Why Barney Frank Went to Work for Signature Bank

The former congressman, who overhauled financial regulation after the 2008 crisis, sits on the board of a bank that was just seized by the government. What happened?
Barney Frank sits in front of a microphone.
Former Representative Barney Frank speaks at a bill-enrollment ceremony.Source photograph by Tom Williams / CQ Roll Call / AP

Last week, depositors rushed to pull money out of Silicon Valley Bank (S.V.B.), which held more than two hundred billion dollars in assets. On Friday, to stem the risk of contagion in the wider banking sector, regulators shut it down. Two days later, New York authorities closed Signature Bank, which held more than a hundred billion dollars in assets, with the similar goal of preventing a systemic meltdown. The federal government has pledged to backstop deposits at both banks. S.V.B. is the largest bank to fail since the 2008 financial crisis.

The crucial piece of legislation to come out of that earlier crisis was Dodd-Frank, which was named for its co-sponsors: former Senator Chris Dodd, of Connecticut, and former Representative Barney Frank, the progressive from Massachusetts. Frank left office in 2013; two years later, he joined Signature’s board. In 2018, the Trump Administration passed a new law that would scale back Dodd-Frank. Crucially, it increased the threshold at which banks would face higher levels of regulatory scrutiny from fifty billion in assets to two hundred and fifty billion. Frank claimed that, were he still in Congress, he would have opposed the bill, but he also defended it publicly multiple times, and even released a statement, with Dodd, that said, “This bill is not a big hand out to Wall Street.” By the time Signature collapsed, it was over the old threshold but under the new one; this has led some—including Senator Elizabeth Warren—to blame the 2018 law.

I recently spoke by phone with Frank about the old rules, the new rules, and why he decided to join Signature’s board. Our conversation, edited for length and clarity, is below.

Do you see any connection between the weakening of Dodd-Frank a few years ago and the collapse?

I came to the conclusion shortly after we passed the bill that fifty billion dollars was too low. I decided that by 2012, and, in fact, said it publicly. The reason I say that is that I didn’t go on the board of Signature until later. In fact, I had never heard of Signature Bank at the time when I began to advocate raising the limit. This is relevant, obviously, because Signature was a beneficiary of that.

I have to say, having been on the board, I became more convinced that I was right. I was on the Signature board both before and after, and the level of supervision did not diminish. The level of reporting diminished. It held off a paperwork chase.

Another thing to note is that, in this case, the key regulator who shut down Signature wasn’t affected by the 2018 law at all, because it’s the New York State Department of Financial Services. The state regulators were totally unaffected by this.

It’s not about who eventually shut down the bank. I’m curious about the weakened regulations because I want to know how the bank got to the place that it needed to be shut down.

I understand that, but the Department of Financial Services had that jurisdiction, and it was unlimited. In other words, I assume people accept that the Department of Financial Services, which took the lead in shutting it down, is a tough regulator. Their authority to regulate was undiminished by the 2018 law.

I have read what Elizabeth [Warren], and others, said. I don’t see any argument that there was something that was going on that would’ve been stopped if they had got the same scrutiny as JPMorgan Chase. No one has made a specific connection there.

Would there have been more scrutiny about whether the bank’s assets were liquid enough?

No. Under the law, the requirement for more capital was totally covered. The Volcker Rule—totally covered, unchanged. [This rule, which is part of Dodd-Frank, prohibits banks from engaging in certain kinds of trading.] There was nothing in the new law that relaxed any of the liquidity requirements for those banks.

What about financial reserves?

Again, unchanged, and nothing in that change diminished the ability of the regulators to impose reserve requirements, and to check reserve requirements. They absolutely had the obligation to check the reserve requirements. That did not go away in the 2018 bill.

I’m just reading from an article that appeared in 2018, in the Washington Post: The law called for a lowering of “the burdens these banks face on submitting plans for winding down if they fail (plans known as ‘living wills’); looser liquidity rules, which mandate that banks have easy access to assets that can quickly be converted to cash to pay their obligations if needed; and less frequent ‘stress tests,’ which gauge how prepared a bank is for a financial crisis.”

Two of those I agree with: less frequent stress tests and the living will. The living will is your plan for what you do when you have to be got rid of. Their power to require liquidity and check liquidity was very strong, and not diminished in any significant way by the bill.

This week, Elizabeth Warren wrote, in the Times, “Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”

I disagree with that. Where there was a weakening—the living will and the stress test—neither one of those goes to the actual physical condition of the bank. They are procedural requirements that were not imposed on banks under two hundred and fifty billion dollars, whereas they had been before. Neither one of those in itself is a cause of weakness. The power to look at liquidity, to increase liquidity and to say, You have too little—they had every power they needed to do that. [The bill allowed regulators to keep liquidity and capital requirements on banks with total assets between a hundred billion and two hundred and fifty billion, but no longer mandated they do so.] I will tell you, as a member of the board of Signature, we underwent some discussions about liquidity, and the need to increase liquidity or maintain it.

You did?

Yeah. By the way, one of the things they said during the weekend with us and with S.V.B. was, We don’t think you have enough liquidity. If they had lost the power to do that in 2018, how could they do that during the weekend?

Wait, aren’t you talking about two separate things: insuring that the bank doesn’t get to a point where it’s in trouble, versus shutting it down when it’s already in trouble?

Please let me finish.

Sure.

That’s exactly the point I tried to make to you. Nothing affected or diminished the ability of the regulators to say, Stop doing this. Get more liquid.

The issue is requirements though, right? I don’t want to defend the regulators here. The issue is whether banks should be—

No question. If the regulators were going to be lax . . . although, by the way, it’s always hard. You can’t force people to do things. The metaphor is you can’t push on a string.

The regulators had full power to deal with the liquidity. Again, it’s relevant about the Department of Financial Services. This tough regulator shut us down, I think unnecessarily, on Sunday. Their powers to do any of this—liquidity, whatever—were totally unaffected by the 2018 law.

It seems to me that we don’t necessarily want to count on the banks or the regulators always being perfect, so having these requirements might be useful.

I agree, but there’s no way to. You can require greater liquidity, etc. But there’s no way to force people to do their job well. By the way, are you assuming that, under Donald Trump, the regulation of Bank of America and JPMorgan Chase was everything it should be because they were still covered by the law?

No. It just seems that having good laws and empowered regulators would be a reasonable way to do it.

No, no. You’re just being too dismissive. All I’m saying is that I don’t think that you had regulators who were refusing to do what they could. Who appoints the regulators? If you have good laws, but somebody’s appointed weak regulators, that doesn’t help.

It’s also good to have good laws. But let me ask you—

We have good laws. You keep being dismissive and I don’t accept that. We have good laws and we had good laws with regard to the banks under two hundred and fifty billion dollars, but it’s all discretionary authority. None of these laws are self-executing; it’s not in the nature of the case. They can’t be. All they are are grants of discretionary authority to regulators, who had complete authority in both cases.

Warren also wrote, of Signature and S.V.B., “They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses. But because those requirements were repealed, when an old-fashioned bank run hit S.V.B‌., the‌ bank couldn’t withstand the pressure—and Signature’s collapse was close behind.” Would stress tests have potentially been effective here?

I don’t think the lack of stress tests was causal. By the way, I was reminded that I had talked about a lower level of a hundred and fifty billion, not two hundred and fifty billion. At the level that we are talking about, I didn’t think the stress tests were necessary for the small ones. The point of the stress tests was to see what impact a failure would have on the rest of the economy.

But isn’t the point of stress tests to see how a bank will do under different scenarios, like the one we saw?

Yeah, that is what a stress test does. It’s an artificial but valid test. I do not think that a stress test would have helped in this situation.

Because?

Well, this all came up very suddenly. I don’t know what a stress test would have shown. A stress test might have been helpful, but part of it was that stress tests were for institutions large enough that it wouldn’t just be about them failing—it would be that their failing could cause great waves. I think that the impact of this failure has been contained, which it wouldn’t have been if it were JPMorgan.

But that’s why the banks were shut down, right? To contain it?

Yeah, the contagion I was talking about. The question is: at what level does a failure cause contagion or a domino effect?

O.K. Maybe the stress test would have helped, and maybe not. Who knows.

Yeah, this came up so suddenly in our case, I don’t see how it would have. The other thing is that they did do some stress testing. They didn’t do it as often.

You recently told Politico, “I think if it hadn’t been for FTX and the extreme nervousness around crypto, that this wouldn’t have happened—even to S.V.B., or to us. And that wasn’t something that could have been anticipated by regulators.” FTX wasn’t the 2008 financial crisis. Shouldn’t the whole point of regulations be that if something like FTX happens—

Right, it works out because banks are much better capitalized. And, yes, it’s a problem for the investors in Silicon Valley Bank and Signature Bank, and there were some disruptions, but it’s been nothing like what happened in 2008. That’s because the law was passed. The regulations did do that. The regulations contained contagion. The purpose of [Dodd-Frank] was not to prevent anything bad from happening, because that’s impossible, but to contain the domino effects of anything bad. That’s working right now.

Probably your most lasting achievement in Congress was Dodd-Frank. Why go work on the board of a bank?

Let me answer by quoting Sheila Bair, who was one of the toughest regulators ever. She was head of the F.D.I.C., and, when she went to the board of a Spanish bank, people said, “How can you, having been a regulator, go on a bank board?” She said, “Oh, are you saying that no one that believes in strong regulation should be on a bank board?” [In 2012, Bair wrote, in her book, “There should be a lifetime ban on regulators working for financial institutions they have regulated.”]

That’s the reason? You wanted to make sure it was regulated more strongly?

No, that’s the answer to, “Why are you doing this? It’s inconsistent.” No, I went on it, frankly, for two reasons. One: it paid well. I don’t have a pension and, having quit, I wanted to make some money. [Frank declined to participate in the congressional pension system.] Two: it is and has been the leading user of the low-income-housing tax credit in New York, one of the best in the country. Affordable housing and multifamily housing has been one of my greatest policy interests. I didn’t go there to regulate, but I didn’t think that my belief in regulation was a negative. In fact, I think it was a positive.

I understand that point in theory, as a debater’s point about Sheila—

It’s not a debater’s point. What’s the matter with you? You really believe that nobody who has regulatory experience should be on a bank board?

No, but when I asked if that’s why you joined the board, you said no.

I told you that that wasn’t my argument. It wasn’t a reason not to go on.

There were good reasons for me to want to go on the board when it was offered. The one negative that might have been offered, as you did, was for someone to say, “Well, there’s something inconsistent.”

There is an incredible amount of cynicism about D.C. and D.C. regulators—whether they are in bed with big business and banks and so on and so forth. It leads to a lot of unhealthy dynamics in our society, both in terms of the actual closeness and the political consequences of the cynicism it engenders. If I were you, or Chris Dodd, I might have just said, “You know what? I’m not going to give the cynics a reason to say that—”

What a terrible argument. This whole approach, of course, is why we have cynicism—people making arguments like the one you’re making, which is, Well, let’s validate the cynics even when they’re wrong. There’s no logic to it. Look at my whole career. I refused to lobby, for example. I’ve made much less money than I could have since retiring because I didn’t lobby. What you seem to be saying is, Look, the cynicism is out there and we have to acknowledge it and bow down to it and not do anything.

Here is an analogy: I think that it would be healthy for no person who served in Congress to become a lobbyist for x number of years, if ever. Even if some of the lobbying causes they could work for were good causes, having a blanket rule would be important.

That’s different because there’s an inherent problem there. But your analogy is wrong for this reason. I think that, on the whole, it’s a good thing to have people who believe in tough regulation on bank boards. If I had been somebody’s colleague and had traded favors with them for twenty years, and then I went to them to ask for favors for private interests, that would be a bad thing. Having people who believe in regulation on bank boards is a positive thing. There’s no analogy.

Well, it was more that you were a member of Congress, especially one known for Dodd-Frank.

No, that’s not what you said. You said that it causes cynicism. Again, what about Sheila Bair, the toughest regulator we’ve ever had at the F.D.I.C.?

I wasn’t commenting about Sheila Bair specifically. What I meant—

Yes, you were.

I was?

I don’t understand your method of argument. The argument you made applies even more to Sheila Bair than to me, because I did a whole lot of things as a member of Congress.

Let me put it this way. As a congressman, you passed the biggest financial regulation in a generation. Then you went to work on the board of directors of a bank, and then after that you supported weakening certain requirements.

No, no. Wrong. Wrong on sequence. I supported the bill before I even heard of the bank. I decided that there was one area where we had been mistaken and began advocating, correcting this.

O.K. While you were on the board of directors, you continued your support for weakening—

Yes. I did not change my opinion, which was reinforced by the experience of being on the board when there was excessive paperwork for no good public-policy gain.

I just think that rather than have every citizen engage in a spirited debate about whether you or Elizabeth Warren is correct about liquid assets, it would be better if people did not have to see this chain of events.

What is the set of events? The events are that I made an independent decision, without regard to being on a bank board, that I had made a mistake. When I went on a bank board, I should stop believing the conclusion I had come to?

I just wonder if going on bank boards and saying that you’re doing it in part because you want to make money is helpful. That’s all.

Former members of Congress should not go to work on anything related to what they may have done while they were in Congress? Could I have become an official of a gay-rights organization? I spent more of my time during my years on gay rights than on financial reform. What about housing? I created programs to support affordable housing. I continue to try to work with that. Is that wrong?

I think that’s a good place to end it.

No, I want an answer to the question.

I don’t know enough about the housing sector. I was making—

You don’t know that much about banking, either. You’re not supposed to; you’re not an expert. It’s the exact same issue as with banking. If I ruled as off-limits anything I’d worked on when I was in Congress, I guess I’d be a monk. ♦