Congress reacts to financial institution failure

Chairman Sherrod Brown, D-Ohio, left, and senior member, Sen. Tim Scott, RS.C., arrive for the Senate Committee on Banking, Housing and Urban Affairs hearing on April 27, 2023, which will review recent bank failures be discussed.

Tom Williams | Cq-roll Call, Inc. | Getty Images

WASHINGTON — Lawmakers who chair key banking committees hailed the federal takeover Bank of the First Republic on Monday and halted the sale of its assets JPMorgan Chase as a successful public-private collaboration to protect the US financial system.

“This quick and cheap sale of the bank protects depositors, limits contagion and ensures there are no costs to our nation’s taxpayers,” said Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee.

The committee’s Republican chairman, Rep. Patrick McHenry of North Carolina, said, “I appreciate regulators’ quick work to facilitate a sale of the bank’s assets while minimizing risk to taxpayers.”

The institution’s collapse, which followed the failures of Silicon Valley Bank and Signature Bank in March, sparked a new debate on Capitol Hill about how best to counter threats to the financial system.

GOP lawmakers have repeatedly warned against passing new legislation in response to the banks’ failures and declined to push for tighter regulation again on Monday.

Democrats, meanwhile, have focused on a 2017 bank deregulation bill that passed with bipartisan support at the time, making it unlikely that an effort to repeal would succeed today.

More broadly, with scrutiny over the House-Senate split and debt ceiling negotiations set to dominate the next few months, there is little hope in Washington that Congress will produce any serious banking reforms this year.

Still, there is an appetite outside of Congress for banking reform.

The Federal Deposit Insurance Corporation, which has secured tens of billions of dollars worth of uninsured deposits at the failing banks, released a new report Monday outlining several options for deposit insurance reform. The report concluded that Congress should allow higher limits or unlimited insurance for business accounts.

Republicans have so far indicated that they favor private-sector solutions over expanding government backstops.

On the Senate side, senior member of the Chamber’s Banking Committee, Sen. Tim Scott, RS.C., said he was “glad” that the FDIC “secured a private markets solution for First Republic.” I look forward to learning more about the application process and bringing transparency to the American people.”

His testimony contrasted with the reaction of the chair of the Senate Banking Committee, Democratic Senator Sherrod Brown of Ohio. He did not respond directly to federal intervention, instead directing his anger at the failed bank.

“First Republic Bank’s risky behavior, unique business model and managerial failures have created significant problems and it is clear that we need stronger guard rails,” Brown said in a statement. “We need to make big banks more resilient to failures to protect financial stability and ensure long-term competition.”

CNBC Policy

Read more about CNBC’s political coverage:

Like Brown, Waters has called for a more robust congressional response to the collapse of three major regional banks since early March: first SVB, then Signature Bank, and finally First Republic.

Friday’s government reports reviewing federal responses to SVB and Signature “underscore the need for Congress and regulators to strengthen regulation and oversight of regional banks,” Waters said, and for “compensation recoveries to secure bank directors for… accountable for their actions”.

Waters also said the House Financial Services Committee should invite First Republic’s CEO to testify. An earlier invitation from the Senate Banking Committee to the chief executives of SVB and Signature Bank in March was declined, according to follow-up letters from the committee to the chief executives.

Still, it was unclear Monday whether the First Republic’s multi-week, slow-motion collapse, culminating in the sale announcement, would be enough to reignite interest on Capitol Hill in legislation to increase regulation of banks or impose tougher penalties on bank executives at failed banks .

After a spate of new legislation in the weeks following the collapse of the SVB, Congress has yet to take concrete action in response to the bank failures, aside from hearings with regulators.

A bipartisan Senate bill tabled in late March would give federal regulators far more power to claw back executive compensation at failed banks than is available under current law.

The bill has been referred to the Banking Committee, which is yet to adopt specific legislation in response to the bank failures.

The Failed Bank Executives Clawback Act was just one of several pieces of legislation championed by Senator Elizabeth Warren, a longtime skeptic of big banks.

In a statement Monday, the Massachusetts Democrat said the First Republic’s failure “shows how deregulation has made the ‘too big to fail’ problem worse.”

She added: “A poorly regulated bank has been bought out by an even bigger bank – taxpayers will end up on the hook. Congress must enact sweeping reforms to fix a broken banking system.”

Comments are closed.