2018 legislation called blameless in SVB, recent bank failures; FDIC vice chair also touches on IRR, deposit insurance coverage

Legislation enacted in 2018 easing some requirements on bank investment activity had “nothing to do” with the recent failure of a California bank, the vice chairman of the board of the federal bank deposit insurance agency said Wednesday.

In remarks to the Bipartisan Policy Center in Washington, D.C., on recent bank failures, Federal Deposit Insurance Corp. (FDIC) Board Vice Chairman Travis Hill said the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) had “nothing to do” with the failure last month of Silicon Valley Bank (SVB) of Santa Clara, Calif.

“I think it is quite obvious that S. 2155 had nothing to do with it,” Hill said, referring to the Senate bill that ultimately became law as EGRRCPA. The legislation, signed into law in 2018 by President Donald Trump (R), eased financial regulations imposed by 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) after the financial crisis of 2007–2008. Among other things, the bill eased limitations via the Volcker Rule on bank investment. Rules adopted by regulators in compliance with the legislation allowed that firms that did not have significant trading activities would have simplified and streamlined compliance requirements, while firms with significant trading activity would have more stringent compliance requirements under the investment limitations.

Further, the legislation generally exempted “community banks” from the Volcker Rule.

Hill was adamant that S. 2155 was blameless for the collapse of SVB. “The rule changes did not change the stringency of capital standards for a bank of SVB’s size, the stress tests did not test for rapidly rising rates, and the exact thing that got SVB in trouble – investing in government bonds – is exactly what the liquidity coverage ratio is designed to require,” he asserted. “The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them.”

The FDIC Board vice chairman also suggested that those who claim the 2019 law played a role in the SVB failure should reassess their view. “When it comes to something like this, I encourage people to first look at the facts, and then arrive at conclusions, rather than starting with a conclusion you hope to be true, and grasping around for facts in support,” Hill said. “And I urge policymakers to propose policy changes based on where we find evident holes in our framework, rather than just trying to undo policies of the past.”

In other comments, Hill touched on:

  • Interest rate risk: “There are numerous potential ways to encourage banks to better manage interest rate risk. We should evaluate any potential policy changes thoughtfully and, in trying to solve the problems of March 2023, remain mindful of how any policy changes impact the majority of banks in the majority of times.”
  • Deposit insurance coverage expansion: “I encourage policymakers to think through how well both the status quo, and proposed reforms, achieve their desired goals.  For example, in the United States today, the deposit insurance cap is set not at $250,000 per depositor, but at $250,000 per depositor per institution per right and capacity.  Which means that the cap is $250,000 for some depositors and much, much higher than $250,000 for others … which might lead one to wonder whether those who would be most likely to impose market discipline are instead those most likely to ensure that all their funds are insured.”
  • Quick action in failures: “Once the bank fails, the government must be proactive in finding an acquirer as quickly as possible. The FDIC not only needs to be open to any and all bidders, it needs to act with urgency and initiative to solicit bids and make a deal happen. And for a bank like SVB, given the broader implications, this process requires the proactive engagement and leadership of other agencies, including the Treasury Department and Federal Reserve.”

Recent Bank Failures and the Path Ahead by Travis Hill, Vice Chairman Federal Deposit Insurance Corporation