Senator Elizabeth Warren is calling for an independent investigation into the Federal Reserve System following the collapse of Silicon Valley Bank (SVB) and Signature Bank.
SVB and Signature Bank invested their clients’ deposits in higher-yielding, long-term mortgage-backed securities and bonds with low, pandemic-era interest rates.
But the value of those assets fell significantly when the Fed raised rates earlier this month.
Warren believes that weakened regulatory processes are responsible for causing banks to collapse and for the risk they pose to other banks.
A new study published in the Social Science Research Network found that nearly 200 other US banks also risk failure if their depositors run on their holdings.
Democratic Sen. Elizabeth Warren is pushing for an investigation into the Federal Reserve System that caused the collapse of Silicon Valley and Signature Banks
A large part of banks’ assets are held in interest rate sensitive financial instruments such as government bonds and mortgage-backed securities.
Warren, who sits on the Senate Banking Committee, said the problem started in 2016 when big banks pushed for loosening regulations.
They argued that they were similar to smaller banks and needed the same regulations to apply to them.
‘Let me describe what I see as the problem; Starting in 2016 or so, these multi-billion dollar banks like SBV… came to Washington and kept saying ‘lighten the regulations on us.’ We’re like small banks, so loosen up the regulations,” Warren said in ABC’s this week.
‘Donald Trump then ran for president pledging to ease regulations on these multi-billion dollar banks. He then got elected president and put in a lot of regulators who eased banking regulations.’
SVB was the 16th largest bank in the country and its collapse is the biggest failure by a lender since the 2008 financial crisis.
Warren explained how in 2018, Congress passed a regulation rollback for the banking industry, resulting in increased risk-taking by banks, short-term gains, and large bonuses and salaries for executives.
“What happened is what we should have predicted,” Warren explained.
“These banks… loaded with risk, increased their short-term profits, gave themselves big bonuses and big salaries and blew up their banks,” the senator said.
Now he’s calling for CEOs to be held accountable and to lose their bonuses and big salaries, even suggesting that criminal charges could be possible from a Justice Department investigation.
“We have to say overall that we can’t keep repeating this approach of loosening regulations on banks instead of stepping in when giant banks get into trouble,” Warren said.
Warren also proposed that CEOs like SVB’s Greg Becker be banned from banking forever.
Warren’s demand for an investigation of the Federal Reserve System and the entire regulatory system comes as the Federal Deposit Insurance Corporation (FDIC) has announced that it will insure deposits lost in the implosions, which some have described as a bailout.
SVB was the 16th largest bank in the nation and its collapse is the biggest failure by a lender since the 2008 financial crisis, with its fall second in scope to the collapse of Washington Mutual that year.
Over the weekend, billionaire Warren Buffett revealed that he is in talks to invest in the US regional banking sector despite the current widespread panic in the industry.
Buffet, who has a history of stepping in to help troubled banks, has reportedly had “multiple conversations” with senior White House officials offering guidance on the current turmoil.
Anonymous sources told Bloomberg that calls between Buffett and President Biden’s administration have focused on the possibility of him investing in the regional banking sector.
But they add that he is also offering advice to officials on how to weather the storm, as officials fear the failures will create a ripple effect in the banking system.
Warren Buffett, pictured, is in talks to invest in the US regional banking sector amid widespread industry panic.
It is not the first time that Buffett, who is currently chief executive of conglomerate Berkshire Hathaway, has used his considerable wealth and experience to help struggling banks.
In 2011, he injected capital into Bank of America after its shares plunged due to losses linked to subprime mortgages.
And during the 2008 financial crisis, it gave a $5 billion lifeline to Goldman Sachs Group Inc.
Representatives for the White House and Berkshire Hathaway have yet to comment.
Big American banks voluntarily deposited $30 billion to stabilize First Republic Bank this week to keep taxpayers from footing the bill.
Panic has rocked the banking sector in recent weeks after SVB became the biggest bank to collapse since 2008.
A notice hangs on the door of Silicon Valley Bank in San Francisco, California, on March 10.
The Social Science Research Network study found that some 186 banks are subject to the same risks as SVB.
The data shows that these banks would fail if only half of their depositors quickly withdrew their funds.
“Our calculations suggest that these banks are indeed at potential panic risk, absent further government intervention or recapitalization,” the study states.
Economists studied the banks’ asset books and found an estimated $2 trillion loss in their market value.