

The lobbying bore fruit last week when Powell testified before the
House and Senate. Over his two days of testimony, a parade of
lawmakers — mostly Republican — warned him about raising capital
requirements and urged him to rein in Barr.

“Capital and its quality must be continually scrutinized,”
Sen. Tim Scott of South Carolina, the top Republican on the Senate
Banking Committee, said at Powell’s March 7 hearing. “But
increased capital does not necessarily provide an increased
benefit.”

That opening salvo suggested that “the banking industry may be on
solid footing to battle against the worst-case scenario,” analysts
with the investment bank BTIG told clients in a note after the
hearings.

Then on Friday, regulators rushed to rescue SVB, and lobbyists began
panicking that their push on capital might be in trouble. Critics
immediately connected the dots.

“Wall Street lobbyists and Republicans in Congress are pushing Fed
Chair Powell for weak capital requirements at exactly the wrong
time,” Warren said on Twitter Friday afternoon. “Silicon Valley
Bank’s collapse underscores the need for strong rules to protect the
financial system. Regulators must not buckle to pressure.”

Former Fed Governor Daniel Tarullo, who led the central bank’s
regulatory policy in the Obama administration, said in an interview
Sunday that the Fed’s regulatory review should revisit rules for
large regional banks. He pointed to a recent Fed policy change that
allowed such lenders to escape tougher rules when they hold securities
that have dropped in value — the exact issue that sparked SVB’s
death spiral.

“It’s a question,” he said. “It’s not an answer.”

Some industry advocates are now hoping that the narrative coming out
of the SVB failure focuses on faults at the Fed and other elements of
bank regulation that were eased under the Trump administration.

“I’m sure somebody will find a way to say that this means that
[global systemically important banks] should hold more capital, but
it’s pretty hard to see that right now,” said one industry
representative granted anonymity to talk candidly about the fallout.
“Politics will find a way but the cogent argument is on the other
side.”

A spokesperson for Scott said that what’s happening with Silicon
Valley Bank “highlights why we cannot have a one-size-fits-all
approach” to bank capital and that regulators must “appropriately
supervise banks to ensure capital levels are tailored to corresponding
risks.”

To be sure, the Fed is facing growing scrutiny of how it supervised
SVB and what it might have missed in ongoing oversight by bank
examiners, beyond specific rules. SVB was regulated by officials from
the Federal Reserve Board of Governors in Washington as well as the
regional Federal Reserve Bank of San Francisco.

Tarullo, who led Fed regulatory efforts after the 2008 crisis, said he
has been worried about the central bank’s supervision of the
industry “for quite a while.” His Trump-appointed successor and
Barr’s predecessor, Randal Quarles, advocated for a lighter
supervisory touch.

“There’s clearly a supervisory gap there, and for me the question
is, does the gap originate at the on-the-ground supervisors, or does
it originate in the instructions they were operating under?” Tarullo
said. “Did the supervisors feel inhibited?”

“What’s really at issue here isn’t the rules,” said Federal
Financial Analytics managing partner Karen Petrou, who advises bankers
and others on policy. “It’s how they were enforced by supervisors
clearly asleep at the wheel because they thought they had a safe,
self-driving car.”

_Victoria Guida and Sam Sutton contributed to this report._

_ZACH WARMBRODT has covered financial services for POLITICO since
2012. His reporting focuses on Washington's relationship with Wall
Street and the broader finance industry, including banks, insurers and
asset managers. Zach is a graduate of the University of Texas at
Austin._

* Banks
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* regulation
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* lobbyists
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* Federal Reserve Bank
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