March 15, 2023
What to expect in Washington (March 15)
In the wake of federal regulators' moves on Sunday (March 12) to step in and back up the deposits of two failed regional banks, Silicon Valley Bank and New York's Signature Bank, the Federal Reserve was reported to be considering applying tougher capital and liquidity requirements to a broader range of banks, while Republicans and Democrats appeared to fall into familiar camps on the need for new regulations or legislation in response to the banking crisis.
The Wall Street Journal, citing "a person familiar" with regulators' thinking, reported that the Fed, which was already in the process of reviewing bank capital rules after the arrival of Vice Chair for Supervision Michael Barr last year, is now considering extending the Dodd-Frank Act's "enhanced prudential standards" to bank holding companies below the current $250 billion asset threshold. Under the expanded scenario, banks with $100 billion or more in assets would have to comply with more stringent requirements on capital, liquidity and stress tests. (At the end of 2022, SVB had $209 billion in assets, while Signature had $110 billion.) A bipartisan regulatory relief law passed in 2018 under President Trump raised Dodd-Frank's $50 billion asset threshold for enhanced supervision to $250 billion but gave the Fed discretion to strengthen rules on the cohort of banks from $100 billion up if necessary. The Journal also reported that "over the coming months, the Fed is expected to propose changes that could require more banks to show unrealized gains and losses on some securities in their regulatory capital."
Meanwhile on Capitol Hill, many Republicans began to follow the lead of Speaker Kevin McCarthy (R-CA) in describing SVB's failure as partly a product of inflation caused by Democrats and arguing that additional regulation isn't necessary. In a conference call with House Republicans Monday night (March 13), McCarthy told members that President Biden's spending policies contributed to inflation, which in turn led to the Fed's yearlong campaign of raising interest rates. The rate hikes punished Silicon Valley Bank's balance sheet, which was heavily invested in long-term, fixed-rate bonds that lost value as rates rose. Rep. Andy Barr (R-KY), a subcommittee chairman on the House Financial Services Committee, told Fox Business that "the proximate cause [of SVB's collapse], of course, was the failure of bank management, but also a failure of bank supervision and a failure of government policy as the underlying cause, overspending by the Democrats, which fueled inflation."
In his remarks from the White House on March 13, President Biden said he would "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." But Senate Finance Committee Ranking Member Mike Crapo (R-ID), who chaired the Banking Committee in 2018 and co-authored the deregulatory bill that year raising Dodd-Frank's $50 billion threshold for enhanced supervision, told Politico, "There is no need for regulatory reform." Sen. Bill Cassidy (R-LA) told the Wall Street Journal, "You can have all the regulations in the world, but if you do a lousy job of implementing your regulations, it doesn't matter what regulations you have."
Those comments and others led Senate Banking Committee Chairman Sherrod Brown (D-OH) to express doubt that Congress would pass any legislative changes to address the situation. "I don't know how we do a legislative fix," Brown told reporters. "We're counting on the administration and the Federal Reserve to strengthen the capital standards and liquidity and stress tests." Brown said he was "encouraged by what I see" from regulators, but "I'm not encouraged by what I see here" in Congress, Politico reported. Hearings on the bank failures are expected in the coming days at both the Senate Banking and House Financial Services committees.
Tax — Chairman Brown is also a member of the Senate Finance Committee, which is scheduled to host Treasury Secretary Janet Yellen for a hearing on the President's FY 2024 Budget on Thursday.
The Budget proposal lays out President Biden's preferred path of creating additional revenue through tax increases and his commitment to Medicare by extending trust fund solvency. The President's Budget document also includes new statements addressing his willingness to consider extension of TCJA individual tax provisions that expire at the end of 2025, though under certain parameters that include: a focus on rewarding work not wealth; no tax increases on those earning less than $400,000 annually; and opposition to "cutting taxes for the wealthy — either extending tax cuts for the wealthy or bringing back tax breaks that would benefit the wealthy."
The Congressional Budget Office published a report March 14 saying the extension of the TCJA provisions would reduce revenues over the 10-year budget window "and larger reductions in spending would be needed to balance the budget," as some Republicans are calling for. The report considers the 2017 law's changes to individual income tax provisions, the higher estate and gift tax exemptions, the changes to the tax treatment of investment costs, and changes to certain business tax provisions. The report doesn't include new estimates of those changes. Rather, it relies on CBO estimates from the Budget and Economic Outlook 2022 to 2032 that found extension of TCJA provisions through 2032 would cost over $2.5 trillion. The report was requested by Finance Committee Chairman Ron Wyden (D-OR) and Senate Budget Committee Chairman Sheldon Whitehouse (D-RI).
A Senate Budget Committee release said the report "found that balancing the budget in 10 years would be mathematically impossible if Republicans kept Social Security, Medicare, defense, and veterans' programs whole while also making permanent the Trump tax breaks for the very wealthy." Senator Whitehouse said, "While they would permanently extend the Trump tax giveaways for their wealthy donors, Republicans have pledged to use draconian cuts to pro-growth investments for everyday Americans to balance the budget in 10 years."
House Republican plans to balance the budget haven't been specified. Their budget resolution is expected to be released the second week in May, according to Budget Committee Chairman Jodey Arrington (R-TX).
The EY Webcast, "Tax in a time of transition: legislative, economic, regulatory and IRS developments," is Friday, March 17 at 12 p.m.