How Not To Respond To A Banking Problem

Eakinomics: How Not To Respond To A Banking Problem​

The recent turbulence in the banking sector, the poster child of which is the collapse of Silicon Valley Bank (SVB), has raised two important questions: (1) What went wrong, and (2) what reforms are needed? So it was notable that last Thursday the White House released a fact sheet outlining the reforms the Biden Administration wants. AAF’s Thomas Kingsley has an insightful review, but a couple of things are immediately obvious.

This is political messaging and nothing more. The Federal Reserve has promised a review of the supervision of SVB in May. Doubtless there will be congressional oversight of the Fed’s handling of the bank. Did the White House wait for any evidence of the source of the problems? No. It simply chose to scapegoat the passage of a modest Trump-era reform to Dodd-Frank in 2018 and call for regulators to roll it back administratively.

The real evidence that the politicos in the West Wing hijacked the response is that nobody bothered to inform Treasury Secretary Janet Yellen. The very same day she gave a speech that asserted: “Federal regulators are in the process of reviewing events surrounding the failure of SVB. It’s important that I don’t prejudge the conclusions of their inquiry.” Awkward.

The other piece of the politics is that the White House (and Treasury) did not actually do anything. It simply called on the regulators to reverse what was done in 2018, thereby pointing the finger at the Fed. This is a disappointing development for a White House that has respected the independence of the Fed in the fight against inflation. I guess this does not extend to regulatory issues.

But the most disappointing aspect was the policy substance. As Kingsley lays out, there is no reason to believe that anything in the 2018 reforms (or the proposed reversal) would have changed the outcome at SVB. So the White House proposal has no benefits. And it would undoubtedly have much higher regulatory costs; the whole point in 2018 was to reduce those burdens.

All costs, no benefits. Hasty, uncoordinated political messaging. Dragging the Fed into politics.

Terrific.