Weeks after the failure of two U.S. banks, President Joe Biden called Thursday for independent regulatory agencies to impose tighter rules on the financial system, telling officials they can act under current law without additional steps by Congress.
The recommended changes from the White House echo proposals laid out this week during House and Senate committee meetings on the collapses, but also try to put a clear blame on the Trump administration for weakening supervision of regional banks. The Biden administration issued a fact sheet noting Biden's predecessor "weakened many important common-sense requirements and supervision."
"The president is urging the banking regulators to consider reforms that will reduce the risk of future banking crises," White House press secretary Karine Jean-Pierre told reporters.
Rattling the financial markets and U.S. voters alike, California-based Silicon Valley Bank and New York-based Signature Bank failed over the course of a weekend this month, requiring government intervention. Then another financial institution, First Republic Bank, received an emergency $30 billion infusion of funds from 11 large private banks.
Now Biden wants to revive and expand rules for midsize banks that face less scrutiny than the industry's behemoths, with administration officials saying U.S. banks have stabilized since the collapse of Silicon Valley on March 10.
Once banks hold assets of more than $100 billion, the administration is asking the banks to hold more capital to absorb losses and to face enhanced stress testing to ensure they could withstand a possible crisis. The banks would also need to provide the federal government with "living wills" to help the banks unwind in case of failure.
Additionally Biden wants regulators to provide more aggressive supervision of banks and to have regulators ensure that community banks are not responsible for replenishing the federal insurance fund for bank deposits.
Greg Baer, CEO of the Bank Policy Institute, criticized the administration's proposals Thursday, saying the efforts impose costs on the economy as the bank failures are still being reviewed.
"This has a strong feeling of ready, fire, aim," said Baer, whose advocacy group represents the financial sector.
The Biden administration's public push is part of a larger effort by Biden to ensure that individual bank failures can be contained without triggering a chain reaction across the wider financial system.
In a speech Thursday afternoon, Treasury Secretary Janet Yellen noted that regulations have been weakened in recent years as the shocks of the 2008 financial crisis wore off, but the recent failures required swift government intervention to preserve public confidence.
"The failures of two regional banks this month demonstrate that our business is unfinished," Yellen said at the National Association for Business Economics conference in Washington. "Regulation imposes costs on firms, just like fire codes do for property owners. But the costs of proper regulation pale in comparison to the tragic costs of financial crises."
What seemed unique in the two recent bank failures was how quickly bank runs started in a digital era, putting at risk accounts that exceeded the $250,000 limit on deposit insurance. The banks' holdings were also hurt by the Federal Reserve raising interest rates to tame inflation.
Yellen is focused not just on banks, but also rules for money market funds, hedge funds and cryptocurrency.
"If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money market funds," she said. In February, money market funds contained net assets worth $5.3 trillion, according to the Securities and Exchange Commission.
She also called for more oversight of digital assets and cryptocurrency, saying "we must identify and fill gaps in existing authority for the oversight of other crypto-assets." Yellen pointed to volatility in the crypto market, as well as the collapse of FTX, the large crypto exchange that failed in November, leaving investors and customers with billions in losses.
Biden, meanwhile, has also sought tougher penalties on the executives of failed banks, including clawing back compensation and making it easier to bar executives from failed banks from working again in the industry.
The root causes of the bank failures are still being explored, and Yellen cautioned government officials Thursday against prejudging any inquiries that subsequently inform regulation changes.
The Justice Department, the Fed, the SEC and several congressional committees have announced some form of investigation into the bank failures.
Lawmakers have held hearings with regulators from the Fed, FDIC and Treasury this week. Both political parties have blamed Fed officials for not quickly spotting the unique risk to which the banks were exposed by holding an unusually large amount of uninsured deposits. The banks simultaneously invested in long-term government bonds and mortgage-backed securities that tumbled in value as interest rates rose from near zero at the start of 2022.
One issue that made Silicon Valley Bank's collapse unique was the "extraordinary scale and speed" of customers trying to make withdrawals, Michael Barr, the Federal Reserve's vice chair for supervision, told a congressional committee Wednesday.
During the committee meetings this week, Barr said the Fed's review of the banks' collapses will consider whether stricter regulations are needed, including whether supervisors have the tools they need. The Fed will also consider whether tougher rules are needed on liquidity -- the ability of the bank to access cash -- and capital requirements, which govern the level of funds a bank needs to hold, he and other officials told lawmakers.
A day before Silicon Valley Bank's March 10 failure, customers tried to withdraw $42 billion, triggering a swift bank run that Barr said he had never seen before. "All of us were caught incredibly off-guard by the massive bank run that occurred when it did," he said.