Josh Wingrove
Lael Brainard, as a US Federal Reserve governor, repeatedly warned that efforts to deregulate banks were a recipe for disaster.
Her counsel went unheeded by Donald Trump’s White House and Congress, whose drumbeat for deregulation led to a 2018 banking reform bill that eased strict rules for mid-sized banks.
Now, as President Joe Biden’s new top economic adviser, Brainard must help contain the very type crisis she feared following the collapse of Silicon Valley BankSignature Bank
Progressives who sounded the alarm in 2018 have said the failure of SVB, the second-largest in US history, is exactly what they feared.
Brainard has so far stopped short of claiming any similar vindication publicly, but will be central to Biden’s plea for regulators and lawmakers — likely futile in a divided Congress — to restore safeguards. The situation may also heighten the administration’s search to replace her as vice chair with a candidate supportive of tougher regulations.
“I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses,” Biden said Monday. “We will not stop at this. We’ll do whatever is needed on top of all this.”
Earlier: Biden Vows to Hold Banks Accountable, Urges Stronger Rules
Brainard left the Fed vice chair role to become director of Biden’s National Economic Council last month, vaulting herself into the orbit of his closest aides. Yet while Treasury Secretary Janet Yellen and her department have led the operation to stem the fallout from SVB, Brainard has already been closely involved.
Brainard and White House Chief of Staff Jeff Zients briefed the president throughout the weekend on the administration’s intense efforts to prevent contagion.
The plan, announced Sunday, included a guarantee to backstop deposits, even above the Federal Deposit Insurance Corp. insurance threshold, and a Federal Reserve program that offered banks loans on more favorable terms.
Repeated Warnings
Progressive stalwarts directly pinned the bank’s collapse on deregulation. “The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump,” Senator Bernie Sanders, a Vermont independent, said Sunday.
So far, Brainard has maintained a low public profile at the White House. She has yet to publicly address the SVB ordeal and the White House declined requests for comment over the weekend and Monday on her behalf.
But at the Fed, her tenure was marked by repeated warnings that deregulation stemming from the 2018 bill went too far, including for banks with deposits between $100 billion and $250 billion, the category SVB was in before its collapse.
“I see little benefit to the banks or the system from the proposed reduction in core resilience that would justify the increased risk to financial stability in the future,” Brainard said in 2019 as the Fed enacted changes.
A liquidity crisis at a bank in that range or higher “would pose substantial risk of loss to the deposit insurance fund,” she said. She raised concerns the changes “weaken core safeguards against the vulnerabilities that caused so much damage” in the last financial crisis.
Over 2019 and 2020, Brainard dissented or abstained more than 20 times on regulatory matters. On monetary policy after she became vice chair last year, she was an unusual counterpoint to the committee hawks. She pointed to corporate profits as a source of inflation, avoiding Federal Reserve Chairman Jerome Powell’s messaging that unemployment was too low and people were making too much money.
Some Republicans have called the criticism of deregulation a distraction. Senator Bill Hagerty, a Tennessee Republican, raised questions instead about oversight and management at SVB.
“Were the regulatory agencies asleep at the wheel here?” he told Bloomberg Radio on Monday. “Was it a management team that was more focused on ESG and cashing out stock than they were in managing their bank competently? There are many, many questions to be answered.”
The Federal Reserve said Monday it is launching an internal review of its supervision of SVB.
Progressive Misgivings
Brainard is not alone among Biden’s inner circle in sounding the alarm. Biden and many staff were present when the Obama administration implemented regulations after the 2008-2009 crisis. Brainard’s deputy, Bharat Ramamurti, is a former senior aide to Senator Elizabeth Warren of Massachusetts, a high-profile progressive who has campaigned against easing bank rules.
Now inside the White House, Brainard may find some progressive allies have misgivings about the Biden response to SVB.
Warren in a New York Times opinion piece Monday stopped short of endorsing Biden’s solution to guarantee depositors, which she said covers “not just small businesses and nonprofits, but also billion-dollar companies, crypto investors and the very venture capital firms that triggered the bank run on SVB in the first place.”
“Regulators have said that banks, rather than taxpayers, will bear the cost of the federal backstop required to protect deposits. We’ll see if that’s true,” she said.
Representative Pramila Jayapal, chair of the Congressional Progressive Caucus, also expressed unease with Biden’s intervention but ultimately pinned the blame on Republicans’ rollback of regulations. She contrasted the help for SVB with Republican opposition to Biden’s student-loan relief.
“If the government is able to respond so quickly to support wealthy investors, it should be able to do the minimum for working people,” Jayapal said in a statement.
— With assistance by Craig Torres and Jarrell Dillard
