Successive bank failures followed a wave of deregulation

In the spring of 2018, President Donald Trump signed legislation that watered down the landmark regulatory reform bill his predecessor enacted in the wake of the global financial crisis. The changes won a surprising supporter: Liberal former Congressman Barney Frank.

Frank was one of the main architects of the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. But since retiring in 2013, he has repeatedly advocated watering down one of the law’s key points: that any bank with more than $50 billion in assets should be subject to extra-intense federal oversight.

The tweak that followed – raising the threshold to $250 billion – had major consequences. Among other things, many very large banks would, at least initially, escape the Federal Reserve’s annual “stress tests” and enjoy lighter financial security requirements.

One of the beneficiaries of the change was Signature Bank, a New York lender of which Frank was a board member.

Now Signature is dead – a victim of a rapidly evolving crisis that has shown the extent to which the banking industry and other opponents of government oversight have shattered the robust regulatory protections erected in the wake of the 2008 financial crisis.

On Sunday, regulators shut down Signature over concerns that sudden mass withdrawals of deposits had done it in dangerous ways. His failure came barely 48 hours after the collapse of Silicon Valley Bank, whose executives had joined Frank in successfully working to break the $50 billion mark.

The back-to-back bank failures have unsettled investors, customers and regulators, raising fears of a repeat of the 2008 crisis that collapsed hundreds of banks, prompted huge taxpayer-funded bailouts and sent the economy into a tailspin.

Federal regulators scrambled to defuse the situation, vowing to protect all deposits in Silicon Valley and Signature, and announcing an emergency lending program for other troubled banks. Even so, regional bank shares were decimated on Monday, with some falling by more than half as some customers rushed to withdraw deposits.

Much of the post-2008 regulatory infrastructure is still in place and the industry is by most reports on a much stronger financial footing than it was 15 years ago.

In an interview Monday, Frank, who joined Signature’s board two years after he began calling for legislative changes, argued that the regulatory rollback did not set the stage for the recent collapses or a broader banking crisis.

However, some of the banks now facing crises of confidence are the same ones that have been telling lawmakers and others in recent years that they are sufficiently safe and should not be the focus of zealous federal oversight.

Many of these banks argued that onerous federal regulations made it difficult for them to serve as an alternative to giants like Bank of America, JPMorgan Chase, and Wells Fargo. But these giants are likely to see an influx of deposits now as shy customers rush to safety.

And while the regional banks already managed to convince the legislator of their systemic importance in 2018, the regulators have apparently come to a different conclusion in the past few days. They agreed to bail out depositors at Signature and Silicon Valley Bank to protect the financial system at large – a powerful reminder of how fear for a few banks, even if they aren’t America’s largest, can quickly infect an entire industry can.

President Barack Obama signed the Dodd-Frank Act into law in July 2010. At the signing ceremony near the White House, he profusely thanked Frank and his co-sponsor, Senator Christopher Dodd, for “working day and night to bring this.” bring about reform. ”

The law was a direct response to the brutal crisis that had just ended. But it was also a rejection of the laissez-faire regulatory approach that had prevailed in the United States and other countries over the previous decades. Bank executives and lobbyists had persuaded politicians that years of solid profits were proof that they knew how to run their companies safely.

With that argument debunked, Dodd-Frank imposed a series of measures to rein in the banking industry. There was a ban on certain types of risky trades. There have been stricter requirements to ensure banks are able to absorb unexpected losses and withstand sudden depositor exodus. And there were regular health checks to ensure the banks would withstand the worst economic scenarios.

From the moment the law went into effect, the banking industry has been scrambling to have it repealed, or at least relaxed. His argument was that onerous regulations were limiting the industry’s ability to lend money to creditworthy customers.

The argument fell on deaf ears in Obama’s White House. Trump was more receptive. Barely a week after taking office, he called Dodd-Frank “a disaster” and told reporters that “we’re going to do a big thing” with the law.

Its top officials, many of whom had worked in or near banking, began to loosen the reins. Sometimes that meant changing rules; sometimes it just meant being nicer to regulated banks.

On-site auditors were urged to be less confrontational and give banks positive feedback, not just criticism. Trump’s currency examiner, one of the top federal financial regulators, has described banks as “clients” of his agency.

“Changing the tenor of supervision is probably going to be the biggest part of my job,” said Randal K. Quarles, the Federal Reserve’s chief bank regulator, in 2017.

That year, Republican lawmakers drafted bills to relax Dodd-Frank. A key focus was the provision that stress-tested every bank with assets in excess of $50 billion to hold larger financial reserves and develop plans for how the bank might close in a crisis.

The legislation followed years of pressure from bank executives and lobbyists, including Greg Becker, who ran Silicon Valley Bank until Friday.

“Without such changes, the SVB will likely have to divert significant resources from providing funding to job-creating firms in the innovation economy,” Becker warned lawmakers in 2015.

Harris Simmons, the CEO of Zions Bancorporation in Utah, was another trying to break free from what he saw as onerous federal oversight. He said regional banks like his posed little threat to financial stability and that strict regulations limited their ability to serve customers.

“If regulations on regional banks were relaxed, those banks would have additional capital — up to $4 billion a year — to lend,” Simmons wrote in American Banker magazine in 2017. To back up his arguments, he cited Frank’s support of raising the $50 billion mark.

Zions, which has more than 100 branches in three states, is now among the banks plagued by concerned investors. Its shares fell about 25% on Monday. A Zion spokesman did not respond to a request for comment.

Supporters of the 2018 changes said they still made sense even as a new crisis unfolded. “These mid-sized banks needed some regulatory relief,” Sen. Mark Warner, D-Va., told ABC News Sunday.

In Monday’s interview, Frank said the aim of the legislation was to focus on the country’s largest banks and not burden smaller institutions with strict rules or oversight.

Had the $50 billion threshold remained in place, Signature would have had to either halt expansion or be subject to Federal Reserve stress tests and other requirements to curb aggressive risk-taking and ensure its security.

Instead, Signature has seen a growth spurt thanks to the 2018 change. Wealth has grown from about $47 billion at the time to $110 billion last year. It expanded into six states.

A recent source of growth has been cryptocurrencies; since 2018, the bank was among the few lenders accepting deposits in the form of crypto assets. By Friday, concerns about the bank’s exposure to cryptocurrencies had sparked a deadly run on its deposits.

Frank, who received more than $2.4 million in cash and stock from Signature during his more than seven years on the board, left the job Sunday as regulators dissolved the board. He said Monday the bank was the victim of overzealous regulators. “We were the ones who shot them to encourage others to stay away from crypto,” he said.

He added that although Signature received less government control than it otherwise would have, New York state regulators were still at the helm of the bank.

“I didn’t see any degradation in the oversight that we were getting,” Frank said. “There was a lot of control”

This article originally appeared in The New York Times.