SVB Collapse: Mike Rounds argues Dodd-Frank rollback ‘did not impact’ bank failure

Sen. Mike Rounds, R-S.D., listens during a Senate committee hearing on Senate Armed Services hearing to examine the posture of United States Central Command and United States Africa Command in review of the Defense Authorization Request for Fiscal Year 2024 and the Future Years, Thursday, March 16, 2023, on Capitol Hill in Washington. (AP Photo/Mariam Zuhaib) Mariam Zuhaib/AP

SVB Collapse: Mike Rounds argues Dodd-Frank rollback ‘did not impact’ bank failure

Ryan King

March 19, 11:56 AM March 19, 11:56 AM

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Sen. Mike Rounds (R-SD) suggested that the controversial 2018 rollback of Dodd-Frank regulations was not responsible for the demise of Silicon Valley Bank.

Rounds, who sits on the Committee on Banking, Housing, and Urban Affairs, argued that, at most, the regulatory regime would have compelled SVB to purchase more of the long-term treasuries that ultimately spelled doom for the bank.


“Even if you would have had the liquidity requirements that would have been there before … what we did in 2018, this bank would’ve qualified already,” Rounds said on Meet the Press. “Even if they would have failed the test at that time under Dodd-Frank, they still would have simply purchased more of those long-term treasuries and been solid again.”

“It’s very, very clear that the portions of 2135 that was done in 2018 did not impact this particular issue,” he added, referring to SVB’s collapse.

Back in 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased the Dodd-Frank threshold from $50 billion to $250 billion for banks that were considered “too big to fail.” Seventeen Senate Democrats backed the move at the time. The Dodd-Frank Act was a regulatory regime enacted in the aftermath of the 2008 financial crisis.

The 2018 rollback was aimed at easing the burden on smaller and mid-sized banks. SVB’s balance sheet was roughly $209 billion in assets, rendering it the 16th-largest federally insured bank in the country. Stress tests gauge how banks can perform during hypothetical macroeconomic scenarios.

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Some, such as Sen. Elizabeth Warren (D-MA), have championed legislation to restore the pre-2018 regulatory outlook for banks.

As Rounds mentioned, SVB’s failures have been widely pinned in part on its stockpiling of long-term bonds, particularly treasuries when interest rates set by the Federal Reserve were hovering near zero. When the Fed began jacking up rates to tame inflation, those assets dipped dramatically in value.

This was because the higher interest rates bring on more returns for investors in newer bonds, rendering older bonds less desirable for investors, and prompting those assets to plunge in value. Rounds appeared to imply that the pre-2018 regulatory framework did not account for massive interest rate hikes. Other banks could be in a similar predicament.

“The real question is why didn’t the managers at SVB take advantage of a lot of the tools that were available to spread the risk out? Why did they use interest rate swaps for a period of time and then basically for the year previous to their failure they quit using them? And why did they not have a chief risk officer in place from April until December,” Rounds added. “Those are the types of things that the investigations should focus on.”

SVB was taken over by federal regulators on March 10. The bank faltered after it announced it was seeking about $2.2 billion in additional capital to stay solvent and had suffered a $1.8 billion loss when it sold bonds to raise liquidity. Panicked customers withdrew $42 billion the day prior.

Rounds’ view was shared by others such as former Sen. Pat Toomey (R-PA) and Steve Eisman, portfolio manager Neuberger Berman who was featured in The Big Short movie.

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“I think Elizabeth Warren has a real valid point about [the rollback]. But we looked at the stress test for last year,” Eisman told CNBC. “[It] had about a line in it about rising rates, and the rest of the entire stress test was about credit. So even if Silicon Valley had been in the stress test, given what the stress test says, I don’t think the regulators would have caught it.”

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