Biden says US banking system is safe after SVB, Signature collapse
US PRESIDENT Joe Biden declared the American banking system “safe” and vowed stiffer bank regulations, after regulators were forced to step in with a series of emergency measures following the collapse of Silicon Valley Bank (SVB) and Signature Bank.
“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” he said. He added that the banks’ managers would be fired, and that investors would lose money.
“They knowingly took a risk, and when the risk didn’t pay off... adjusters lose their money. That’s how capitalism works.”
Biden also promised new regulations after the biggest US bank failure since the 2008 financial crisis. “I’m going to 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, and to protect American jobs as a small business,” he said.
The president’s economic team worked with regulators over the weekend on the measures, which included guaranteeing deposits in both banks, setting up a new facility to give banks access to emergency funds, and making it easier for banks to borrow from the Federal Reserve in emergencies.
On Monday (Mar 13), the US Federal Deposit Insurance Corporation said it had transferred all SVB deposits to a newly created bridge bank, and that all depositors would have access to their money from Monday morning.
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The moves sent waves of relief through Silicon Valley, but a relief rally was short-lived. The crisis tested confidence in the US financial system, and fears remained that the fallout would roil global markets in the week to come.
Bank shares in Europe and Asia sank on Monday before the US market’s opening, while US stock index futures were down, even as some investors bet on a pause in interest-rate hikes by the Fed. S&P 500 futures dipped 0.7 per cent, with investors appearing to take little comfort in Biden’s remarks which largely tracked an earlier written statement.
Dodd-Frank in the spotlight
Rules that were introduced after US banks sparked a global financial crisis in 2008 with aggressive mortgage lending were partially repealed in 2018 under former president Donald Trump.
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The changes to the Dodd-Frank Act, pushed by the Republicans, raised the threshold at which banks were considered systemically risky and subject to stricter oversight to US$250 billion from US$50 billion. SVB had $209 billion in assets at the end of last year.
Biden, a Democrat, faces a divided Congress after Republicans took control of the House of Representatives in January, and new US bank regulations could be a tough sell.
“The prospect of legislation in this polarised political world is very low,” said John Coffee, a professor at Columbia Law School.
“The real problem here is that banks that are holding illiquid loans or securities on a hold-to-maturity basis do not have to mark them down, even though they have a market value well below their balance-sheet value. But when (SVB) sold some of these and revealed their loss, they created some panic.”
Senator Tim Scott, a Republican from South Carolina who sits on the Senate’s banking, housing and urban affairs committee, said it was important to bring markets to a “calm and orderly resolution”, but warned against too much intervention.
“Building a culture of government intervention does nothing to stop future institutions from relying on the government to swoop in after taking excessive risks,” he said, adding that he was committed to bringing accountability for the crisis.
“We deserve to know what exactly happened and why.” REUTERS
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