Irregularity, a Banking Disease

   

It’s no secret that businesses generally do not like governmental regulation. Self-regulation, however, appears to be more spin-control that true consumer-directed protection. Where regulation of risk is crucial – to consumers, workers or the environment – BIG OIL and BIG FINANCE, are often the first in line to talk a good game but also to make sure they do not have to spend money that can be avoided by making vastly less expensive than campaign contributions and lobbying expenditures. Remember, if compliance is voluntary or close to it, corporate America – a legal construct that only has a fiduciary duty to shareholders and no one else – almost never wants to saddle itself with a cost that its competitors do not also have. So, guess what? Between the PR machine and those legislative influence payments, they generally do not happen.

This pressurized corporate effort to avoid governmental oversight has real world consequences. Whether it is a string of train derailments in Ohio, literally contaminating entire neighborhoods, oil spills in the Gulf of Mexico or collapsing banks sending shutters of instability across our entire financial sector, “we the people” pay… much, much more than if the subject companies faced the kind of scrutiny that their business operations really required. Risk management within companies and their insurers (who often syndicate risk to several entities) is usually a wager based on internal “probabilities” and “cost-benefit analyses” where serious consequences are simply accepted if the odds look good. It is no substitute for genuine governmental oversight. A measured level of death and disaster is just part of the acceptable risk. Their risk. Your life.

It’s also no secret that government regulations – environmental, worker-consumer safety and financial – are always in the crosshairs of the Republican Party, sometimes with the complicity of Democratic Congresspeople elected in primarily red states. However, federal regulatory agencies faced a sustained bloodbath under the Trump presidency. For example, the Consumer Protection Agency was placed under the helm of a distinctly pro-business director, and the Environment Protection Agency was severely constrained as thousands EPA employees were let go.

Railroad safety also succumbed to industry lobbying to a pro-business president: “Trump’s administration, which rolled back more than 100 environmental rules in total, watered down several regulations at the behest of the rail industry. [Trump] withdrew an Obama-era plan to require faster brakes on trains carrying highly flammable materials, shelved a rule that demanded at least two crew members on freight trains and dropped a ban on transporting liquified natural gas by rail, despite fears this could cause explosions.” The Guardian, February 22nd.

And now we have two small-to-medium sized banks, Silicon Valley and Signature banks failing, being taken over by regulators with depositors covered under the FDIC plan or a follow-up federal pledge to guarantee any uncovered deposits. Why? Simply, deregulation played a major role. Didn’t the post-2008 legislation, resulting from the crash of those “too big to fail” institutions, fix the bad risk problem? Let’s look at recent history to see what happened: “Under regulations implemented in accordance with the Dodd-Frank banking reform law of 2010 safety-and-soundness standards were tightened for banks with more than $50 billion in assets… Those larger banks were required to submit annual disclosures to the Fed, meet stricter liquidity and risk management requirements, and undergo ‘stress testing’ that would reveal how they would fare under extreme financial scenarios.

“Mid-sized banks launched a vigorous lobbying campaign to raise that threshold. In testimony submitted to the Senate Banking Committee in 2015, Greg Becker, the chief executive of Silicon Valley Bank [SVB], called for raising the threshold as high as $250 billion… Becker’s statement bristled with the buzzwords and catchphrases beloved of Silicon Valley entrepreneurs. He asserted that without the change, the regulations would be so burdensome that ‘SVB will likely need to divert significant resources from providing financing to job-creating companies in the innovation economy.’… Becker referred to ‘SVB’s deep understanding of the markets it serves, our strong risk management practices, and the fundamental strength of the innovation economy.’

“As it happens, SVB plainly didn’t understand how the markets it serves were vulnerable to lock-step flight from its deposit accounts, had weak or paltry risk-management practices, and failed to recognize that the innovation economy has its ups and downs… The industry’s lobbying yielded fruit. President Trump raised the Dodd-Frank threshold in 2018. At the signing ceremony, Trump labeled the regulations ‘crushing.’ He said, ‘Those rules just don’t work.’” Michael Hiltzik, writing for the March 13th Los Angeles Times. SVB and Signature then fell below a new, asset level threshold raised during the Trump years… and thus were permitted to rely on their own internal risk management assessments without much in the way of federal oversight.

Reynold Aquino, writing for the March 12th Newbreak.com, adds: “The [SVC] collapse was preceded by an announcement from the bank that it had sold a number of securities at a loss and planned to sell $2.25bn in new shares to improve its balance sheet. This news prompted VC firms to advise their companies to withdraw their holdings from the bank, which caused a run on the bank and led to its ultimate collapse. Federal regulators stepped in to take control of the bank after its failure.

“Critics have focused on a list of Republican senators who voted to reduce regulatory oversight on Silicon Valley Bank in 2018. Howard Forman, a professor at Yale, shared the list which includes names like Senators Marco Rubio, Lindsey Graham, Rand Paul, and Mitch McConnell, as well as a few Democrats, including Senators Joe Manchin and Tim Kaine. David Sirota, founder of The Lever, specified that ‘50 Republican senators and 17 Democratic senators voted to ignore warnings and weaken risk regulations for Silicon Valley Bank. Donald Trump signed the bill into law. And now the bank is the 2nd biggest bank collapse in American history.’…

“While external factors, such as inflation and a drop in available VC funding, contributed to the collapse of the bank, some banking experts argue that the bank might have managed its interest rate risk better if parts of the Dodd-Frank financial-regulators package had not been rolled back under President Trump. The Dodd-Frank Act was introduced by the Obama administration in response to the Great Recession, which was sparked by the banking collapse of 2007 onwards. The Act introduced new financial regulations, including a reduction in the frequency of stress tests conducted by the Federal Reserve for banks whose assets totaled between $100bn and $250bn.” I guess business gets what they pay for… except the rest of us pay so much more.

I’m Peter Dekom, and the underlying battle of slogans prevents the average voter from truly understanding what happens when some those extreme slogans get passed and implemented… because campaign and lobbying money talks.