‘A desperate attempt.’ Barr’s blame for bank failure ignores Trump rollbacks, critics say
Rep. Andy Barr of Lexington is laying the blame for the breakneck fall of Silicon Valley Bank at the feet of three entities: the bank, the regulators and the Democrats.
While there’s near universal agreement on the culpability of SVB management, banking experts say Barr’s diagnosis is an overreach that ignores the role of former President Donald Trump’s regulatory rollbacks and his vehement opposition to interest rate hikes.
“This was not a failure of regulation as the president suggests. The proximate cause, of course, was the failure of bank management, but also a failure of bank supervision and a failure of government policy as the underlying cause,” said Barr, a Republican member of the House Financial Services Committee on Fox Business Tuesday morning.
He continued, “Overspending by the Democrats, which fueled inflation, and a monetary policy that kept interest rates too low for too long, quantitative easing when we had economic growth – resulted in a need for a precipitous rise in interest rates and that combined with basic bad bank management here – a huge percentage of uninsured deposits combined with a failure to hedge interest rate risk, resulted in this bank failure.”
What Barr didn’t mention was that Trump attacked Federal Reserve Chairman Jerome Powell in 2018 for repeated interest rate hikes in 2018.
“The low interest rates were pushed by Trump when publicly blasted Powell in 2018 when he properly tried to raise interest rates,” said Mike Calhoun, president of the Center for Responsible Lending. “[President] Biden, in contrast, has respected and protected the Fed’s independence.”
SVB’s heavy concentration of assets in securities – rather than a diverse loan portfolio – placed it in a more vulnerable position as interest rates continued to climb.
Democrats contend the Trump-era rollback of the Dodd-Frank regulation package that reduced liquidity requirements and reduced testing of vulnerable banks.
Rep. Brad Sherman, a Democrat from California who also sits on the Financial Services Committee, said flatly the collapse of SVB would not have occurred if Trump hadn’t moved to repeal rule tightening produced by former President Obama.
“Oh, you wouldn’t be writing this story,” Sherman replied when asked on what difference Dodd-Frank would have made.. “Any stress test worth its name, you say, ‘How’s a bank going to do in rising interest rates? Falling interest rates.’ Just as a stress test by your cardiologist, it’s going to put you on a treadmill.”
Sherman called Barr’s position “a desperate attempt by him to take his fingerprints off the bill he voted for. “
Citing an “avalanche of red tape” enveloping the nation’s financial controls, Barr was part of a bipartisan House vote in 2018 to unwind the stricter regulatory regime. After its passage, Barr heralded the Economic Growth, Regulatory Relief, and Consumer Protection Act as the “most pro-growth regulatory relief legislation in a generation.”
Fast forward five years and a historically rapid bank run that metastasized last Thursday into Friday caused the second largest bank failure in U.S. history, leaving markets rattled and the confidence of other regional banks in question. The $200 billion Silicon Valley Bank was a consumer tech bank that backed half of the country’s start-ups as well as many California wineries.
Lawmakers in both parties are beginning to turn their focus on the Federal Reserve Bank of San Francisco – the regulator in charge of monitoring SVB. As Barr said on Fox, “Bank supervisors didn’t do their job.”
The Federal Reserve is launching an investigation into its oversight of SVB to identify how they missed warning signs.
“The regulators need to do some soul-searching here about extracurricular political errands that they’re on, instead of basic nuts-and-bolts, bank supervision,” Barr said, lightly referencing broader GOP critiques that banks were distracted by diversity and equity initiatives.
But James Ballentine, a former executive vice president of congressional relations of the American Bankers Association said, “a lot [is] being spun on the root cause.”
“I think ultimately this will come down to bank management, a lack of portfolio diversity in a high interest rate environment and a lack of oversight by the regulatory agencies,” he added.
“A bank that grows that fast in deposits should have triggered concerns among the regulatory agencies,” Ballentine said.
He doubts the failure will spur any new legislation because he believes regulatory agencies already have the tools needed for proper oversight.
On this point, he’s in agreement with Barr.
“Calls for more regulation on regional banks and putting more pressure on regional banks with more rules and regulations is not the answer,” Barr said.
Sherman, who is planning to draft legislation to return to the pre-2018 financial guardrails, said moving on without an attempt at reforms would be akin to brushing aside a mass shooting.
“What Republicans are counting on is that scenario. Mass shooting. Reporter calls congressman and asks him if we’re going to do something about reasonable gun control. Republicans wait for it to blow over. And little or nothing is done,” Sherman surmised. “Let’s hope we don’t do that scenario.”
