Ex-Biden Treasury official details playbook for next administration

WASHINGTON — A former Biden Treasury official said that the administration hasn’t finished or prioritized critical banking regulations in a new research report, and called on the next administration to complete them quickly. 

Graham Steele, recently the assistant secretary for financial institutions at the Treasury Department, said the Biden administration has put bank regulatory measures on the back burner of policy priorities, despite glaring shortcomings. 

“More than three years into the administration’s term, despite a crypto crash, a regional banking panic, and a climate-driven crisis in home insurance markets, financial policy issues haven’t been at the top of the progressive economic policy agenda — but they should be,” said Steele, who stepped down from his Treasury post in January. 

In his paper, which was published by the Roosevelt Institute, an influential progressive think tank on economic and banking issues, Steele outlines a framework for the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. 

These include some of the unfinished reforms from the 2008 financial crisis, undoing some of the Trump administration’s tailoring of the bank regulatory system and responding to increased digitization in the financial system. 

Steele suggested increasing risk-based capital leverage ratios for “too big to fail” banks, upping the largest banks’ lowest minimum capital requirement from 8% to 13.5% and raising the highest risk-based capital requirement to 18.5%. He also recommends replacing the 5% supplementary leverage ratio for these banks with a progressive leverage ratio between 6% and 10%. 

Regarding bank failures, Steele said that the banking agencies should establish a presumption against any transaction that would result in a bank having more than 10% of deposits nationwide, and Congress should pass a law that would allow the FDIC to accept the next least costly bid for a failed bank where the least-cost bid would result in an institution that exceeds that threshold. 

Steele proposes a tiered system for capital and leverage requirements for “domestically systemically important banks” around the size of the banks that failed in the Silicon Valley Bank crisis last year. 

“Ensuring that DSIBs are better capitalized would have addressed one of the factors that contributed to depositor runs in 2023 — namely, banks with greater losses in their investment securities portfolios relative to their regulatory capital,” he said. 

Regulators should also roll back some of the tailoring done during the Trump administration, particularly when it comes to failed banks and resolution planning, because of the aftermath of the SVB crisis, Steele said. 

Because of the large regionals’ rapid growth and the “lag in application of enhanced prudential standards implemented through the tailoring changes,” SVB and First Republic filed their first and only living wills a few months before they failed, while Signature Bank was scheduled to file its first living will three months after it failed. 

“This is an implicit indictment of how the tailoring project has undermined the effectiveness of the resolution planning process,” he said. 

Regulators should also figure out strategies to break up large banks in resolution or resolve them via public securities offerings. 

Steele said that agencies should also undo changes finalized in 2020, at the end of the Trump administration, to the brokered deposit rule, a process that the FDIC began this week with a proposal at its board meeting. 

“The 2023 regional banking stress again highlighted the risks from deposits that can be withdrawn quickly, leading to bank runs,” Steele said. “While SVB, Signature, and First Republic had high percentages of uninsured deposits, brokered deposits are another form of unstable deposit with a history of contributing to bank failures.” 

Crypto deposits should also be classified as brokered deposits, Steele said, and banking agencies should narrow the scope of bank-permissible crypto activities. 

Steele also said that regulators should take a more active role in overseeing bank-fintech partnerships. The prudential regulators issued a joint warning on bank-fintech risks last week, but Steele said they could go farther. 

“The recent bankruptcy of the fintech company Synapse has demonstrated that more oversight of these complex arrangements is needed to ensure that these partnerships — and by extension the fintech companies involved — comply with applicable laws and regulations like consumer protections, and that customers can be made whole in a timely way in the event of a fintech’s bankruptcy,” he said. 

The OCC, Fed and FDIC should “take further steps” by using laws that give them authority over bank service companies and institution-affiliated parties to examine fintech partnerships, Steele said, or issue additional rules or guidelines that outline each party’s legal obligations. 

Steele also called on the Financial Stability Oversight Council to designate nonbank financial companies like asset managers for enhanced prudential regulation and supervision by the Fed. 

“There is no justification for allowing large firms that are functionally banks to evade the critical regulatory framework that applies to banks,” he said.