After 2 banks collapsed, Sen. Warren blames the loosening of restrictions
Banks across the nation are reassuring their customers that they will not collapse like Silicon Valley Bank and Signature Bank. Sen. Elizabeth Warren, D-Mass., says Congress and the Federal Reserve are to blame for bank failures.
"Remember after the crash in 2008, we understood that if you don't put pretty strict regulations on these big banks, they'll go out and boost their profits by taking on a lot of risks," Warren told NPR's Leila Fadel on Tuesday's Morning Edition.
"Then in 2018, the Republicans under Donald Trump said, no, we need to loosen those regulations," Warren said. "And they got some help from the Democrats and ultimately passed a bill that rolled back that kind of protection for banks that were bigger than $50 billion but smaller than $250 billion.
"And sure enough, we saw the consequences of that over the weekend," Warren said.
Sixteen Democrats joined Republicans to pass the Economic Growth, Regulatory Relief and Consumer Protection Act in March 2018 in a 67-31 vote. Warren voted against the legislation, as did Senate Majority Leader Chuck Schumer, who said Tuesday that the Senate will look into the causes of the banks' collapse.
"If the damage had spread across our financial system, the deposits and savings of tens of millions of families and small businesses could have been at serious risk," Schumer said speaking on the Senate floor. "[T]he American people can rest assured that bank regulators have acted quickly and are doing everything they can to protect consumers. In the days and weeks to come, Congress will look closely at what caused the run on Silicon Valley Bank and how we can prevent similar events in the future."
Barney Frank, a former congressman and former board member of Signature Bank, told NPR's Juana Summers yesterday that these bank failures did not happen because of the roll back of Dodd-Frank Act but because of crypto.
Warren disagrees and said, "In both cases, it was about loading up on risk in order to boost the profits."
"It's not just Congress. It's also the Fed that stepped in."
The Fed announced a review of SVB supervision and regulation on Monday after its takeover by financial regulators led to the largest bank failure since the 2008 financial crisis.
"Look, for this inquiry to have any credibility, Chair (Jerome) Powell must recuse himself," Warren said. "When the law was weakened, it permitted the Fed to loosen those regulations. Chair Powell led the charge on that. He not only loosened the regulations, he went further than some people thought the law permitted."
"You know, this is part of the reason that I opposed him for his re-nomination to be chair of the Fed. I thought that this was a very dangerous move on his part."
For people who use smaller regional banks, Warren says they should not worry.
"The federal government has stepped in and said we're going to make sure that depositors are protected. And that means everyone should breathe a big sigh of relief over that issue. Now, we need to make changes in the law so this problem doesn't happen again."
Speaking later Tuesday on the Senate floor, Warren continued to stress that Congress and the Fed have to reimplement strict rules for financial institutions to prevent future banking catastrophes.
"The bank failures our nation experienced this weekend were entirely avoidable if Congress and the Fed had done their jobs and kept strong oversight of big banks in place," she said. "And now we must act quickly to prevent the next crisis by repealing the dangerous Trump era provisions that made banks weaker."
Federal officials are attempting to auction off some $200 billion in assets, which Silicon Valley Bank holds. Any deposit support that does not come from the insurance fund, or asset auctions, will rely on special assessments on banks, or essentially a tax that mostly larger banks will bear the brunt of, according to officials with the Federal Deposit Insurance Corp.
Republican Sen. James Lankford of Oklahoma said Tuesday that that the special assessment is a "backdoor tax increase" on all Americans since the money comes from all U.S. banks. He said that means banks in his home state and in "rural towns are about to pay a special fee to be able to bail out millionaires in San Francisco."
"Now listen, I don't want to see a contagion of banks either, but let's be honest, what's really happening is a backdoor tax increase on every single Americans, just not using the IRS to do it," Lankford said. "It's using community banks to do it all over the country, to charge them a quick higher fee, which they know will mean a higher fee to the people that are members of their banks. And that's how it's going to get covered."
There is currently no prohibition against banks recouping the assessment by charging their customers.
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Transcript
LEILA FADEL, HOST:
Right now, other midsized banks are taking pains to assure their investors and depositors they won't be the next Silicon Valley Bank or Signature Bank. Senator Elizabeth Warren is on the line to discuss what might have prevented those implosions and what should be done to avoid future collapses. Good morning, Senator.
ELIZABETH WARREN: Good morning.
FADEL: So, Senator Warren, you've said the blame for these bank failures lies in Washington. Walk us through why you say that.
WARREN: So, remember, after the crash in 2008, we understood that if you don't put pretty strict regulations on these big banks, they'll go out and boost their profits by taking on a lot of risks. And so Dodd-Frank was passed and said, for the big banks, we're really going to put some stringent controls in place...
FADEL: Right.
WARREN: ...So-called stress tests and higher capital requirements and more regular and closer looks at those banks. And that worked. And then in 2018, the Republicans, under Donald Trump, said, no, we need to loosen those regulations. And they got some help from the Democrats and, ultimately, passed a bill that rolled back that kind of protection for banks that were bigger than $50 billion but smaller than $250 billion. So this slice of big banks - and their argument, by the way, at the time, the banks, is they said we're too small to cause any problems in the economy.
Now, you know, I warned, this is not going to work. This is not going to end well. And sure enough, we saw the consequences of that over the weekend. These very large banks that had very aggressively taken on risk - SVB had seen its profits grow by 40% in the last three years, and their CEO had paid himself a big salary and lots of bonuses for all the executives. And it all worked great right up until the bank exploded. Washington needs to put those stricter regulations in place. So that's a big part of the problem.
FADEL: Now, former congressman and former board member of Signature Bank Barney Frank, who ended up supporting those loosening of restrictions, told my colleague Juana Summers on All Things Considered it wasn't the rollback of the Dodd-Frank Act in the case of Signature Bank but crypto that fueled the bank failures. What's your response to that?
WARREN: Well, you know, let's remember, we watched two banks fail simultaneously. And one of them, it's a very different story. In both cases, it was about loading up on risk in order to boost the profits. And, look, that's what some of these bank executives want to do. They say, gee, this is a - you know, a great opportunity to make money by loading up on risk. It is the job of the regulators to stop them. And rolling back those regulations is why the bank regulators weren't in a position to stop it. Now, I should also be clear here, it's not just Congress.
FADEL: Yeah.
WARREN: It's also the Fed that stepped in.
FADEL: Well, speaking of that, the Fed announced it's reviewing its own oversight of Silicon Valley Bank in light of what's happened. What do you want to see from that review, and should the Federal Reserve be investigating itself?
WARREN: Look, for this inquiry to have any credibility, Chair Powell must recuse himself. And the reason behind that is that when the law was weakened, it permitted the Fed to loosen those regulations. Chair Powell led the charge on that. He not only loosened the regulations, he went further than some people thought the law permitted. You know, this is part of the reason that I opposed him for his renomination to be chair of the Fed. I thought that this was a very dangerous move on his part. He did not follow through on the regulation and supervision obligations of the Fed. And now we've watched at least two banks explode over that.
FADEL: Now, in your view, was waiving the insurance cap to contain the fear, really, around this the right move to get depositors back all their money?
WARREN: You know, I want to start by saying, I'm so glad that Joe Biden is president of the United States right now. He's been very calm in this, very steady. And I very much understand why it was necessary to protect small businesses, to protect nonprofits, to say that - you know, these businesses, they weren't making profits off the banks. Their job was just to put money in the bank so they could make payroll next Monday. And stepping in and backstopping that so they can count on getting access to their money, I think that is the right thing to do. Now, for the giant so-called depositor, the one who really acts more like an investor, who has a billion dollars in that bank, giving those guys help - no, I'm not so on board for that.
FADEL: What's your message to people who use smaller regional banks who are worried right now about their deposits?
WARREN: The deposits are going to be fine. The federal government has stepped in and said, we're going to make sure that depositors are protected. And that means everyone should breathe a big sigh of relief over that issue. Now we need to make changes in the law so this problem doesn't happen again.
FADEL: Senator Elizabeth Warren, Democrat from Massachusetts. Thank you so much, Senator, for your time.
WARREN: Thank you for having me. Transcript provided by NPR, Copyright NPR.
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