Anyone who doubted how detrimental the Trump regime was should be analyzing the damage unfolding with those being trampled by Silicon Valley Bank’s collapse. On May 24, 2018, Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Reform Act”). This was a regulatory relief bill for regional and community bill, which bank lobbyists and numerous politicians had fought hard for.
The argument at the time was that many of the provisions in the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) were ‘one size fits all.’ Despite any proof, those lobbying for the EGRRCPA argued that capital, liquidity, and stress requirements for regional and community banks would be detrimental to the economy. In a number of Forbes columns, I argued that the weakening of bank regulations under Trump would be the seeds for the next financial crisis.
Thanks to Trump and his supporters this all changed. Some of the key changes that EGRRCPA made were:
· Increasing the asset threshold for “systemically important financial institutions” or, “SIFIs,” from $50 billion to $250 billion.
· Immediately exempting bank holding companies with less than $100 billion in assets from enhanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including but not limited to resolution planning and enhanced liquidity and risk management requirements).
· Exempting in 18 months bank holding companies with between $100 billion and $250 billion in assets from the enhanced prudential standards.
· Limiting stress testing conducted by the Federal Reserve to banks and bank holding companies with $100 billion or more in assets.
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Under Dodd-Frank’s Title I, any bank in the U.S. with an asset size of $50 billion or more could be designated as a domestically systemically important bank (D-SIB). This would then allow national bank regulators like the Federal Reserve to impose what are called enhanced prudential standards. These include rules about:
· capital, which purpose is to sustain unexpected losses,
· liquidity, including calculating the liquidity coverage ratio (LCR) and liquidity stress tests, and
· bank resolution plans, referred to as living wills.
A lot of the results of these supervisory exercises, as well as the capital and liquidity ratios, is made public. This type of financial and risk transparency is critical for investors, lenders, depositors, rating agencies, and numerous market participants.
Systemically Important Bank (SIB)
Just by EGRRCPA changing the asset size, banks like Silicon Valley Bank were no longer designated as systemically important. Only those $250 billion or larger would now receive the systemically important designation. EGRRCPA Su ignored the fact that while a failing or failed bank may not destabilize the entire national banking system, it sure can destabilize a region. Just ask California how things are going now with the SVBVB
Even as early as 2015, CEO Greg Becker lobbied for lighter regulations. He argued that his bank was not a big bank, since it had under $40 billion in assets. In the statement that he submitted to the Senate Banking Committee, he stated that “since the enactment of the Dodd-Frank Act, we have made meaningful investments to our risk systems, hired additional highly skilled risk professionals, and established a standalone, independent Risk Committee of our Board of Directors.” Becker’s statement did not age well. From that year to last week, SVB had grown by 430%. It was $212 billion in assets on Friday, March, 10, 2023, the day that California’s Department of Financial Protection and Innovation closed it down and appointed the Federal Depository Insurance Corporation as the receiver for the failed bank.
Dodd-Frank Liquidity Requirements
Because Trump’s EGRRCPA eliminated important elements of Dodd-Frank’s Title I, Silicon Valley Bank and other banks of that asset size, are not required to calculate and report the Liquidity Coverage Ratio, the Net Stable Funding Ratio, or to conduct comprehensive liquidity assessment reviews. Capital and liquidity are not the same thing. High quality capital is comprised of common equity and retained earnings; they help you absorb unexpected losses. Liquidity is having enough assets that you can deploy when you urgently need to meet liabilities under stressed conditions. Clearly when SVB had to meet fleeing deposits which are a significant part of a bank’s liability, it did not have liquid assets to cover them.
The purpose of the Liquidity Coverage Ratio (LCR) is for banks to add up all of their high quality liquid assets such as cash, U.S. treasuries, AAA investment grade fixed income securities, and other cash equivalents. That figure is then divided by net stressed cash outflows; this is the part where banks have to calculate all the ‘what if’ scenarios. This part of the LCR requires banks to simulate what happens when big deposits or a significant number of deposits flee. The LCR also asks banks to calculate what happens to them when large receivables do not come in or how a bank is impacted when its biggest counterparties default. Diving the numerator by the denominator tells you if a bank is sufficiently liquid in periods of stress. If the result is 100 or preferably much higher, banks should be able to meet their obligations at least for a month even in stressed obligations.
In his statement to the Senate in 2015, Becker stated that “we have been conducting a range of different stress tests designed to measure and predict the risks associated with our business in different economic scenarios. As a result of taking these steps, we believe we are effectively managing the risks our business and reasonably planning for possible unfavorable future business scenarios.” Since at the time SVB was under $50 billion and therefore not a systemically important bank, it is unclear whether the stress tests that SVB was conducting were for capital or for liquidity. This is why requiring banks, especially those over $50 billion to calculate report their LCR is so important. This gives market participants a view into a bank’s liquidity in a simulated stressed environment. We never had that information about SVB.
Silicon Valley Bank also did not have to calculate or report the Net Stable Funding Ratio (NSFR). Knowing a bank’s NSFR is important because this tells us what a bank is doing about relying on stable sources of funding. If Silicon Valley Bank had been required to calculate and disclose NSFR, market participants would have had more detail about all of its sources of funding such as size, type and concentration of deposits. The NSFR makes banks look 12 months ahead to see what assets there are to cover all liabilities.
Another important enhanced prudential standard requirement that Trump’s EGRRCPA gutted is the Comprehensive Liquidity Assessment Review (CLAR). The purpose of CLAR is for banks to conduct serious stress tests of their liquidity. Banks focus on how resilient they are both under normal and stressed conditions. While banks do not have to disclose the results to the public, the information is closely analyzed by Federal Reserve analysts to determine a bank’s liquidity.
It saddens me greatly that people ignore history. Every couple of years lenders and traders tell me that ‘this time, it will be different.’ The style of the movie may be different, but the ending is always the same. Every time bank regulations are eliminated or made lighter, banks proceed to take on more risks, reduce risk identification and measurements. They then implode. Pundits jump to point fingers, especially at bank regulators, who had been asked to do their job with one hand tied behind their back. And far worse yet, the ordinary, unsuspecting citizen who does not even work at a bank will lose her job. I sure hope that the Republicans and Democrats who gleefully sided with Trump in gutting prudent regulations will now pay the groceries and housing costs of all those people who will lose their jobs due to SVB’s mismanagement and greed.
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