Patrick McHenry backed weaker bank rules. Bank failures show he was wrong | Opinion

As the federal government scrambled to head off a banking crisis over the weekend, House Financial Services Chair Patrick McHenry tried to soothe the public’s worries.

The Republican congressman from North Carolina whose 10th District includes an area north and west of Charlotte, a major banking center, said, “I have confidence in our financial regulators and the protections already in place to ensure the safety and soundness of our financial system.”

What McHenry didn’t mention are the financial regulations and protections that are no longer in place. They’re gone as a result of regulatory changes he supported.

In 2018, President Donald Trump signed a bill rolling back provisions of the Dodd-Frank financial reform act. The rollback eased the law’s requirements that banks pass a stress test showing they could withstand a surge in withdrawals or losses. The threshold for banks required to pass stress tests rose from those with $50 billion or more in assets to those with assets above $250 billion. Silicon Valley Bank had $209 billion in assets at the end of last year.

In a New York Times op-ed on Monday, Sen. Elizabeth Warren, (D-Mass.), said easing banking regulation reforms contributed to the forced closing of two banks in the past week. Regulators shuttered California-based Silicon Valley Bank on Friday and New York-based Signature Bank on Sunday. The closures threaten to spark a run on community and mid-sized banks if depositors were to suddenly move their money to larger banks they consider to be more stable.

Warren wrote, “These recent bank failures are the direct result of leaders in Washington weakening the financial rules. .… Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”

McHenry was among the cheerleaders for weakening the Dodd-Frank Act. In a 2015 op-ed in the Charlotte Observer, he wrote:

“This week we mark the fifth anniversary of Dodd-Frank becoming law. In that time, our economy has improved but deep problems persist. Small and medium-sized banks are closing and N.C. consumers are worse off. The root cause of the issues that continue to plague our financial system is the law designed to fix it, Dodd-Frank.

“Dodd-Frank was designed to reform our financial system following last decade’s collapse. Instead it has grown the government and empowered Washington regulators, while hurting those most impacted by the collapse: everyday families.”

Fortunately, fast action by the Biden administration may protect “everyday families” from the kind of exposure McHenry’s anti-regulation fervor invites. Bank regulators said all deposits at both closed banks will be protected.

The federal action may prevent a panic, but the experience makes it clear that avoiding a broader bank run means tightening regulations.

Banks like Silicon Valley Bank, which had a branch in Raleigh catering to the Triangle’s tech community, are smaller than the nation’s largest banks, but they may operate at bigger risks.

Silicon Valley Bank, for instance, was dominated by deposits from high-tech businesses and startups. The Federal Reserve’s recent stepping up of interest rates slowed investment in the tech sector. That led to heavy withdrawals by depositors affected by a change that would not have spooked a more diversified customer base.

McHenry appears unwilling to acknowledge the threat exposed by the bank failures. He described Silicon Valley Bank’s collapse as “the first Twitter-fueled bank run,” as if it were some kind of flash mob action by depositors that would pass as quickly as it arose.

But these failures are hardly a quirk. They were evidence of how the financial industry is forever pushing the limits of risk in pursuit of profits. The protection for consumers lies in strong regulation and vigilant regulators.

After this scare, we hope the leader of the House Financial Services Committee will realize that his obligation is to protect depositors rather than reflexively oppose regulations.