House Financial Services Chair Warns Against Quick Regulatory Fixes For Banking Crisis

U.S. Rep.-elect Patrick McHenry (R-N.C.) delivers remarks in the House Chamber during the fourth day of voting for Speaker of the House at the U.S. Capitol Building in Washington, DC, on Jan. 6, 2023. Chip Somodevilla/Getty Images

The House Financial Services Committee Chairman Patrick McHenry (R-N.C.), warned against quick regulatory fixes for the banking crisis.

The congressman from North Carolina told the American Bankers Association Washington Summit on March 22, we “cannot legislate confidence” when it comes to the banking sector.

He stated that it was too early to see if any new legislation was necessary after the recent failure of Signature Bank and Silicon Valley Bank.

McHenry believes that Congress must first gather the facts and determine what caused both collapses to occur before pushing for new banking regulations.

“Too often, as legislators, we walk around and assume the answer is legislation,” said McHenry to the audience.

“I think it is too early to tell if new legislation is necessary. … Some policymakers on both sides of the aisle are already jumping to the conclusion with incomplete information.”

The Unintended Consequences of New Financial Legislation

The committee chair said that raising the deposit insurance limit “could have serious consequences for the financial system” and listed moral hazards and further bank consolidations as potential trade-offs.

“We need to have a full understanding of what those trade-offs truly are,” he said.

McHenry also said that regulators needed to stop the spread of the crisis, but that capitalism will always entail risks.

“Without failure, you cannot have capitalism. So firms need to be able to fail,” he explained.

Silicon Valley Bank (SVB) was taken over by the U.S. government on March 10 after its collapse, followed by Signature Bank on March 12.

Federal regulators, including the Department of Justice and the Securities and Exchange Commission are probing SVB executives.

First Republic Bank received a multibillion-dollar rescue loan from major U.S. lenders last week, while Credit Suisse was bought out by UBS after its failure on March 19.

Global banking markets have been volatile since the beginning of March, as investors remain fearful of wider economic repercussions.

Senate Committee Chair Calls for More Hearings

McHenry along with his ranking member counterpart, Maxine Waters (D-Calif.), recently announced that the Senate committee would shortly hold the first round of hearings on the recent bank failures, amid major economic stress.

In his remarks, the chairman criticized some of his lawmakers who he said were too quick to call for more regulation and there were key questions about the bank failures that needed to be answered first.

“Did regulators miss red flags that would have alerted them to problems at both institutions? Were the banks’ management teams deficient?” he asked.

“Is new regulation needed or did regulators fail to use the tools already available to them?

“It’s important to note that we can’t legislate competence,” he said. “We give power to regulators and supervisors, they need to be competent. Management of institutions need to be competent. Boards of directors need to be competent ... We need to have competent people at the helm,” said McHenry.

A few prominent lawmakers on the committee said over the weekend, that they would consider passing a bill that would raise the federal insurance limit on bank deposits.

They believe that is needed to stem a financial crisis marked by a massive outflow of uninsured deposits away from small and regional banks.

Meanwhile, Federal regulators have also discussed increasing deposit insurance without obtaining approval from Congress, as they discussed various solutions to the banking crisis, sources told Reuters.

President Biden said last week, that the banking crisis was calming down and he promised American depositors that their money was safe.

Reuters contributed to this report.