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March 14, 2023
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THE TOP
Happy Tuesday morning.
The U.S. financial system avoided a meltdown on Monday. But what happens next?
The banking sector took a beating as global financial markets digested the significant steps announced by the Biden administration to guard against potential systemic risks following the high-profile collapse of two banks. But with the exception of some mid-sized regional banks such as First Republic, sell-offs were more limited than analysts had feared.
We’re still in the early stages of this situation. True financial crises can take months or years to develop. Inflation and interest rates also remain a critical concern, with the February consumer price index data set to be released this morning.
Yet the political fight over who’s to blame for the shocking collapse of Silicon Valley Bank and Signature Bank is already underway, and it’s going to be messy.
Democrats have so far dominated the conversation, expressing support for the Biden administration’s handling of the emergency and calling for significant financial reforms.
These proposed changes range from expanded federal deposit insurance to wholesale repeal of a 2018 package that eased key regulations for small- to mid-sized regional banks, S.2155, aka the Economic Growth, Regulatory Relief and Consumer Protection Act. That legislation passed with significant support from Republicans and moderate Democrats and was signed into law by former President Donald Trump.
And while we’ve heard little from Republicans during the last few days, the shape of their response began to come into focus Monday night.
The House GOP conference held a private call to debrief with Speaker Kevin McCarthy, House Financial Services Committee Chair Patrick McHenry (R-N.C.) and Rep. French Hill (R-Ark.).
Based on that conversation, we expect the party’s response will go something like this – Democrats are responsible for the collapse of these banks. Their historic spending created historic inflation, which led to historic interest hikes that the banks weren’t ready to manage.
Most importantly, there doesn’t seem to be a lot of GOP support for congressional action, including rewriting S. 2155.
On the call, McCarthy blamed the Biden administration’s “failed” fiscal policies combined with rising interest rates for Silicon Valley Bank’s demise in particular. McHenry added that SVB’s collapse was “current social media meets the bank rush scene in ‘It’s a Wonderful Life.’”
McHenry aso argued that bank management’s pushed for SVB to grow too quickly, and the assets it held were a poor fit for a rising interest rate environment.
Hill, chair of the House Financial Services subcommittee on digital assets, blamed SVB’s failure on a lack of oversight from the San Francisco Fed office. That complaint was echoed by Rep. Andy Barr (R-Ky), chair of the financial institutions and monetary policy subcommittee on Financial Services.
Our take? Many of these observations have some merit. But there wasn’t much focus on systematic regulatory gaps that may have precipitated the crashes we saw over the weekend. That’s not an accident. It’ll take a lot more than two bank failures for Republicans to come around to that point of view.
In an interview with Punchbowl News late Monday night, McHenry was generally supportive of the Biden administration’s response to the current crunch but he disputed the need for an immediate legislative response.
“They currently have the tools, and they‘ve used them appropriately to resolve two banks,” McHenry said. “They acted swiftly and boldly, and I’ve told them more than once that bold action I will absolutely support if it is in the interest of the financial system and in the interest of the American people.”
It’s also worth setting some baseline expectations here as well – getting Congress to pass financial reform legislation is tough in the best of times, and divided government isn’t going to help.
Even as the financial system limped away from the Great Recession in 2010, the Dodd-Frank Act squeaked through the Senate by a single vote before being signed into law.
If the 118th Congress is going to respond legislatively to this week’s financial palpitations, it’s going to need to be a bipartisan affair.
We asked Rep. Maxine Waters (D-Calif.), top Democrat on the House Financial Services Committee, about the odds of finding any bipartisan alignment on this issue in the Republican House, let alone with the Senate.
“My hopes are that what Mr. McHenry keeps saying that he wants to do – work in a bipartisan way – is something that can happen,” Waters told us Monday. “We’re just gonna have to work at it.. If he’s interested in bipartisanship, I’m certainly interested, and I want to work with them to see what we need to do.”
– Brendan Pedersen, John Bresnahan and Jake Sherman
Two weeks out – how timely! House Financial Services Committee Chair Patrick McHenry (R-N.C.) will join Punchbowl News founders Anna Palmer and Jake Sherman on Tuesday, March 28, at 9 a.m. ET for an interview on his priorities as chair of the panel. In person attendance is full, but RSVP now to join us on the livestream!
THE CHAIRMAN
McHenry talks insurance caps, systemic risk and hearings
We caught up with House Financial Services Committee Chair Patrick McHenry (R-N.C.) late Monday night after he briefed Republicans on the collapse of Silicon Valley Bank and Signature Bank.
Here’s McHenry’s thinking right now on a host of critical questions that will help inform the debate in Washington.
McHenry on expanding deposit insurance to more than $250,000: McHenry seemed uninterested at this juncture in a discussion about expanding the FDIC’s deposit insurance cap beyond $250,000. Rep. Maxine Waters of California, the top Democrat on Financial Services, said Monday that the federal government should consider it.
When we asked about expanding deposit insurance, McHenry replied: “I’ve been in wide communication with all the appropriate heads of the agencies and regulators and Cabinet secretaries, and this has not once come up.”
Was there truly systemic risk? One of the big debates currently in financial policy is the extent of systemic risk present in the banking system. The Biden administration said there was enough of it to warrant use of emergency powers on Sunday night, which allowed them to guarantee all of the uninsured deposits at Signature and SVB.
Here’s McHenry’s response:
When will McHenry hold his first hearing? McHenry said he hasn’t made a decision as to when he will hold the first SVB-Signature Bank hearing. But he did talk about what he’s looking for when it does happen.
“You have the decisions of the institution, and you have decisions of the supervisors,” McHenry said. “Two separate questions. One is a management failure. The other is supervisory failure. And we’re going to look into those things.”
As we said above, Republicans aren’t sold on the need for legislative fixes in the financial system. We’ll see in the coming weeks and months whether the financial system makes the case for itself.
– Brendan Pedersen and Jake Sherman
THE LEADERS
Our third profile of The Leaders is live, featuring Rep. Emilia Sykes (D-Ohio). As a freshman member of Congress, Sykes is focusing on the role of northeast Ohio in reviving manufacturing in the United States and new opportunities for technological innovation in the state’s agriculture sector. Check out the profile today!
THE SENATE
Short but busy week on tap for the Senate
The Senate is back tonight for a rare Tuesday-to-Thursday week, but it’ll be a busy one. The health situation surrounding Senate Minority Leader Mitch McConnell will be the chief topic of discussion, but there are also some key votes scheduled.
Senators are expected to hold initial procedural votes on former L.A. Mayor Eric Garcetti’s nomination to be U.S. ambassador to India and on legislation repealing the Iraq war authorizations. As we scooped in Monday’s AM edition, Majority Leader Chuck Schumer will file cloture on that repeal bill when the Senate convenes this afternoon.
The first Garcetti vote will happen as early as Wednesday, and he could be confirmed by day’s end. The initial AUMF vote is on tap for Thursday.
A number of Senate absences could throw a wrench in the chamber’s plans for the week, but leadership aides don’t foresee any issues — yet.
Sen. John Fetterman (D-Pa.) is still at Walter Reed for clinical depression treatment, and Sen. Dianne Feinstein (D-Calif.) was hospitalized recently for shingles. Feinstein was released from the hospital but isn’t expected to return for votes this week, according to a Senate aide.
Meanwhile, McConnell was released from the hospital on Monday, but he won’t be returning to the Senate immediately. McConnell will instead head to an inpatient rehabilitation facility for further treatment.
In addition to a concussion, McConnell also suffered a “minor rib fracture” during a fall last week, according to David Popp, the Kentucky Republican’s communications director. The injury occurred as McConnell was attending a GOP event at the Waldorf Astoria D.C. hotel last Wednesday night.
McConnell aides say the 81-year-old Kentucky Republican could spend one to two weeks in the rehab facility:
Having three senators out shouldn’t affect the Garcetti vote. If anything, it’ll impact the AUMF repeal bill. But that legislation has a dozen GOP co-sponsors, so it should be able to clear a filibuster if there aren’t any additional no-shows.
McConnell has long opposed repealing the Iraq authorizations, so he would be voting against that bill regardless.
— Andrew Desiderio and John Bresnahan
FARM BILL
Johnson previews farm bill fight over SNAP
We caught up with Rep. Dusty Johnson Monday afternoon to chat about the South Dakota Republican’s efforts to change the eligibility for SNAP benefits. Johnson is releasing legislation to increase work requirements for certain participants in the low-income nutrition program that he hopes will be included in a new farm bill.
As we’ve been saying for months now, the farm bill’s reauthorization will be one of the most consequential legislative fights in Congress this year. It’s seen as must-pass legislation and will need bipartisan buy-in. GOP efforts such as Johnson’s call to increase work requirement provisions for food stamps will be one of the key flashpoints in the coming negotiations.
Here’s the legislative text and a one-page summary of the bill.
Here are some takeaways from our interview with Johnson:
| → | “Work requirements work,” Johnson told us. Johnson said his bill aims to prevent states that “are using a waiver process to ignore the existing work requirements already in federal law.” |
| → | Johnson centers his argument around the statistic that “55% of the able-bodied, non-seniors without dependents at home who received food stamps didn’t have any taxable income.” The South Dakota Republican says this group won’t “be able to escape poverty without us helping them make sure that they’re in the workforce.” |
| → | Democrats have slammed proposals like this as impeding states’ abilities to set their own policies. Johnson says this isn’t true and argues his bill still gives states “broad flexibility.” |
| → | Johnson admitted the path ahead isn’t straightforward given the reality of the Democratic-controlled Senate. “I’m just hoping that some Democrat leaders will step up and do what Democrat leaders have done in the past, which is to acknowledge that work is a necessary component to escaping poverty,” Johnson said. |
The bill has 21 GOP cosponsors, stretching from Republicans who flipped seats red last cycle to Freedom Caucus members. Here’s the full list.
We will be tracking this issue closely as farm bill negotiations heat up later this year.
— Max Cohen
DOWNTOWN DOWNLOAD
D.C. police union registered to lobby on criminal code
The D.C. Police Union signed up Modern Cartographers, a California-based lobbying shop, to lobby Capitol Hill on Washington’s criminal code.
The lobbying registration was filed Monday but was active as of Feb. 4. The union signed up to lobby on H.J. Res 42 and H.J. Res 26.
Congress overturned D.C.’s revised criminal code earlier this month after President Joe Biden said he would sign the disapproval resolution. The D.C. City Council withdrew the legislation before the vote but the resolution still got wide bipartisan support.
– Jake Sherman
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