Anyone who doubted how damaging the Trump administration’s policies would be need only analyze the damage done to those crushed by the Silicon Valley bank collapse. On May 24, 2018, Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Act”). It was a regulatory relief bill for regional and community bills, which was fought hard by bank lobbyists and many politicians.
The argument at the time was that many of the provisions in the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) were ‘one size fits all’. Despite any evidence, lobbyists for EGRRCPA argued that the capital, liquidity and stress requirements for regional and community banks would be harmful to the economy. in the number of forbes columnI argued The weakening of bank regulations under Trump will be the seed of the next financial crisis,
That all changed thanks to Trump and his supporters. Some of the major changes made by EGRRCPA are as follows:
- Raising the asset limit for “systemically important financial institutions” or “SIFIs” from $50 billion to $250 billion.
- Immediately exempting bank holding companies with less than $100 billion in assets from the advanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including but not limited to resolution planning and enhanced liquidity and risk management requirements).
- Bank holding companies with assets between $100 billion and $250 billion are exempted from enhanced prudential standards over 18 months.
- Limiting stress testing by the Federal Reserve to banks and bank holding companies with $100 billion or more in assets.
Under Title I of Dodd-Frank, any bank in the US with $50 billion or more in assets can be designated as a domestically systemically important bank (D-SIB). This would then allow national bank regulators such as the Federal Reserve to impose enhanced prudential standards. These include rules for:
- capital, the purpose of which is to sustain unforeseen losses,
- Liquidity, including calculation of Liquidity Coverage Ratio (LCR) and Liquidity Stress Test, and
- Bank Resolution Plan, which is called Living Will.
The results of many of these supervisory exercises, as well as capital and liquidity ratios, are made public. This type of financial and risk transparency is important to investors, lenders, depositors, rating agencies and many market participants.
Systemically Important Banks (SIBs)
By simply changing the asset size by EGRRCPA, banks such as Silicon Valley Bank were not designated as systemically important. Only those with $250 billion or more will now receive the systemically important designation. EGRRCPA proponents ignore the fact that while a failed or failed bank may not destabilize the entire national banking system, it can certainly destabilize a sector. Just ask California how things are going with SVB now
Also in early 2015, CEO Greg Baker advocated lighter regulations, He argued that his bank was not a large bank, as it had less than $40 billion in assets. In statement that he presented to the Senate Banking Committee, he stated that “since the enactment of the Dodd-Frank Act, we have made meaningful investments in our risk systems, hired additional highly skilled risk professionals, and created a standalone , has established independent risk committee. Board of Directors.” Baker’s statement did not age well. From that year to last week, SVB had increased by 430%. Friday, March 10, 2023, $212 billion in assets that day California Department of Financial Protection and Innovation It closed and appointed the Federal Depository Insurance Corporation as receiver for the failed bank.
Dodd-Frank Liquidity Requirements
Because Trump’s EGRRCPA eliminated important elements of Title I of Dodd-Frank, Silicon Valley Bank and other banks of that asset size are not required to calculate and report the Liquidity Coverage Ratio, the Net Stable Funding Ratio, or perform a comprehensive liquidity assessment review. Is not needed. Capital and liquidity are not the same thing. High-quality capital includes common equity and retained earnings; They help you absorb unexpected losses. Liquidity consists of having enough assets that you can deploy when you have an immediate need to meet liabilities under stressed conditions. Clearly when SVB had to meet outstanding deposits which form a significant part of the bank’s liabilities, it did not have liquid assets to cover them.
The Liquidity Coverage Ratio (LCR) is intended for banks to cover all of their high-quality liquid assets such as cash, US Treasuries, AAA investment grade fixed income securities and other cash equivalents. That figure is divided by the net stressed cash outflows; This is the part where banks have to calculate all the ‘what if’ scenarios. This part of the LCR requires banks to simulate what happens when large deposits or a large number of deposits run away. LCR also asks banks to calculate what happens to large receivables when they do not come through or how the bank is affected when its largest counterparty defaults. Dividing the numerator by the denominator tells you whether the bank is sufficiently liquid during a period of stress. If the result is 100 or preferably much higher, banks should be able to meet their obligations for at least one month even in stressed liabilities.
In his statement to the Senate in 2015, Baker said that “we are conducting a series of different stress tests designed to measure and predict the risks associated with our business in various economic scenarios. As a result, we believe that we are effectively managing the risks of our business and planning appropriately for potentially adverse future business scenarios. Since SVB at that time was less than $50 billion and therefore a systematic It is not clear whether the stress test the SVB was performing was for capital or for liquidity. This is why banks are required, especially those over $50 billion, to count. Their LCR is so important. It gives market participants a view about a bank’s liquidity in a simulated stressed environment. We never had that information about SVBs.
Silicon Valley Bank was also not required to calculate or report the Net Stable Funding Ratio (NSFR). Knowing a bank’s NSFR is important because it tells us how well the bank is doing to rely on stable sources of funds. If a Silicon Valley bank were required to calculate and disclose the NSFR, market participants would have more information about all sources of funds, such as the size, type and concentration of deposits. The NSFR looks ahead 12 months to banks to see what assets they have to cover all liabilities.
Another important enhanced prudential standard requirement that Trump’s EGRRCPA lacks is the Comprehensive Liquidity Assessment Review (CLAR). The purpose of CLAR is to conduct a serious stress test of their liquidity for banks. Banks focus on how resilient they are to both normal and stressed situations. While banks are not required to disclose the results to the public, the information is closely analyzed by analysts at the Federal Reserve to determine a bank’s liquidity.
It saddens me that people ignore history. Every couple of years lenders and traders tell me ‘this time, it will be different.’ The genre of the film may be different, but the ending is always the same, Every time bank regulations are eliminated or eased, banks move to take on more risk and reduce risk recognition and measurement. After that they explode. Pundits jump in to point fingers, especially at bank regulators, who were told to do their jobs with one hand tied behind their back. And worse, the ordinary, unsuspecting citizen who doesn’t even work in the bank will lose his job. I sincerely hope that Republicans and Democrats Those who gleefully sided with Trump in breaking prudential rules will now pay for the groceries and housing costs of all those who will lose their jobs because of SVB’s mismanagement and greed.
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Credit: www.forbes.com /