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In the early days after the second-largest bank failure in history, the fallout inevitably becomes political as Democrats call for the strengthening of the post-financial crisis legislation, while Republicans blame the firm’s ESG policies.
In the first chaotic days after the collapse of Silicon Valley Bank (SVB), US Democrats and Republicans alike were quick to react, starting a blame game about what had led to the unexpected collapse of the technology start-ups’ favourite bank.
The Republican House Oversight Committee chair James Comer (R-KY) said SVB was “one of the most woke banks” and these are the consequences “of bad Democratic policy”.
Florida governor Ron DeSantis, who is widely believed will run for the next presidency in 2024, also argued that SVB was so concerned with diversity, equity and inclusion that it “diverted from them focusing on their core mission”.
For example, some have questioned the bank's diversity goals for its senior leadership positions and its commitments to provide $5bn in sustainable financing, while pointing to the fact that it had no chief risk officer between last April and January, according to its company filings.
Meanwhile, speaking at the White House on Monday (March 13) morning, President Joe Biden praised his administration for taking swift action to ensure that all depositors, including small businesses, get their money back.
“No losses will be borne by the taxpayers,” Biden emphasised.
“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them.”
At the same time, he said the management of SVB will be fired and investors, who knowingly took on the risks, will not be protected. “That’s how capitalism works,” the President said.
He promised that they will take on a full accounting of what happened and hold accountable those responsible for it. “In my administration, no one, in my view — no one is above the law.”
Biden also pushed Congress and banking regulators to prevent such bank failures by strengthening banking rules.
The President, as well as several Democratic lawmakers, pointed at a Trump-era piece of legislation as a potential facilitator of the collapse.
Donald Trump signed S. 2155 into law in 2018. At that time, the bill was described as the “most significant piece of regulatory reform” for community banks in a decade and a bipartisan effort. Indeed, 16 senators and 33 house representatives from the Democratic caucus voted in favour of passing the bill.
The legislation, authored by Republican Senator Mike Crapo, rolled back some of the requirements of the post-financial crisis Dodd-Frank Reform Act, including raising the threshold for “too big to fail” banks from $50bn to $250bn.
SVB had around $209bn in assets at the end of last year and would have been subject to heightened regulatory scrutiny and the obligation to set up a resolution plan had the bill not raised the threshold.
According to Democratic Senator Elizabeth Warren, the bank’s failure is “the direct result of leaders in Washington weakening the financial rules”.
Warren stressed that reversing the 2018 legislation “must be an immediate priority for Congress”.
On Tuesday (March 14), Warren and Congresswoman Katie Porter introduced legislation to reverse that law.
Although some lawmakers blame the Trump-era rule for the bank failure, several experts argue it is unknown whether the collapse could have been prevented in a counterfactual scenario.
Instead of looking for restoring stricter regulations, several Republicans point at federal regulators for failing to foresee the events.
In an interview, Republican Senator Bill Cassidy noted that short sellers made $500m following Friday’s events, which shows that regulators too could have known that something was wrong.
Congressman Andy Barr (R-KY) argued that the underlying causes were basic fiscal and monetary policy errors and a failure not of a lack of regulation but inadequate bank supervision.
“In the proximate cause, it was the failure of bank management, but also a failure of bank supervision, and a failure of government policy as the underlying cause, overspending by the Democrats that fueled inflation and then a monetary policy kept interest rates too low for too long,” according to Barr.
Crapo also defended his 2018 legislation, saying that “calling for more regulation is a distraction”. He argued that the collapse was “a basic supervisory oversight failure of poor financial risk management strategies”.
Meanwhile, Patrick McHenry, chairman of the House Financial Services Committee, noted that this was the first Twitter-fueled bank run, potentially signalling greater scrutiny into the role of social media in how last week’s events unfolded.
