internet last week run at Silicon Valley Bank it could give a boost to lawmakers who want to revive a Great Depression-era law that kept the banking system safe, if somewhat dull, for more than six decades.
The idea of reviving the most important parts of the law, named Glass-Steagall after its sponsors in Congress, wasn’t even on the radar before Silicon Valley Bank’s unexpected $209 billion bankruptcy.
But in an example of how much the SVB’s downfall has caused some in Washington to question its record, Treasury Secretary Janet Yellen was asked about reviving Glass-Steagall Thursday at a Senate committee hearing and she didn’t say no. the idea immediately.
“I think there will be plenty of time (when) it will be appropriate to look at what happened and consider whether regulatory or supervisory changes are necessary or not. I look forward to working with you as we discuss what happened and what response is appropriate,” Yellen told Sen. Maria Cantwell (D-Washington).
“But for now, I would like to see confidence restored in the strength of the United States,” he said.
“I think there will be plenty of time (when) it will be appropriate to look at what happened and consider whether regulatory or supervisory changes are necessary or not.”
– Secretary of the Treasury, Janet Yellen
Glass-Steagall was passed in 1933 in response to the banking crisis caused by the Great Depression. He established the Federal Deposit Insurance Corporation, which guarantees bank deposits up to $250,000 per bank per account. But Silicon Valley Bank depositors were guaranteed your money above the $250,000 limit into law once regulators identified the bank as important to the entire banking system.
However, Glass-Steagall is primarily known for separating commercial banking (checking accounts, certificates of deposit, personal and small business loans offered by major banks) from investment banking, where Wall Street banking firms trade stocks, bonds and other securities. , underwrite initial public offerings of company shares and finance complex mergers and acquisitions.
In 1999, a Republican Congress and President Bill Clinton repealed the most important part of the law that prevented banks from offering securities or selling insurance in addition to banking. The change came after years of heavy lobbying by the financial services industry and partly as a reaction to market changes and the march of technology, which was seen as facilitating a single window for banking, securities and insurance. .
Revive Glass-Steagall has go up beforeafter the accounting scandals of the early 2000s, including Enron and WorldCom, and after the 2008 financial crisis, but it never gained much traction.
‘capital formation’
On Thursday, Cantwell, whose estate includes the Seattle tech area that is home to Microsoft, wondered whether Glass-Steagall would have prevented SVB from failing. She also said that she was not sure if the current system was the best way to preserve access to capital.
“I want great access to capital formation. I don’t want the banking that understands startups to disappear,” he said. However, regarding the current system, he said. “I’m not sure that’s the way we access capital. Or at least we didn’t have a system to protect us.”
Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, chimed in to say, “I happen to share Sen. Cantwell’s views on this.”
Reinstating Glass-Steagall, or some version of it, would require a major overhaul of the banking system and would likely make the consumer experience of buying financial services more complicated. It would also pit defenders against one of the toughest and best-funded industry lobbying efforts in Washington.
Also, as Yellen pointed out to Cantwell, Silicon Valley was not an investment bank and therefore did not do the kind of business that Cantwell was concerned about.
But the speed at which SVB fell clearly unsettled lawmakers, leaving some defending their votes in a separate banking deregulation bill in 2018, blame the bank itself and wondering what changes to make. Sen. Mark Warner (D-Va.), who made his fortune in the telecommunications industry, said that when Washington Mutual, a savings and loan company, failed in 2008, it took depositors 10 days to withdraw $16 billion.
“I’m not sure what regulatory system, anywhere, no matter how much capital and how many stress tests, would have protected any institution from a $42 billion bank run in a single day. That literally, at the time, was 25 cents on the dollar of every dollar that was deposited,” he said.
“I’m not sure what regulatory system, anywhere, no matter how much capital and how many stress tests, would have protected any institution from a $42 billion bank run in a single day.”
– Sen. Mark Warner (D-Va.)
The concerns aren’t necessarily exclusive to Democrats, either. Sen. Josh Hawley (R-Mo.), a high-profile conservative, told HuffPost on Wednesday that Glass-Steagall should be reviewed.
“We used to separate the commercial banks and the investment banks and, you know, the FDIC only supervised and the guarantee was only for the commercial banks,” he said. “I think we have to get that rule back.”
Hawley said he was concerned about further concentration in the financial services industry because of how SVB was run.
“We are going to have three banks in this country. I think that’s terrible, terrible, terrible.”
Arthur Delaney contributed to this story.
