Pat Toomey on The Lead with Jake Tapper

us now to discuss former Republican senator Pat Toomey from the great Commonwealth of Pennsylvania to me was the top Republican on the Senate Banking Committee until he retired from the Senate a few months ago Senator thanks for joining us um 2018 you were one of the leaders behind the 2018 Bill to roll back parts of the Dodd-Frank Financial Reform Act which eased restrictions on some banks we've heard president President Biden and others saying that this rollback could have contributed to the banking failure take a listen to Bernie Sanders Senator Sanders on the floor of the senate in 2018 warning uh that a bank pretty much this size Silicon Valley Bank would failing would be likelier with this deregulation let's roll that roll that clip just yesterday the Congressional budget office told us that the legislation we are debating today will and I quote increase the likelihood that a large Financial firm with assets of between 100 billion and 250 billion would fail end of quote that's the CBO in other words this legislation makes it more likely that we will see another financial crisis so uh here's the CBO report Senator Sanders is quoting the part about this is not a huge part of it but the basic argument is that the stress tests that had been required that are no longer required could have caught uh Silicon Valley Banks interest rate risks the the problems that they were having investing in in treasury bonds too much is that not possible uh extremely unlikely and here's why Jake there's actually two arguments that people who uh objected to this very modest rollback of Regulation a site um with respect to the stress test what they don't point out is while we relieved the obligation to do one category of stress tests to a bi-annual rather than an annual frequency they're still obligated to do ongoing stress tests for other purposes and here's the more important thing fundamentally I don't think anyone designs a stress test to test the result of losing 40 of your deposits in 24 hours that's what happened so I think that's completely spacious they also will sometimes cite the relief from the liquidity coverage ratio the fact is despite the fact that svb wasn't and was no longer mandated to meet that it almost certainly exceeded that requirement also so this was had nothing to do with 2155 uh nothing at all well I take your point on the run on the bank but but wouldn't the strip the stress test wouldn't have discerned somebody wouldn't have been able to say hey I mean it doesn't sound like the bank was managed very well hey you have too much invested in in treasury bonds and when inflation goes up that's and interest rates uh go up like that that's going to be a real problem yeah I mean the duration mismatch they had would have been obvious uh at many levels without the requiring the stress test the point is the stress test is usually designed to measure what happens under various stresses and I'm saying that there's no stress test that's designed to measure the results of something anywhere near as severe and radical and immediate as what svb underwent what I think Jay Jake I'm sorry that we we've got to focus on here is it's very hard to overstate the role of the Federal Reserve in this just think about it this way wildly unprecedented Easy Money sloshing around on a massive scale combined with all the spending that was going on absolutely was a big source of the surge in deposits that's the first point maintaining zero interest rates and in fact negative real interest rates pressured all the banks to move out the risk curve now in the case of svb it wasn't the credit risk curve but it was a maturity risk curve and then finally when the FED eventually realized how badly they've gotten this wrong and they very quickly raised rates they drove underwater the very Bond portfolios that they themselves had created at the bank so you know coming and going this has the fed's fingerprints all over it do you think that the people who might have encouraged the run on the bank uh Venture capitalists individuals on on Twitter or other forms of social media bear any responsibility for this uh you know it's hard to fault people from observing what they think is a problem and and notifying people of that right they may be right they may be wrong I don't know what their motives were but uh you know uh free speech is a pretty important Bedrock of uh of our country senator Pat Toomey thank you so much sir good to see you again thanks for having me Jake anyway