White House calls on financial regulators to bring back safeguards for regional banks

WASHINGTON —  The Biden administration, placing blame on Trump-era rollbacks, Thursday called on federal banking regulators to reinstate safeguards for regional banks after the record-setting collapse of Silicon Valley Bank and Signature Bank of New York earlier this month.

The White House wants the agencies to revive regular stress testing at banks in the $100- to $250-billion size range and impose stricter capital requirements to buffer against market shocks. 

The administration also wants agencies to guarantee that community banks do not bear the costs of making whole the uninsured depositors at SVB and Signature that benefited from an extraordinary emergency increase in the amount covered by the government’s Deposit Insurance Fund.

“We think that these are common-sense steps that regulators can take under their existing authority that would really strengthen the stability and resilience of the system,” a White House official told reporters Thursday.

The administration maintains that each of the recommendations can be implemented under current law and will not require congressional action.

A 2018 change to the Dodd-Frank Act — a law enacted after the 2008 global financial crisis — relaxed the rules that applied to banks with less than $250 billion in assets, the official, speaking on background, said.

“Remember both Signature Bank and Silicon Valley Bank were in the asset size category that was targeted for rule rollbacks under the Trump administration. Our view is that that vulnerability should be addressed with reinstating those rules and taking the other additional steps that we discussed today,” the official told reporters on a call. “The context and backstory here is important.” 

The administration wants federal regulators to reimpose liquidity requirements ensuring that regional banks “hold sufficient high-quality liquid assets to cover expected net outflows during a stress period,” according to a fact sheet distributed by the White House Thursday.

The administration also wants to see regional banks again required to “submit plans describing how they could be wound down without transmitting stress to the rest of the banking system.”

After SVB’s historic run of $42 million in withdrawals in just a matter of hours on March 9, quickly followed by the collapse of Signature Bank, the Federal Reserve, Treasury Department and the Federal Deposit Insurance Corporation issued a swift joint decision to insure all deposits — even above the $250,000 threshold — in an effort to prevent panic in the markets.

Lawmakers on a key U.S. Senate panel Tuesday questioned officials from the three agencies about the cause of the SVB and Signature failures — the second and third-largest in U.S. history.

The regulators promised a full review by May 1 and called SVB’s rapid failure a “textbook case of bank mismanagement,” according to testimony given by the Fed’s Michael Barr, the Board of Governors’ vice chairman for supervision.

Barr told lawmakers that the bank had been “quite aware” of liquidity risks posed by rising interest rates. The bank had been told as early as November 2021, he said.

Several members of the Senate Committee on Banking — including Democratic Sen. Mark Warner of Virginia, and GOP Sens. Mike Crapo of Idaho and John Kennedy of Louisiana — probed whether the 2018 rollbacks stood in the way of federal regulators who still had some power to stress test the banks at their discretion. Crapo was an original sponsor of the 2018 amendment, which Warner supported.

The legislation language states that the Fed “shall, on a periodic basis, conduct supervisory stress tests” on banks with assets between $100 billion and $250 billion.

“I agree with you, there was substantial discretion under that act,” Barr told Crapo. “… That’s one of the areas we’ll be looking at in our review.”

The White House deferred questions about that discretion to the Fed.

President Joe Biden said in a short address March 13 that money in American banks remained safe and that any depositors of SVB and Signature “can rest assured they will be protected and they’ll have access to their money as of (March 13).”

He also called for the bank managers to be fired and for Congress to reverse the 2018 rollbacks.

When asked whether Biden still wants Congress to act, the White House official said: “I don’t want today’s announcement to be taken to mean that no congressional action is necessary on any of those topics. What we are saying is that under existing law, there are a lot of important steps that we think regulators can take … and we are urging the regulators to take those steps.”