(Bloomberg) — Eight years ago, Greg Becker sent a stark message to lawmakers in Washington: The bank he ran was not like Wall Street.
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As chief executive of SVB Financial Group, he urged Congress to pass legislation that would save workers at his company thousands of hours each year from undergoing stress tests and preparing resolution plans. It was a simple lender, not like the global systemically important banks that regulators should focus on.
“The evidence is clear that the Dodd-Frank Act framework for G-SIBs is not appropriate for SVB and our peers,” Becker said in comments to the powerful Senate Banking Committee. “The costs are not only high for us, but for our customers.”
Becker was hardly alone. Legions of executives from other small and medium banks, collectively known as regional lenders, were arguing a similar case. Eventually, they all got their wish.
In 2018 – a decade after a crisis that nearly collapsed the global financial system – then-President Donald Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act. . It freed mid-sized companies like SVB from some of the toughest post-crisis regulations and reduced their compliance costs.
“One size fits all – these rules just don’t work,” Trump said at the White House, touting the removal of the “crippling” rules. “They shouldn’t be regulated in the same way as large, complex financial institutions, and that’s what happened and they were bankrupted one by one.”
More than a dozen Democratic senators joined Republicans in supporting the measure.
Fast forward five years: Three regional banks, including SVB’s Silicon Valley Bank, collapsed last week and some say the lighter touch Becker wanted so badly actually accelerated their demise.
The debate rages on
Friday’s fall of Silicon Valley Bank was the biggest U.S. bank failure in more than a decade. It sent shockwaves across the world. By the time regulators stepped in two days later to say all depositors would be cured, allay fears, and to take over another regional lender, Signature Bank, critics of the 2018 rollback were waiting to pounce.
“We’ve known since 2008 that tougher regulations are needed to prevent exactly this type of crisis,” said Democratic Rep. Ro Khanna, who represents a California district that includes parts of Silicon Valley. “Congress must come together to reverse the deregulatory policies that were put in place under Trump to prevent future instability.”
Wall Street giants eclipse lenders like SVB, Signature and Silvergate Capital Corp., which announced its voluntary liquidation last week. But collectively, regional lenders have grown rapidly and now have billions of dollars in assets. They play a vital role in the US economy, providing funding to industries from wineries to tech startups.
Following the collapse of SVB, Federal Reserve regulators – in private deliberations with key industry leaders – provided an update on the 2018 regulatory withdrawal.
The biggest banks are seeking to overturn the argument that Becker and other regional bank executives have successfully made for the past decade. Rather than tighten the screws even further on the Wall Street giants with tougher stress tests, they argue, regulators should spend more time on these smaller companies, which they have largely ignored in recent years, people say. familiar with discussions.
Some executives are pointing to Fed Vice Chairman for Supervision Michael Barr’s comment last week that the regulator is handling the smallest of lenders known as community banks with “a very light-hearted approach.” Granted, Silicon Valley Bank was the 16th largest US lender before its bankruptcy and would not be considered a community bank.
A Fed representative declined to comment.
Interest rate
In their private discussions with officials, big bank executives also pointed to actions taken by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in 2019 – when they allowed banks with fewer $700 billion in assets to retire. recognize changes in so-called accumulated other comprehensive income in their regulatory capital.
This was intended to make key capital ratios less volatile, but may have helped make smaller lenders more comfortable taking risks in their bond portfolios, as losses there would be less likely to immediately endanger investors. share buybacks and dividends.
It certainly played out at SVB. In late 2020, the company’s asset-liability committee received an internal recommendation to buy shorter-dated bonds as more deposits poured in, according to documents seen by Bloomberg. This change would reduce the risk of significant losses if interest rates rise rapidly. But that would come at a cost: an estimated $18 million revenue reduction, with an impact of $36 million from there.
The executives hesitated. Instead, the company continued to invest cash in higher yielding assets. It helped profits jump 52% to a record high in 2021 and helped the company’s valuation soar past $40 billion. But as rates soared in 2022, the company racked up more than $16 billion in unrealized losses on its bond holdings.
Throughout the past year, some employees have argued for repositioning the company’s balance sheet into shorter-dated bonds. The requests have been repeatedly denied, according to a person familiar with the conversations. The company began setting up hedges and selling assets late last year, but the moves proved too late.
Neither Becker nor an SVB representative responded to requests for comment.
“I have no doubt that if this bank had been subject to much stricter regulation, it would not have been permitted to purchase long-term Treasury bills and federally insured long-term debt securities – essentially mortgage-backed securities,” Brad Sherman, a Democratic congressman also from California, said Sunday. “They would have been pressured into buying short-term instruments and we wouldn’t be having this conversation,” he added.
big losses
The big losses were not unique to SVB: in total, US banks had incurred $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to documents filed with the FDIC. But SVB’s investment portfolio had swelled to 57% of its total assets. No other competitor among the 74 major US banks had more than 42%.
And some banks saw it coming. JPMorgan Chase & Co. initially faced pushback from investors when it didn’t immediately invest excess deposits in securities, but company executives said they preferred more cash if necessary.
JPMorgan had the credibility to make such a call in part because its $48 billion haul in 2021 marked the most profitable year of any U.S. bank in history. And it addressed the concern that had triggered some of the regulatory pushback: Consumers were turning to digital banking, and with JPMorgan and its rival giants spending tens of billions each year on technology, there were fears that small businesses simply cannot keep up. . Reducing their compliance costs, it was thought, at least gave them a better chance in the race.
FDIC Auction
After last week’s failure, the FDIC is still figuring out what to do with what’s left of SVB. The regulator tried to stage a sale of the bank and asked for offers from potential buyers. But regulators realized the timeline was too tight before markets opened on Monday, and instead invoked a so-called systemic risk exception, allowing the FDIC to back SVB’s uninsured deposits. The move has eased market jitters and the agency can still consider options to sell all or part of SVB.
There was a feeling that if a bank a 17th the size of JPMorgan failed, it wouldn’t be catastrophic. But turmoil in the tech industry and fears of contagion challenge that logic.
In December 2022, more than 12 years after the Dodd-Frank Act took effect, SVB filed its first resolution plan with the FDIC. No one knew they would use it weeks later.
–With help from Craig Torres, Allyson Versprille and Ed Ludlow.
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