Thank you Chair Sanders and Ranking Member Borello for the invitation to testify before this committee. As a born and raised Brooklynite, it is an honor to have this opportunity.
In 2018, among the flurry of lobbying being done by the mid-size banks to roll back many of the provisions in the banking reform bill known as Dodd-Frank, Signature Bank’s chairman Scott Shay publicly said “We strongly believe that we are not even in the same zip code as being systemically important.”
On March 12, Secretary Yellen, following the recommendation of the FDIC–Signature’s primary federal regulator–invoked the systemic risk exception of the Federal Reserve Act when deciding to close Signature and guaranteeing all deposits within the bank.
Signature Bank, along with many other banks dubbed “midsized banks,” successfully lobbied in 2018 to remove enhanced requirements placed on large banks, such as stress testing, capital and liquidity requirements, and resolution planning. Although sometimes referred to as midsized banks, Signature and others placed in that category are indeed very large banks. The name “midsized” banks is simply the result of them being compared to the JP Morgans and Bank of Americas of the world–a dangerous comparison because it leads many to fall for the notion that their smaller size should equate to a lighter regulatory touch.
At the time of its failure, Signature Bank had $110 billion in assets and almost $89 billion in deposits. According to the DFS, between 2019 and 2021, Signature launched a number of new business initiatives, the Bank’s assets doubled, and its uninsured deposits tripled. In 2021, uninsured deposits made up 82% of Signature’s deposit base. However as the bank grew, it lacked the robust risk controls needed to effectively monitor a bank its size. It was the fourth-largest bank to fail in US history.
Regulators at the state and federal level must appropriately acknowledge the risk these banks pose, although they are not as complex and interconnected as the megabanks.
The problems present at Signature Bank–rapid period of growth without adequate risk management, high percentage of uninsured deposits, and high concentration of deposits is not unique to Signature. These factors also led to the failure of First Republic and Silicon Valley Bank and it has been reported that many other banks in a similar asset class also hold a disproportionately high amount of uninsured deposits, as Superintendent Harris mentioned earlier.
Yet because of the The Economic Growth, Regulatory Relief and Consumer Protection Act, also known as S.2155, the bill that Chairman Scott and his peers heavily lobbied for that repealed many of the safety and soundness guardrails created by Dodd-Frank, regulators and supervisors, including at the FDIC, scrutinized these banks less as the belief that they were inherently safe took hold.
On one hand, we can say that Signature’s failure is the result of the bed these executives made by not only lobbying for lax rules, but also by poorly managing their banks. However, the consequences of Signature’s failure is not contained to only Signature executives. The consequences include, the public’s confidence in our banking system being tested again for another time within 15 years; the public again witnessed the extraordinary actions our federal government is willing to take to rescue the well-connected few while so many currently struggle to make ends meet; the scores of bank tellers and non-executive employees at this bank who are now unemployed; and the implications of the effectiveness of our banking laws if these crises are now periodic and the responsible executives come away virtually unscathed. Not only unscathed, but often enriched by executive compensation plans that reward risky behavior.
Regulators, supervisors, and lawmakers must grapple with these realities. In the very least, Congress should repeal S.2155 and return to the enhanced prudential standards set by Dodd-Frank. The federal regulators can and should use their current authority to better regulate banks between $100 to $250 bn in assets. Regulators must also restore a culture of robust supervision among their regional offices. Additionally, Congress should arm the FDIC and other regulators to claw back compensation. The Fed should finish rulemaking to properly govern systemically important non-banks, especially as we see the outsized growth of the private equity industry and how we saw in 2008 how AIG and MetLife brought our economy to its knees.
Lastly, and probably most importantly, policymakers must acknowledge the public element of banking and how banks serve as agents of the Federal Reserve by creating money. This fact, that banks serve a public utility, is partially why governments are quick to rescue banks.
Because of this, Americans for Financial Reform has been a supporter of public banks. The United States had a public banking system (based in the post office) for over a half-century, from 1911 to 1966. Funny enough, the idea percolated among reformers before the Panic of 1907, when excessive bank failures wiped out the savings of many and this lent to broad political support for public banking.
The equity arguments for a public banking option are strong. Imagine a system where people can access simple banking services via the U.S. Postal Service. Our report released last week, “Banking Fair: The Promise and Urgency of Doing Postal Banking Right,” calls for a public banking option to be restored within the U.S. Postal Service. Our current banking system has failed so many, including the $10 mm unbanked households, most of which are Black and Brown families. Public banking will provide an opportunity to give more households access to the financial system, a key factor in wealth creation.
Interestingly, we are about to recreate a public option for one important part of the financial system: payments. In July, the Fed will launch FedNow, a real-time payment system. And It’s about time. Currently 56 countries including India, South Korea, the UK, Japan, China, and Nigeria developed the infrastructure to allow real-time payments.
Policymakers must continue to think about providing public options for services so widely used, they should be considered utilities, including banking. AFR continues to support efforts in New York, Massachusetts, and California to create state public banks. Thank you for the opportunity to testify before you all today.