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The rallying cry in Washington always seems to be the same: Send in the arsonists to put out the fire.
P oliticians and regulators are famous for giving themselves power to “fix” the problems that they themselves created. The rallying cry in Washington always seems to be the same: Send in the arsonists to put out the fire.
Here we go again. Earlier this year we had a mini-banking panic as interest rates rose and several big banks — most notably Silicon Valley Bank and Signature Bank — went out of business. These banks got in trouble by buying and holding low-interest bonds that tanked in value when interest rates soared over the past two years.
They made a bad bet. But bank regulators were encouraging the banks to hold the very Treasury securities that plummeted in value. The FDIC paid out emergency bailout money to keep the depositors whole and to prevent a 1930s-style run on the banks.
The regulators who are supposed to prevent these crises were asleep at the switch. In the case of SVB, Federal Reserve examiners overlooked the actual risks that contributed to SVB’s collapse. There were clear failures in government supervision.
In response to that temporary bank crisis, Congress and regulators want more control. The regulators are asking Congress to raise capital requirements on their loans. This punishes the healthy banks, not the lenders that are poorly managed. Even worse, the increased capital requirements would force banks to lend out less money at the very time that credit is in short supply.
Holding more of the “safe” investments — such as government securities — has exacerbated the squeeze on banks. Regulators incentivized the banks to purchase Treasury bills at a 1.5 percent interest rate only to find that several years later those bonds have tumbled in value because the interest rate is now above 4.5 percent.
An even worse idea is new legislation called “The Recoup Act.” This law is designed to tighten penalties for gross bank negligence, financial misconduct, and breach of any fiduciary duty. That part is fine.
What’s dangerous is that the law empowers the government to unilaterally remove bank executives. Bank CEOs or executives could be fired without the board of directors’ or shareholders’ consent — and without any due process of law. The regulators could even recover (“claw back”) up to two previous years of pay from bank executives. These regulators would be authorized to dismiss executives even if the bank is making money and is not in financial distress.
If regulators can assert this type of judge-jury-and-executioner power over private banks, what’s to stop Congress from passing other laws to allow them to remove executives they don’t like from steel companies, utilities, or professional football teams on a losing streak? So much for “free enterprise.”
Can the feds replace bank executives for failing to invest in green-energy projects, or for failure to adhere to leftist notions of social justice in hiring? Will they be fired if they fail to invest enough — or too much — in distressed neighborhoods?
Our banking industry provides the financial oxygen for small and growing companies through their lending practices. They don’t bat 1.000 in their risk portfolios. But they are far better at allocating capital than federal officials who routinely put billions of dollars behind bankrupt companies.
There is probably no industry in America that comes under more intense regulatory scrutiny than our banks — which have at least five separate federal agencies overseeing their activities. The lending industry is overregulated, not underregulated. Government power grabs such as the Recoup Act won’t make America’s banks safer.