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The SVB Collapse Means Banking Crisis Politics Are Back In Washington, D.C. Money

The SVB Collapse Means Banking Crisis Politics Are Back In Washington, D.C.

Silicon Valley Bank Shut Down By Regulators

It’s the 15-year anniversary of the government intervention to facilitate the JP Morgan Chase purchase of Bear Stearns. To commemorate the occasion, the banking system and Washington, D.C. decided to have another banking crisis.

Paraphrasing an Oscar-winning movie, the capital was everything everywhere all at once this past week. The collapse of two banks – Silicon Valley Bank and Signature Bank – and the government response was a crisis within a crisis within a crisis. Interest rates, bailouts, bank regulations, the tech sector, venture capital, crypto, social media, woke capitalism, and even the debt ceiling were all intertwined.

Can policymakers unravel the recent events into a coherent set of policies moving forward or will it remain a jumbled mess until the next crisis? There are four things investors should watch moving forward.

In 2008, bailouts helped investors and owners of systemically important large banks. As Treasury Secretary Janet Yellen said last weekend, “We’re not going to do that again.” President Joe Biden made pains to say what the government was doing was not a bailout.

Over a decade ago, being associated with bank bailouts was the worst thing for a politician’s electoral future. The bailouts spawned the Occupy Wall Street movement on the left and the Tea Party on the right. The populist elements in the country have only grown since then.

Several of the leading politicians and regulators today have battle scars from the Great Financial Crisis and the development of the Dodd-Frank Act to prevent the largest banks from getting any more power or size. None of them wants to be near the term bailout or be seen growing the largest banks. However the banking unit of SVB VB gets resolved or sold off, regulators don’t want the big banks involved.

Of course, what’s considered a “bailout” is in the eye of the beholder. It’s an argument over semantics. Regardless, some Republicans hope to harness anti-bailout populism in the aftermath of the non-bailout bailout.

The decision was reportedly unanimous this weekend among Yellen and the FDIC and Fed boards to determine there was a “systemic risk” to the financial system to protect the uninsured deposits of SVB and Signature Bank.

The Fed also created the Bank Term Funding Program to provide new liquidity to banks with market-rate collateral. Officially, this gave banks unlimited funds to meet depositor withdrawals. Unofficially, this removes duration risks on bank holdings in the hopes of stopping more bank runs.

The BTFP lasts for a year. In the interim, the Fed needs to find an off-ramp to build back trust in non-mega banks. That comes, in part, from developing new regulations.

The key person here is Fed Vice Chair for Supervision Michael Barr. He is leading a review of the supervision and regulation of SVB. Barr today has a broader agenda besides just getting to the bottom of what happened with SVB. One of the lead negotiators for the Obama administration in drafting the Dodd-Frank Act, Barr has his eye on several changes to banking regulations. He will likely want to strike while the iron is hot.

The Wall Street Journal first reported the Fed is looking at toughening capital, liquidity, stress test, and long-term debt standards for banks with assets between $100 billion and $250 billion. SVB at the end of last year had $210 billion in assets. Signature Bank had $110 billion. The Fed could also change how banks show market-rate securities on their capital levels. It was unrealized losses on long-dated maturities that contributed to SVB’s downfall. Even though the biggest banks didn’t contribute to the latest banking crisis, they are not immune to new questions about their own regulations and stricter standards.

Bank lobbyists and Republicans this month were pushing Fed Chair Jerome Powell to rebuke Barr’s quest for tighter banking regulations. But tradition is for the Fed chair to be deferential on regulatory matters to the vice chair for supervision just as it’s tradition to be deferential to the Fed chair on interest rate matters. In an institution that seeks consensus, even if Powell opposed some of Barr’s measures, he has a tough hill to climb in pushing back, especially after the latest banking crisis.

Still, there are tradeoffs to stricter bank regulations as Barr may be seeking. The SVB crisis hastened a push of deposits from small- and mid-sized banks to the largest banks. More regulations for the SVBs of the world would only constrain their offerings and services further. For market-wide regulations, the shadow banking industry could be in a position to pick up new business opportunities.

All of this also has a political downside for Democrats. Stricter banking regulations means a constrained economy at a time when risks of a recession on the horizon are high. The last president to win re-election when there was a recession in his third or fourth year was President William McKinley in 1900.

A Crisis Is A Policy And Political Opportunity

This banking crisis was a catalyst for further attention and progress on anything tangentially related to the collapse of SVB and the government response. Few opportunities will be fully capitalized on, but it creates a new moment, if even fleeting, for certain political and policy headlines.

Democrats Against Republicans

Democrats are using the opportunity to say the latest banking crisis is a result of the GOP deregulatory agenda. Specifically, progressives are planning to introduce legislation reversing part of bipartisan banking legislation from 2018 that raised the too big to fail level threshold for banks from $50 billion to $250 billion. This legislation is unlikely to pass a divided Congress. However, it provides a more populist contrast to Republicans on the issue.

Republicans Against Democrats

Meanwhile, House Speaker Kevin McCarthy (R-Calif.) is putting the blame of SVB’s collapse on “Biden’s reckless spending [that] caused record inflation and rapid interest rate hikes that broke family budgets and banks too.” He also noted that “We must restore fiscal sanity.” Most Republicans are focusing not on the need for new regulations but how regulators like the Fed dropped the ball and how Biden’s fiscal policy stimulated inflation, resulting in a quick rise in interest rates that caused this crisis. This line of attack not only plays into 2024 but the current debt ceiling fight. Republicans may argue this banking crisis only plays into the ongoing fiscal crisis of too much spending. None of this clarifies McCarthy’s task to unify the party on specific asks for the debt ceiling. If anything, the banking crisis only emboldens elements of the GOP to fight for more reforms with the debt ceiling.

Investors And Some Democrats Against Rate Hikes

As the Wall Street Journal’s Nick Timiraos noted, “There is a saying that the Federal Reserve raises interest rates until something breaks.” Something broke this past week. It’s a moment that investors are hoping will give Powell pause in his rate hiking campaign. Senate Banking Committee Chair Sherrod Brown (D-Ohio) also called for the Fed to pause rate increases. Just last week Powell was indicating rates may need to go higher if the economy remains strong. Absent this banking crisis, the recent unemployment and CPI data would point to a more hawkish Fed. The bank failures may change the immediate trajectory but Powell’s war against inflation is far from over.

Republicans Against Woke Capitalism

According to Republicans, “Get woke, go broke” is a rallying cry that should be taken seriously and literally. Governor Ron DeSantis (R-Fla.) said SVB was “so concerned with [diversity, equity, and inclusion programs] and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission.” It’s a “woke bailout” according to Senator Josh Hawley (R-Mo.). It’s unsurprising that the GOP’s anti-woke capitalism fight found a target in a bank with “Silicon Valley” in its name. This is just more fuel for the fire that a populist GOP looks to harness today and implement as soon as after the 2024 elections. In the near term, Republicans will point to this as a reason financial regulators should stay away from ESG efforts.

Populists Against Carried Interest

The preferential tax treatment of carried interest survived the Democratic agenda last Congress. Venture capital firms were often the public face in defense of the tax provision as compared to the more publicly maligned private equity and hedge funds. This weekend complicates this strategy as VCs were at the forefront of the bank run and depositor bailout. Every Congress, legislation is introduced to treat carried interest as ordinary income. The Carried Interest Fairness Act will have new momentum to be introduced pretty soon this Congress. Notably, some of its biggest Senate sponsors include Senators Tammy Baldwin (D-Wis.), Brown, and Joe Manchin (D-W.V.). All of them face re-election in 2024. The legislation likely won’t pass this year. However, this creates further momentum for a fight in 2025 as Congress looks for offsets in trying to extend or make permanent some of the individual and business provisions from the Tax Cuts and Jobs Act.

Uncertainty Still Lurks

It ain’t over till it’s over. The Bear Stearns buyout was in March 2008. In the aftermath there were many congressional hearings and regulatory reviews the following spring and summer. Then, Lehman Brothers folded and changed everything. In the parlance of the late Defense Secretary Don Rumsfeld, there are many “known unknowns.” Maybe the dust will settle after this weekend. Maybe there are more knock-on effects to come, whether financially, economically, or politically. Keeping an open mind to what could come after the second largest bank failure in US history is warranted.