FDIC vice chairman: Don’t blame regulatory tailoring bill for bank closures

Legislation that gave the bank regulators broad discretion over how they supervised certain banks had nothing to do with the failure of Silicon Valley Bank, FDIC Vice Chairman Travis Hill said today. The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) was passed with bipartisan support in 2018 to give regulators more leeway in tailoring regulation for financial institutions based on asset size. Some Democrats have argued the changes made as a result of the bill’s passage allowed SVB and Signature Bank to skirt regulatory oversight, although many left-of-center commentators have cast doubt on that interpretation.

Hill—one of two Republicans on the five-member FDIC board—said S. 2155 wasn’t to blame during a speech at the Bipartisan Policy Center in Washington, D.C. “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 said. “The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them.”

Mismanagement of interest rate risk was at the core of SVB’s problem, Hill said. In addition, its deposits were almost all uninsured, highly concentrated and remarkably quick to run. “We should closely review the lessons to be learned from the recent failures, and be open to targeted changes to our framework, but we should be humble about what our rules and policies can accomplish, and avoid the temptation to overcorrect,” he said. “In a competitive, dynamic financial services industry with thousands or millions of independent actors, there will always be vulnerabilities, and in an era of aggressive Fed tightening, there will always be bigger pressures at play.”