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Bank rule fight looms in Washington in aftermath of SVB collapse

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Capitol Hill wasted no time in pointing fingers after U.S. officials swooped in to shore up confidence in the banking system after the failure of Silicon Valley Bank (SIVB.O), with some accusing the Trump administration of weakening regional banks and others bemoaning government intervention.

After a dramatic weekend, which also saw the collapse of New York-based Signature Bank (SBNY.O), regulators said customers at both of the failed banks would have access to all their deposits starting Monday, and announced a new facility to give banks access to emergency funds.

But lawmakers were quick to speculate as to the root cause of the failures, previewing a potentially contentious fight in Congress as the rules governing midsize banks are set to face increasing scrutiny.

In remarks on Monday, U.S. President Joe Biden said he would “ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again.”

An administration official said there’s no timeline for Biden to make any particular requests of Congress as his aides were still working to manage the immediate situation and better understand what caused the crisis and what to ask of lawmakers.

At issue are changes to the Dodd-Frank Act passed in 2018, pushed by Republicans, which raised the threshold at which banks are considered systemically risky and subject to stricter oversight to $250 billion from $50 billion. Silicon Valley Bank had $209 billion in assets at the end of last year, while Signature Bank had $110.36 billion.

“Let’s be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed,” said Vermont Sen. Bernie Sanders in a statement.

In a tweet, Republican Rep. Warren Davidson argued the 2018 law was not a factor in the bank failure, and instead suggested that policymakers use the crisis “to address systemic risk,” including high deficits and Fed policy.

Some Republicans faulted Silicon Valley Bank’s leadership, with several throwing jabs at their perceived support for liberal priorities.

“It is abundantly clear that SVB was terribly mismanaged. Their executives appeared to be more focused on diversity and (environmental, social and corporate governance) than managing their own risks,” said Republican Sen. Bill Hagerty in a tweet.

Experts say SVB ultimately collapsed because it failed to manage its portfolio amid rapidly rising interest rates, and had a huge amount of uninsured deposits that were quick to leave when the stress was apparent. There were no immediate indications a focus on ESG policies contributed to those missteps.

In an op-ed for the New York Times, Democratic Sen. Elizabeth Warren placed some of the blame at the feet of bank regulators, whom she accused of “letting financial institutions load up on risk.”

“It’s clear there were big misses here,” said Jonah Crane, a partner with Klaros Group and former Treasury Department official. “For one, the Fed has only once ever stress tested for a high interest rate environment, despite knowing they would have to raise rates.”

Although Congress is expected to make a lot of noise about the fallout, the prospects for legislation in a divided Congress are dim. As a result, regulators will also be in the spotlight for speedier tweaks, said Ian Katz, managing director of Capital Alpha Partners, in a note.

“There won’t be legislation getting through Congress, and so regulators will be making the big decisions,” he said.

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