White House Calls for Tougher Bank Rules After Crisis

President Joe Biden speaks with reporters before departing from the South Lawn of the White House on Marine One on March 17, 2023. (Anna Moneymaker/Getty Images)

President Joe Biden is urging federal banking agencies to consider a series of changes that would “reduce the risk of a future banking crisis” and refrain from penalizing community banks, a White House official says.

Biden is recommending reinstating rules and regulations that were rolled back under former President Donald Trump for banks with assets between $50 billion and $100 billion, the administration official confirmed during a March 30 call with reporters.

They include enhancing capital and liquidity standards, conducting supervised annual stress tests, mandating living wills or resolution plans (the company’s process of liquidation under the U.S. bankruptcy code), and expanding long-term debt requirements.

“The president is urging the federal banking agencies to take steps to once again ensure strong oversight and supervision that includes strengthening supervisory tools, including stress testing, to make sure that banks can withstand high interest rates and other stresses and also reducing transition periods,” the official said.

Biden is also requesting that the Federal Deposit Insurance Corp. (FDIC) make certain that the costs associated with refilling the Deposit Insurance Fund (DIF) amid the Silicon Valley Bank (SVB) and Signature Bank failures won’t be borne by community banks.

This week, FDIC Chair Martin Gruenberg confirmed to the Senate Banking, Housing, and Urban Affairs Committee that resolving SVB and Signature would cost the DIF $22.5 billion. He revealed in his testimony that the FDIC would propose a special assessment on banks in May to repay the DIF following the uninsured deposit coverage.

Administration officials acknowledged that “things have stabilized considerably” since the president’s March 13 press conference. But while banking conditions have improved, these proposals are “really about making sure that we are protecting the resilience and stability of the banking system going forward,” the White House official noted.

Employees stand outside the headquarters of the shuttered Silicon Valley Bank (SVB) in Santa Clara, Calif., on March 10, 2023. (Justin Sullivan/Getty Images)

“We are not in that crisis link situation that we faced a few weeks ago,” the official said. “These changes ... are common sense, straightforward changes.”

Rep. Patrick McHenry (R-NC), the House Financial Services Committee chairman, dismissed the White House’s proposal, accusing the administration of politicizing the recent bank failures.

Instead of giving regulators more authority, “we should hold them accountable for their inability to utilize their existing supervisory tools,” according to McHenry.

“As we heard from Biden’s own regulators at our hearing yesterday, supervisory incompetence was the leading cause of the failures. There is no evidence that the original Dodd-Frank would have prevented these bank runs,” he said in a statement. “Additionally, no recent stress test has considered the current economic conditions—most notably the Fed’s rapid rate increases to combat Democrat-induced inflation—that contributed to the fall of these institutions.”

Rob Nichols, president and CEO of the American Bankers Association (ABA), believes that it’s “premature” to request rule changes.

“With Federal Reserve, FDIC and GAO [Government Accountability Office] reviews ongoing, it is premature to call for rule changes by independent regulatory agencies before determining the extent to which supervisors failed to make full use of their existing regulatory tools and authority. Allowing for a thoughtful and deliberate process will yield better and more lasting results,” Nichols said in a statement.

The Blame Game

In the aftermath of the SVB and Signature Bank failures, lawmakers have been trying to find the culprit behind these collapses.

Republicans say the Federal Reserve and federal regulators “fell asleep at the wheel,” even as distress indicators were spotted at SVB as early as 2021. Fed Vice Chair for Supervision Michael Barr suggested that while the banking system was robust and regulations were appropriate, bank managers ignored the warning signs. The White House blamed the previous administration for its lack of aggressive focus and tone.

Officials, including Fed Chair Jerome Powell and Barr, have agreed with calls to strengthen rules in the banking system. Barr will lead a probe of what happened at Silicon Valley Bank and Signature Bank and also research on bank runs, uninsured deposits, business concentration, and social media’s influence on the financial system.

Democrats contend that Trump’s signing of the Economic Growth, Regulatory Relief, and Consumer Protection Act contributed to these failures. The legislation raised the minimum threshold for national banks to conduct stress tests to $250 billion and reduced the frequency. However, critics assert that SVB would have passed stress tests, since they assessed how the company could handle falling gross domestic product, rising unemployment, and tighter credit conditions.

“It’s like somebody going in for a test for COVID and getting a test for cholera,” Sen. John Kennedy (R-La.) said during the Senate committee hearing.

The White House official thinks it’s “less important” if SVB or Signature Bank would have met individual liquidity, stress testing, and capital standards.

“The question is, by testing each of these different metrics by putting in place all of these different requirements, are we going to reduce the risk of the kind of bank failure that we’ve seen? And I think independent experts would say unequivocally yes,” the official said.

Speaking at the Future Investment Initiative Institute’s Priority summit in Florida on March 30, former Treasury Secretary Steven Mnuchin said there should be a bipartisan push to bolster the FDIC insurance limit to $10 million or $25 million, “something that’s legitimate that small businesses that have operating accounts can have their money safe, people can have their money safe.”