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LINK SVB and mid-size banks spent $50 million to weaken Dodd-Frank

March 17, 2023

A group of mid-size banks spent nearly $50 million on a lobbying blitz supporting 2018 legislation that eliminated oversight rules experts now say could have prevented the recent collapse of one its members, Silicon Valley Bank, or SVB.

That legislation, which received bipartisan support in Congress, eliminated key reforms instituted by the Dodd-Frank Act in 2010 for banks with between $50 billion and $250 billion in assets — regulations developed after the last major financial crisis. The two-dozen mid-size banks that stood to benefit from the 2018 bill spent $46 million lobbying lawmakers and executive branch agencies over a key 18-month period while the legislation was being discussed and implemented, a Grid analysis has found.

The banks’ lobbying efforts were accompanied by a flood of campaign cash to key federal lawmakers. Members of the Senate Banking Committee received $2.4 million in campaign contributions from the commercial banking industry during the 2018 campaign cycle.

It paid off: The bill was a rare bipartisan success. The Senate passed it with a 67-31 vote in March 2018, and the House followed, voting 258-159 in May, before then-President Donald Trump signed it into law. Sen. Mike Crapo (R-Idaho), the then-chair of the Senate Banking Committee, said at the time that “relief from enhanced prudential standards” for banks with less than $100 billion in assets was “a key provision of the bill.”

“The primary purpose of the bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, midsize banks and regional banks to promote economic growth,” Crapo said in 2018.

Five years later, however, critics have blamed those weakened standards for a pair of bank failures that put the U.S. financial system on the brink of systemic failure. The exact causes of Silicon Valley Bank’s failure are still being debated — and will likely be investigated in the coming months. But critics of the 2018 law argue that it helped set the stage for the current crisis by removing the stricter regulatory oversight that SVB would have been subject to under the 2008 law. And they’re placing the blame squarely on the bank lobby.

“These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Sen. Elizabeth Warren, D-Mass., wrote in a New York Times op-ed this week.

Sen. Sherrod Brown of Ohio, who opposed the 2018 law when he was the top-ranking Democrat on the Senate Banking Committee and is now the chair of the committee, said at a hearing Thursday that banks have long “had too much power in this town.”

“Of course Wall Street didn’t change its ways” after the 2008 recession, Brown said. “Wall Street spent the ensuing years lobbying to roll back safeguards we passed in the wake of that crisis.”

Despite recent criticism, Crapo does not believe his legislation — also known by its bill number, S.2155 — is to blame for the demise of Silicon Valley Bank.

“The Silicon Valley Bank failure is a result of poor liquidity and interest rate risk management,” a Crapo spokesperson said in a statement to Grid. “It is not the result of S.2155, which gave regulators the authority to tailor capital regulations. Those making this erroneous claim are simply politicizing the issue without any solid evidence.”
“Excessive regulations”

When it passed in 2010, the Dodd-Frank law was hailed as a significant step toward protecting consumers and preventing the next financial crisis. The law created a series of new regulatory requirements for financial institutions, including a requirement that banks with more than $50 billion in assets be subject to heightened regulation in an attempt to avoid financial disasters like the 2008 Lehman Brothers bankruptcy.

Within months of Dodd-Frank’s passage in 2010, banks started pushing back against its raft of new regulations. In 2014, a new organization was formed that advocated specifically for banks with assets between $10 billion and $50 billion: the Mid-Size Bank Coalition of America (MBCA). It focused on one argument: Banks of its size were not responsible for the 2008 financial crisis and shouldn’t be held to the standards laid out by Dodd-Frank.

“With straight forward balance sheets, conservative lending practices, common sense underwriting, and Main Street DNA, mid-sized banks were not responsible for the problems that brought the 2007-2008 financial crisis to its peak,” the MBCA’s website read in 2014. Regulations meant to apply toward large international banks should not apply “to mid-sized banks headquartered in Milwaukee, Memphis, Kansas City, San Antonio, and Denver.”

This message that regional banks should not be regulated like Citibank or J.P. Morgan proved powerful with lawmakers. In the coming years, it became a rallying cry for reforming Dodd-Frank, which was painted as stymying local business.

The solution put forward by Republicans as early as 2014 was to raise the $50 billion “too big to fail” cap laid out by Dodd-Frank to $250 billion — a change that would alleviate regulations not just for banks traditionally thought of as “mid-size,” but also some larger financial institutions. With a cap of $250 billion, all but a handful of the very largest banks would be exempt from the “too big to fail” rule.

Regardless, the argument that the change would help smaller banks prevailed among the growing number of proponents for reform.

“Excessive regulations — intended for the largest banks — are making it too expensive, too time consuming for small banks and credit unions to serve consumers, farmers, and small businesses,” Sen. Mark Warner (D-Va.), an author of the 2018 reform bill, wrote in an op-ed for the Virginia-based Tidewater News shortly after Trump signed the bill.

Warner painted banks in need of relief as local institutions that “don’t have big teams of lawyers and accountants to help them comply with government regulations like the big banks do.”

Warner and Crapo each received $10,000 in campaign contributions from the mid-size bank coalition’s political action committee in 2017.

But many of the banks looking for deregulation were not local or small. The bill that Warner and others authored eased Dodd-Frank restrictions on all but a handful of very large international banks. It raised the “too-big-to-fail” limit on banks from $50 billion to $250 billion, allowing a bank like SunTrust — which had roughly 1,400 branches and $200 billion in assets as of 2018 — to operate with less regulation.

Regional banks like Silicon Valley Bank and Signature Bank were also allowed to grow without having to comply with regulations that used to apply to larger financial institutions. They had powerful allies in doing so: Prior to its collapse, Silicon Valley Bank CEO Greg Becker served on the board of the San Francisco Federal Reserve, and the bank included an Obama-era Treasury official, Mary J. Miller. Signature Bank added former senator Barney Frank (D-Mass.) — one of the Dodd-Frank law’s namesakes — to its board in 2015.

The MBCA supplemented a raft of other large banking trade groups that have long held sway in Washington, most notably the American Bankers Association (ABA), which spent more than $9 million on lobbying in 2018 alone and gave $3.5 million to candidates in the 2018 midterm elections through its PAC.
“Non-existent” risk

Silicon Valley Bank was one of the mid-size banks that pursued looser regulation.

In a 2015 written statement to the Senate Banking Committee, Silicon Valley Bank parent company SVB Financial’s CEO, Becker, wrote: “We urge Congress to act quickly to increase the $50 billion threshold and create a new asset-level floor below which enhanced prudential standards will not apply.”

Silicon Valley Bank, “like our mid-sized bank peers, does not present systemic risks,” Becker wrote in the 2015 letter.

In November 2017, Crapo and others introduced the legislation that Silicon Valley Bank and its peer institutions wanted. Mid-size banks argued that the changes the bill made to existing bank regulations would pose minimal risk to the overall financial system.

Crapo’s bill would allow Silicon Valley to “focus even more on lending and job growth,” Becker said in a statement at the time the legislation was introduced, according to the trade publication American Banker.

Yet the nonpartisan Congressional Budget Office, in a March 2018 analysis of the bill, concluded that it would “increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.”

Despite the warnings, mid-size banks continued their advocacy efforts.

Total federal lobbying expenditures by a core group of roughly two dozen mid-size banks affected by the regulations grew from $6.7 million in the second quarter of 2017 to $9 million in the first quarter of 2018, Grid found.

In late 2017, MBCA penned a letter on behalf of 84 mid-size banks it represented at the time — including the ill-fated Silicon Valley Bank and Signature Bank, which also failed last week, urging federal lawmakers to loosen regulations.

“In addition to virtually non-existent individual risk,” the coalition’s letter states, “mid-size banks do not present even a marginal systemic risk.” MCBA did not respond to questions from Grid for this report.

Yet when Silicon Valley Bank failed last week in the second-largest bank failure in U.S. history — bringing with it the smaller, New York City-based Signature Bank — federal regulators said that is exactly what happened: a systemic risk to the nation’s financial system.

The Treasury, Federal Reserve Board and Federal Deposit Insurance Corp. said in a joint statement Sunday that they had invoked the “systemic risk exemption” in order to make depositors of the two banks whole.

“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the joint statement reads.
Democrats played a key role

In the wake of SVB’s collapse, critics have lobbed attacks at the Trump administration for its role in softening the Dodd-Frank law.

“During the Obama-Biden administration, we put in place tough requirements on banks, like Silicon Valley Bank and Signature Bank,” President Joe Biden said in his speech addressing the SVB collapse on Monday. “Unfortunately, the last administration rolled back some of these requirements.”

Biden’s critique leaves out a key part of the story: While Republicans led by Trump were eager to change Dodd-Frank, they couldn’t have done so without a sizable bloc of 16 Democrats who joined them to overcome the threat of a Senate filibuster. More than 30 House Democrats, meanwhile, joined with Republicans to pass the bill in the other chamber.

Democrats argued they supported the bill because it would help local banks. Then-Sen. Heidi Heitkamp (D-N.D.) said it was a bill she was “incredibly proud of” and had been working on since 2013, and that the bill was “drafted to address access to capital concerns and consolidations of small banks in areas where I live, which is the state of North Dakota.”

But key provisions would affect banks that were far larger than a one-branch institution Heitkamp was referencing in North Dakota. And Heitkamp, along with Democrats like Warner, Sen. Jon Tester (D-Mont.) and then-Sen. Joe Donnelly (D-Ind.), didn’t just vote for the bill, they helped write it in a way that would garner support from them and other Democrats in the chamber.

Warner, who served on the Senate Banking Committee, that year spoke at the American Bankers Association’s conference in Washington D.C., where he urged the 1,300 attendees to pressure lawmakers to pass the bill in the House without modifications that the Senate couldn’t swallow.

Heitkamp and several other key supporters, including Tester and then-Sen. Claire McCaskill (D-Mo.), were meanwhile facing tough reelection fights in November. In their reelection battles, they became top recipients of cash from the banking and finance industries, netting hundreds of thousands of dollars in cash from banking PACs and company employees. A Koch brothers-backed group ran ads online thanking Heitkamp for donating the money, while the ABA ran ads in Tester’s favor.

Nine days after the bill was passed in the Senate in March 2018, the mid-size bank coalition’s political action committee contributed $5,000 to Heitkamp’s campaign.

Ultimately, the influx of cash did not save most of the red-state senators at the ballot box. Heitkamp, Donnelly, McCaskill and others lost their seats, only feeding progressive critics who argued they were acting against the interest of their voters.

“It’s a crazy thing to think that voting with banks is a way to attract swing voters,” said David Segal, co-founder of Demand Progress, an advocacy group that rallied against the banking bill.

snytiger6 9 Mar 18
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