Elizabeth Warren blamed anti-regulation lobbying for SVB’s collapse

The waters are far from calm after being seized by federal regulators over $300 billion in deposits and assets from Silicon Valley Bankthe expensive lender to the tech and VC sectors, in the second largest bank failure in US history on Friday, and then the third largest, based in New York Signature Bank on Sunday. But finger pointing is what caused the banks lightning fast collapse has begun. Businesses and clients regret mismanagement at the executive level of the SVB, which among other things, there is no chief risk officer for eight months last year. Cryptocurrency proponents said the centralized financial system is at fault. Venture capitalists mostly blame each other fueled panic on social media which turned into a record $42 billion bank run. But for Democratic Senator Elizabeth Warren, legislative changes lobbied by bank executives years ago (including SVB’s own CEO Greg Becker) mean the sector’s crisis in the bank is both predictable and late, and the writing is on the wall for more pain ahead.

It remains unclear what impact SVB’s failure will have for the banking industry. The Biden administration promised that even customers with unsecured deposits at SVB make whole and those banks, not taxpayersbear the burden of healing the crisis, but tensions are still on a knife’s edge as clients in the US and all over the world worry that other banks may spiral like SVB. Like SVB, regulators have promised that Signature depositors can also be fully, under a similar “systemic risk exception.” When markets opened for trading on Monday, regional banks on the west coast collapsed, along with dozens of them stopped trading amid record declines.

The storm in the banking industry isn’t set to die down anytime soon, but in full blame game, Warren pointed to a long-standing complaint of his as the main cause of the crisis: The banks pushing for higher low-income profits despite making. increased financial risk, and anti-regulatory lobbying efforts to destroy legislative safeguards that could have prevented the crisis from unfolding.

“These recent bank failures are the direct result of leaders in Washington weakening financial rules,” Warren wrote. and op-eds published Monday at the New York Times.

The collapse of the SVB has shades of other bank runs which happened during the 2008 financial crash. That crisis—and the role of government intervention in mitigating it—set the stage regulatory reforms to prevent future systemic bank failures. In 2010, the government implemented the Dodd-Frank Actone of the most significant pieces of legislation regulating financial activity since the Great Depression, to increase accountability and transparency in the US banking sector and discourage risky lending practices.

Dodd-Frank was designed to consigned to history the “too big to fail” era where certain financial institutions are so important to the economy that the government is obligated to step in and save them. But the nature of the SVB collapse and the extent to which the economy may suffer as a result once again raised the ghost of a bank that is “too big to fail.” For that, Warren insists you can blame a significant reduction in the government’s regulatory power over banks since 2018 after bank executives, including SVB’s own CEO Greg Beckersuccessfully lobbied to reduce the scope of Dodd-Frank.

“In 2018, the big banks won. With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank,” Warren wrote. “If Congress and the Federal Reserve do not rollback stricter oversight, SVB and Signature could be subject to stronger liquidity and capital requirements to withstand financial shocks.”

Weakening the regulatory power of banks

Efforts to block federal regulators from having more say in the financial industry started well before Dodd-Frank was enactedbut the lobbyists finally got their way in 2018, when former President Donald Trump signed a law to reduce the regulatory power of the action. The bill received bipartisan approval in Congress, but managed support from There are only 17 Democrats in the Senatewith members of the progressive air of the party strongly opposed.

Warren has been one of the most vocal opponents of the changes, which keep strict federal oversight powers for big banks but largely exempt small and regional banks from reporting requirements criticized by the industry. which is very complicated and time consuming. Warren contended at a time when “small banks” are actually anything but, and rolling back the restrictions will increase the likelihood of another crisis.

“These rules have kept us safe for almost a decade,” he said. “Washington is about to make it easier for banks to run risk, make it easier to put our constituents at risk, make it easier to put American families at risk , so that the CEOs of these banks can get a new corporate jet and add another floor to their new corporate headquarters.”

Becker of SVB argued for looser regulations while testifying in Congress in 2015. After the deregulation bill, SVB’s deposits grew from around. $50 billion by 2020 to over $170 billion at the time of the foreclosure, also benefited from a low interest environment that favored risky lending. Warren wrote in his op-ed that the bank failed to adequately prepare for the higher rate environment that became a reality last year.

“SVB suffers from a toxic mix of risk management and weak governance,” he wrote, adding that it “clearly failed to hedge against the obvious risk of rising interest rates. This business model is good for SVB’s short-term revenue, which has increased by almost 40 ‌percent in the last three years‌—but now we know its cost.”

Warren added that with stricter regulations for small and regional banks remaining in place, regularly required stress tests could better prepare SVB for a bank run. He also repeated his frequent criticism of the actions of the Federal Reserve under the guidance of Jerome Powell, saying that a priority of loose monetary policies and low interest rates for much of his term would allow “financial risk-bearing institutions.”

Warren recommended the government and the banking sector work together to instill confidence in the industry by discouraging excessive risk-taking and increasing regulatory oversight, and make it clear to financial institutions that the burden of failure and risks are on their shoulders, and that the government’s participation mandate for banks that are “too big to fail” is actually a thing of the past.

“These threats should never have been allowed to happen. We must act to prevent them from happening again,” he wrote.

luckThe CFO Daily newsletter is the must-read analysis every finance professional needs to keep up with. Sign up now.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *