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Trump needs to explain his bank deregulation

He may prefer to rant about “witch hunts” and “rigged elections,” but if Donald Trump intends to be a serious candidate in the 2024 presidential election, he needs to address bank deregulation that took place under his watch and set the stage for the 2023 banking crisis, the worst since 2008.

Investigators are still gathering the facts behind the failure of Silicon Valley Bank, or SVB, and Signature Bank earlier this month. The Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) both say they’ll issue reports on the failures by May 1. But plenty of evidence is surfacing that links lax oversight of the banks to a series of deregulatory moves Trump pushed for, and got, after he won the presidency in 2016. Bailouts of the two banks have so far run up a $20 billion bill, which the government will seek to recoup through new fees on banks.

Trump ran in 2016 as a business-friendly mogul eager to cut red tape and unleash the private sector. The chief fundraiser for his campaign was Steve Mnuchin, a banker who became Trump’s Treasury Secretary. Gary Cohn, former president of Goldman Sachs, was Trump’s chief economic adviser in 2017 and 2018. “They picked the people in charge of the regulatory agencies, and they picked deregulators,” said Dennis Kelleher, CEO of the watchdog group Better Markets.

Two months into his presidency, Trump hosted a group of community bankers at the White House and told them he hoped to ease the rules on banks within six months. It didn’t happen quite that fast, but in May of 2018 Congress, controlled by Republicans, passed a law that raised the threshold for the toughest level of supervision from $50 billion in deposits to $250 billion. When Trump signed the bill, he bragged that “the legislation I’m signing today rolls back … crippling regulations that are crushing community banks.”

At the same time, bank regulators including the Fed and the FDIC were easing bank regulations and trying to create friendlier relationships with banks. In September of 2018, four agencies that regulate banks changed their supervisory guidance in ways that, beginning the following year, would effectively make it harder for bank supervisors to raise objections if they saw risky behavior. That December, the Wall Street Journal reported that “banks get kinder, gentler treatment under Trump.”

U.S. President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria
U.S. President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria (Carlos Barria / Reuters)

The two banks that failed this year, SVB and Signature, both fell into the category of banks that enjoyed lighter oversight after the 2018 changes. “The 2018 legislation and 2019 regulatory relief sent a very powerful signal to banks between $100 billion and $200 billion—it’s time to take a deep breath and relax,” Anna Gelpern, a professor of law and international finance at Georgetown, said during a March 28 event. “If you take the combination of that regulatory relief, supervisory relief and legislation, then look at the business model of these two banks, these combinations gave you the toxic mix we saw implode.”

Supervisors did notice problems with the banks before they failed. Federal Reserve supervisors, for instance, found liquidity problems at SVB at the end of 2021 and documented numerous problems in 2022. In February 2023, Fed staff highlighted SVB during a briefing for the central bank’s Board of Governors on growing interest-rate risk at banks—the very problem that doomed SVB. Yet the Fed still failed to take action in time to stem a ruinous run.

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There’s now a ferocious battle underway to assign blame for the failure of the two banks, along with the instability that has rattled the whole sector. Michael Barr, the Federal Reserve’s vice chair for supervision, said in March 28 testimony before the Senate Banking Committee that “SVB’s failure is a textbook case of mismanagement.” The bank tripled the size of its deposit base after the Trump administration eased supervision in 2019, which provided a lot more money to invest. But the bank failed to account for rapidly rising interest rates, and got overexposed to securities it bought when rates were low. When withdrawals were higher than expected, the bank had to sell those assets at a loss, triggering a vortex that led to more withdrawals, more money-losing asset sales and the bank’s rapid failure.

Those mistakes are now clear in hindsight, but the Fed itself played a much bigger role in the banking meltdown than it wants to admit. “The Federal Reserve [is] responsible in large part for the failure of Silicon Valley Bank and the ongoing banking crisis,” Better Markets argued in a March 27 report. “Once Trump took office in 2017, the financial industry was significantly unleashed, unsupervised and unpoliced.”

When Trump came into office, Jerome Powell, a Fed governor, was already pushing for the deregulation of banks below the top tier. Trump named Powell to be Fed chair in 2017, and President Biden appointed him to a second term in 2021, before there was any sign of a banking crisis. So Powell has to deal with the consequences of his own policymaking. Another Fed official who spearheaded the regulatory rollback was Randal Quarles, who Trump appointed as the Fed’s vice chair for supervision, also in 2017. Quarles left that job when his four-year term expired in 2021. In a March 27 Wall Street Journal op-ed, Quarles insisted that Trump-era legislative and regulatory changes had nothing to do with SVB, which, he contends, failed simply because its managers screwed up.

At the FDIC, the lead deregulator was banking lawyer Jelena McWilliams, who Trump appointed to a five-year term heading the agency in 2018. But she resigned in 2022 amid a spat with Democrats over policy. The new FDIC chief, Martin Gruenberg, headed the agency once before and is considered tougher on banks than his predecessor.

Trump has an explanation for the banking mess that has nothing to do with his own policies. During a March 27 Fox News interview, Trump blamed SVB’s failure on higher interest rates, while the interviewer, Sean Hannity, didn’t even ask about Trump’s own deregulatory policies. As for a solution, Trump said, “I would have done a very big number on Powell,” without specifying what that means. Powell may yet end up the fall guy, which would probably be fine with Trump. He’s got better things to talk about.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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