NC’s McHenry begins congressional hearings on ‘the first Twitter-fueled bank run’

Rep. Patrick McHenry, R-N.C., speaks during a House Financial Services Committee hearing on Capitol Hill in Washington.

Asked whether he still wants to lead the House Committee on Financial Services, a goal he’s had almost his entire congressional career, Rep. Patrick McHenry chuckled for a minute.

“What’s that old saying about plans and God laughing?” McHenry asked.

The 47-year-old Republican from Lincoln County joined Congress in 2004, at just 29, and has spent most of the time since learning about banking and finance and looking toward leading the committee that oversees it all.

But, now, after taking the committee’s reins in January, he’s navigating his House colleagues through two crises: reaching the country’s debt ceiling, and the largest banking collapse since 2008.

“I spent months with my team working out the calendar for our legislative agenda, our hearing schedules, and everything else,” McHenry said in an interview with McClatchy. “A lot of work goes into that, but you know, events overtake our schedules.”

And this week, the event in question led to a series of hearings to understand what led to the banking collapses.

“This was the first Twitter-fueled bank run,” McHenry said. “We know about the hole in the balance sheet and how inflation, and thereby the feds’ rapid rate increase, contributed to the hole in the balance sheet, but there’s a whole lot we don’t know yet.”

Banks collapse

Experts have said that lenders’ large holdings of long-term bonds lost value as the Federal Reserve raised interest rates to deal with inflation, and their depositors panicked.

Silicon Valley Bank, in California, lost billions of dollars, and with an unusually high number of customers with large — and therefore mostly uninsured — deposits, its customers began to pull their money from the bank. Then customers at Signature Bank, in New York, did the same.

The federal government stepped in to guarantee bank customers would have access to their money regardless of whether it was insured. Guaranteeing the deposits at the two banks alone cost the Federal Reserve $140 billion, according to CNN. Raleigh’s First Citizens Bank bought the former Silicon Valley Bank.

Republicans have seized on the moment to criticize the Biden administration for what they’re essentially deeming a bailout, but McHenry has supported the decision.

He told McClatchy last week that the Federal Deposit Insurance Corp. (FDIC), the federal government and the Treasury Department acted appropriately to stop panic.

“There are questions I have about the decision making in the first weekend that needs to be answered, but I’m glad they’ve calmed the waters,” McHenry said.

Asked if he is concerned about future bank collapses, McHenry said he is focused on building confidence in the banking system. McHenry — whose 10th Congressional District boundary lines have included both the state’s northern and southern border at various times — said he is talking to officials in Charlotte, one of the largest banking hubs in the country, to learn more.

Gathering information

McHenry said he hopes the hearings provide insight about decision making that happened in the first week of the collapse, what regulators were doing and what was happening with the banks’ supervisors.

“Was there a supervisory problem here?” McHenry asked. “It is clearly a mismanagement problem. Clearly there was a hole in the balance sheet. How did the supervisor allow all that to occur?”

McHenry said he has more questions than answers right now, and until they sort those out, he can’t begin looking at next steps on prevention.

Ahead of the hearings, McHenry sent a letter to FDIC and Treasury Department officials to demand information on the administration’s response to the bank failures. He said he wants to know if there was a viable private-sector solution.

The committee also sent letters to California and New York state regulators asking about their supervisory efforts; to Treasury Secretary Janet Yellen and other officials about minutes and details from an emergency meeting they held about the banks; and to Federal Reserve officials including Michael Barr, vice chair for supervision, asking for specific communications surrounding Silicon Valley Bank.

“I’m a legislator,” McHenry said. “I want to legislate. But that doesn’t mean in this circumstance new laws are required. We could legislate and regulate a lot of things, but at the end of the day, you have to have competent management of companies and you have to have company supervisors in these regulated institutions, so I want to understand that first, before we start getting into questions of changing laws.”

Dodd-Frank law

One thing McHenry doesn’t question is whether the banks’ collapses had anything to do with Congress’ decision in 2018 to change Dodd-Frank, a federal law that passed in 2010 to further regulate Wall Street.

The original Dodd-Frank law did four key things:

  • It created tougher regulations on large banks;

  • It gave the Federal Reserve more authority;

  • It gave the federal government more power when banks fail;

  • It created the Consumer Financial Protection Bureau.

Congress intended to use Dodd-Frank to prevent financial crises like the one seen during the Great Recession.

The 2018 bill released banks under a $250 billion asset threshold from the Dodd-Frank regulations. All of North Carolina’s 2018 Republican members of Congress voted for the partial repeal except the late Rep. Walter Jones. Sen. Thom Tillis cosponsored the bill.

And while Democrats have seized on this opportunity to blame former President Donald Trump for signing the 2018 bill into law, McHenry said he doesn’t believe the original Dodd-Frank would have prevented what happened.

McHenry said the portions of Dodd-Frank that were repealed required certain banks considered “systemically important” to maintain their cash obligations, known as liquidity, and file a living will, which is a plan they have in place in case of failure.

“On liquidity-cover ratio, this institution would have passed with flying colors,” McHenry said. “That was the main change to this institution. As far as the living-will process, the institution still had a living-will on file. Those are the two major provisions here, and so the rest of the stuff had to do with community banks.”

Senate reaction

Across the Capitol, Sen. Thom Tillis spent Tuesday morning in the Committee on Banking, Housing and Urban Affairs’ hearing on the bank collapse.

The hearing’s witnesses included Barr, Martin Gruenberg, chairman of the FDIC, and Nellie Liang, undersecretary for domestic finance at the U.S. Treasury Department.

Tillis and Barr discussed the Dodd-Frank decision, but Tillis said he believes further analysis will show the fault lies with regulators.

Tillis has some harsh words about that.

“If you looked at their liquidity stress testing, if you took a look at their contracts on an interest-rate exposure, this does not take a highly sophisticated person to understand the risk, and it damn sure had to be known months before the chickens came home to roost,” Tillis said. “And I wish that we could just focus on that problem and not use the red herring of some lapse in regulatory oversight, that was the root cause of the bank collapse. It simply was not and I’d love to find anybody to prove it wrong.”

Republican fundraiser

McHenry also addressed a controversy he found himself in the middle of after Bloomberg reported on an ill-timed fundraiser at Signature Bank in New York, the week before the bank’s collapse.

“I’ve spent a significant amount of effort in trying to elect conservatives to office and I raised money to help elect conservatives,” McHenry said. “I made no bones about that and I’ll continue to do it, and I want conservative policy to win the day and conservative candidates to win the day, and this is my way of helping, by raising money for my fellow Republicans.”

While donors had pledged money at the fundraiser, McHenry’s staff had not yet done what was necessary to collect the money from their accounts. After learning about the bank failure, McHenry said he chose not to go through with processing the donations.

“I thought that was the responsible decision to make, given the circumstances,” McHenry said.