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Biden gives up on changing the law on Trump-era banks


The president calls for tougher regulation of the Federal Reserve, but admits that it can be achieved with the current legislation

The President of the United States rectifies.

On March 13, after the fall of Silicon Valley Bank and Signature Bank, he said that he was going to ask "Congress and the regulators" to toughen the regulation so that other similar cases would not be repeated.

This Thursday he has specified the list of tasks that he considers necessary to undertake, but with an important nuance: Congress leaves the equation.

"Each of these points can be achieved under current law," the White House has acknowledged.

In other words, the regulation that he defends fits into the legislation reformed by Congress during the period of Donald Trump as president.

Biden's requests are now directed to the Federal Reserve "in consultation with the Treasury", that is, to an independent body in consultation with its own Administration.

Despite this, the White House has decided to use the fall of these two banks politically to blame the previous president, Donald Trump, albeit with some confusion about the powers that correspond to each one.

During the recent appearances in Congress by the Vice President of Supervision of the Federal Reserve, the President of the Federal Deposit Insurance Corporation (FDIC) and an Undersecretary of the Treasury, it has been made clear that the legislation in force allowed stricter supervision than the one carried out by the central bank.

And that even with the existing regulation, it detected the problems in 2021 and urged managers to apply corrective measures, but they would not have done so before March 2023.

“It doesn't sound like a very urgent oversight process to me,” said Rep. French Hill, an Arkansas Republican.

And fellow Republican Blaine Luetkemeyer, a congressman from Missouri, insisted on that line: before promulgating strict new rules for banks, "how about we first enforce the ones that already exist?"

Despite this, the White House spokeswoman, Karine Jean-Pierre, assured this Tuesday that the fall of the two banks is due, according to "experts", to the regulatory changes of the Trump era.

In a legal change approved in 2018 by Congress, with the support of not only Republicans, but also a good number of Democratic congressmen, the Federal Reserve was granted more flexibility in graduating supervision of midsize banks, with assets of 100,000 to 250,000 million dollars.

The new law exempted Silicon Valley Bank from having to meet certain liquidity requirements, and in that sense weakened its position, but the bank's fall was mainly due to the special profile of the bank, to clumsiness by managers and an accelerated flight of money. deposits.

And it also eliminated the need to stress test those banks, but Federal Reserve Vice President of Oversight Michael Barr assured in the Senate that those tests, as designed, would not have served to prevent the fall of Silicon. Valley Bank.

In any case, the law approved in 2018 gave the central bank the ability to be more demanding in regulation and supervision.

Biden is aware that not even among his congressmen would he have enough support to change it.

So the list of tasks that the White House is now putting out are duties mainly for Jerome Powell, who was appointed by Trump, but who now occupies his position because he was confirmed by Biden and the Senate under Democratic control for a second term.

The recommendations of the White House are in line with those that the congressmen have asked the authorities this week in their appearances in the Capitol and that they have admitted that they were necessary.

The Federal Reserve itself has opened an internal investigation and is waiting for its conclusions to formulate proposals to improve regulation and supervision, but the White House has preferred to go ahead.

Liquidity and capital

Biden calls for more liquidity requirements and stress tests.

“Silicon Valley Bank's liquidity stress contributed to its failure and was quickly passed on to other banks.

Bank regulators are encouraged to consider reinstating these requirements and using rigorous liquidity stress tests that take into account the risks of faster withdrawals in an always-on online environment,” the White House says.

Another request is stress tests for solvency.

“When Silicon Valley Bank failed, it had never been subjected to a comprehensive capital stress test even though it had more than $200 billion in assets.

The concern about the bank's capital levels contributed to the loss of confidence and the withdrawal of deposits, ”they say in the Biden government, although that concern had little to do with the results of some tests.

Regulators also removed during Trump's tenure the requirement that bank holding companies in the $100 billion to $250 billion size range, such as parent Silicon Valley Bank, submit comprehensive resolution plans (also known as "living wills"). ) and stated that the bankruptcy of these banks would not threaten the financial system.

“But the failures of Silicon Valley Bank and Signature Bank have clearly demonstrated that bank failures of this size can pose systemic risk.

Therefore, banks and holding companies of this size should have to present plans that describe how they could be liquidated without spreading stress to the rest of the banking system, ”says Biden.

The White House is also demanding sufficient capital buffers to absorb possible losses in stress situations such as those suffered by Silicon Valley Bank.

“There is work to be done to fully implement the post-financial crisis capital rules,” he admits.

Biden puts some more tasks related to supervision and endowments to the deposit guarantee fund and makes it clear that all this is possible with the legislation of the Trump era.

Still, he concludes: “It is important to put in place common-sense safeguards to reverse the Trump Administration's damaging weakening of bank safeguards and supervision and help ensure that community and regional banks remain resilient and continue to support small businesses. companies and jobs.

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Source: elparis

All business articles on 2023-03-30

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