Yellen Open To Reexamining Bank Regs And Oversight After They Failed To Prevent SVB Collapse

Debate continues over role of 2018 regulatory rollback in SVB's collapse.
WASHINGTON, DC - SEPTEMBER 30: Janet Yellen, U.S. Treasury secretary, listens at a House Financial Services Committee hearing on oversight of the Treasury Department and Federal Reserve coronavirus pandemic response ... WASHINGTON, DC - SEPTEMBER 30: Janet Yellen, U.S. Treasury secretary, listens at a House Financial Services Committee hearing on oversight of the Treasury Department and Federal Reserve coronavirus pandemic response on Capitol Hillon September 30, 2021 in Washington, DC. The Treasury secretary this week warned in a letter to congressional leaders that her department will effectively run out of cash around Oct. 18 unless Congress suspends or increases the debt limit. (Photo by Al Drago-Pool/Getty Images) MORE LESS
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Treasury Secretary Janet Yellen suggested on Thursday that she would be open to examining whether 2018 changes to bank scrutiny contributed to the collapse of Silicon Valley Bank.

Sen. Elizabeth Warren (D-MA) asked Yellen during a hearing of the Senate Finance Committee whether she believed that the government should “strengthen our banking rules” as part of a question about the impact of 2018 deregulation.

Warren attributed the collapse to “policymakers’ decisions over the last five years, beginning with a 2018 law signed by President Trump with the support of both parties to weaken the regulations that have been put into place since the 2008 crisis to ensure that big banks never again crash our economy.”

“Well, I think we certainly need to analyze carefully what happened that triggered these bank failures and reexamine our rules and supervision and make sure that they’re appropriate to address the risks that banks face,” Yellen replied.

Yellen stopped short of taking the bait that Warren offered her: To say that the rules themselves needed to be rewritten by Congress. Warren has proposed that exact solution, though any effort to tighten financial regulation would struggle to get through a Republican-controlled House.

Fed Chairman Jay Powell said that the vice chair for supervision would conduct a review of the body’s oversight of SVB. Members of Congress have called for a separate investigation of the Fed’s role in recent days, raising the prospect of a congressional investigation into potential oversight lapses at the fed.

But Yellen’s response leaves the door open to additional federal examination of how Congress’ weakening of bank regulation laws during the Trump administration may have contributed to SVB’s implosion last week.

The extent to which the bank failure was downstream of Congress’ 2018 move to loosen Dodd-Frank’s safeguards on banks of SVB’s size remains a topic of considerable debate.

When Congress changed the law in 2018, it gave the Federal Reserve new leeway on how aggressively it regulates mid-sized banks. Trump appointees at the Federal Reserve took the opportunity to allow SVB and other banks in its asset size class to avoid regular stress testing and other safety checks.

The 2008 financial crisis was met with overwhelming calls for investigations and accountability; the response saw Congress pass sweeping legislation tightening bank oversight while the DOJ failed to bring any prosecutions against senior executives. How deep and what Yellen envisions as part of an examination is unknown, in part because it’s early and the exact nature of the SVB crisis, and what caused the collapse, remains to be determined.

Whether the SVB crisis would even warrant that kind of accountability remains unclear.

Sen. Mark Warner (D-VA) tried to pin the blame at the hearing on venture capitalists who withdrew their deposits from SVB last week as part of the run on the lender. Warner has faced criticism since the bank failure for supporting the 2018 deregulation.

“The idea that there is no responsibility for the equivalent of shouting fire in a crowded theater,” Warner said, “presents a problem that I hope we can all put our heads together on.”

Warner also argued to Yellen that none of the post-2008 financial regulations — including, presumably, the pre-2018 version of Dodd-Frank — would have protected SVB due to the scale of the run, where the bank saw roughly one quarter of its assets withdrawn in the course of a day.

She replied that SVB was unusually vulnerable in part because of its high amount of uninsured deposits, and added that “we need to think about that.”

She also suggested that she didn’t have an answer for what to do if a bank faced an “overwhelming run” due to panic spreading on social media and messaging apps — a factor in SVB’s collapse.

Republicans spent much of the hearing arguing about inflation, though some asked pointed questions about SVB which largely tended to move the discussion towards blame on bank management or those withdrawing deposits, as opposed to larger critiques of the regulatory structure.

Sen. Marsha Blackburn (R-TN) asked whether the decision to guarantee deposits was a prelude to “nationalizing the banking system.”

“Absolutely not,” Yellen replied, saying that she saw it as a step towards helping the financial sector avoid contagion.

Sen. Mike Crapo (R-ID), an architect of the 2018 deregulation, pressed Yellen on the bank’s “liquidity risk,” before suggesting that bank leaders and fed supervisors failed to catch the danger.

Yellen replied that the risk was present, but it was the “run on the bank” which caused the crisis.

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  1. They absolutely need to be re-examined, re-written and re-instituted.

    Unfortunately, the moment the regulatory agencies try that, litigation will begin and the courts will insist that Congress is the only organization that can fix this. The courts have demonstrated time and again that regulatory agencies have no power and must be destroyed.

    Congress will do nothing, at least not before 2025. And with the wrong guy in the Oval Office, it could be far more disasterous.

  2. Republicans: “We must not regulate banks or we’ll handcuff job creators!”

    Also Republicans: “We must fight inflation by raising interest rates to drive up unemployment!”

  3. Treasury Secretary Janet Yellen suggested on Thursday that she would be open to examining whether 2018 changes to bank scrutiny contributed to the collapse of Silicon Valley Bank.

    The fact that she is NOT certain that the contributed to the collapse is very disconcerting.

  4. 1928, 1986, 2008 and now 2023. And what happened prior to these financial disasters? Unregulated markets that allowed people to:

    • Buy stocks with 10% down. What could possibly go wrong?

    • Allow the Savings and Loan industry to make high risk stupid investments with other peoples money (thank-you so much Charles Keating).

    • Loan Officer’s who thought that Families with an annual income of $35000 dollars could absolutely afford a home worth $300,000 dollars. Suddenly the American people were learning new words like Subprime Mortgage, Mortgage Backed Securities and Collateral Debt Obligations. Learning new things is so much fun.

    And now here we are in 2023 where once again greed head bast*rds were able get weak politicians to repeal regulations designed to prevent something rude, such as the collapse of the US and possibly World economy.

    But then again why should the 1/100th (of 1%) care. The system is rigged so they will never have to suffer any consequences for their failures.

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