The Republican lawmaker overseeing the House investigation into the ongoing banking crisis told an influential bank lobbying group last week that it was "hackish" to blame deregulation for recent bank failures — including the collapse of an institution that’s been his top individual source of campaign cash.
Rep. Patrick McHenry (R-N.C.), who has received $275,000 in donations since 2013 from executives at Signature Bank, will lead the House Financial Services Committee’s first hearing on Wednesday looking into the sudden failures of Signature Bank and Silicon Valley Bank (SVB) earlier this month.
One key factor in Signature Bank’s collapse was its decision to aggressively pursue cryptocurrency companies’ deposits before the crypto market imploded. McHenry, who benefited last election cycle from nearly $170,000 in spending by a pro-crypto super PAC, has been an avid supporter of the industry, which is built around digital money or assets.
The lawmaker has previously scolded financial regulators seeking to scrutinize crypto — which critics describe as inherently speculative and without real use — and he has embraced crypto lobbyists’ proposal to establish new special regulations for digital currencies, even though they can be overseen and reined in using existing regulatory authorities.
In advance of the House hearing this week, McHenry has made several public appearances urging lawmakers to wait to get the facts and avoid speculating about what caused the banks’ downfalls. But in a speech last week before the American Bankers Association, a powerful Washington banking lobby, McHenry ruled out one potential factor: the bipartisan 2018 deregulation law signed by President Donald Trump.
The 2018 law, which McHenry supported, pared back government oversight of so-called regional banks like Signature Bank and SVB.
“We Need To Be A Little More Patient”
McHenry was one of a handful of lawmakers from both parties who addressed the American Bankers Association last week during its annual Washington summit. The bank lobbying group raised $141 million in 2021, according to its most recent tax return.
After a quick speech, McHenry was interviewed by the American Bankers Association’s CEO, Rob Nichols, who asked McHenry to respond to critics blaming the recent bank failures on the 2018 deregulation law, which the association backed.
“I think it's unbecoming, I think it's quite hackish,” said McHenry. “We need to be a little more patient and find out what the facts are,” he continued, adding that the 2018 law “did not touch at all the facts and circumstances for these two failed banks.”
The legislation reduced mandatory oversight of regional banks, firms holding between $50-250 billion in assets under management. Instead, the law allowed banking regulators, who have historically been differential to the banking industry, to use their discretion to apply enhanced rules on regional banks.
Both SVB and Signature Bank surpassed the $50 billion asset threshold in 2019, the year after Congress passed the deregulatory law. Both banks then continued expanding rapidly until earlier this month, when they were taken over by state and federal banking authorities. If Congress had never relaxed the rules, each bank would have been subject to more stringent regulations, stress tests, and capital requirements.
Nichols, who was paid nearly $5 million in 2021, said that he was in “heated agreement” with McHenry, whom he described as “the adult in the room.”
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During an appearance on CBS News on March 19, McHenry similarly cautioned against pointing fingers over the collapse of SVB and Signature Bank, saying that “until I have the facts, I'm not going to draw a conclusion.”
However, he also gave a nod to conservative culture warriors’ insistence that SVB’s failure stemmed from the company’s interest in “environmental, social, and corporate governance,” suggesting that SVB and Signature Banks’ executives may have been “more concerned about politics, or the environmental or social goods” than with “proper oversight of people's deposits.”
Ironically, no other lawmaker has financially benefited more in recent years from Signature Bank executives’ interest in politics.
McHenry has been the top House recipient of campaign donations from Signature Bank executives in every election cycle since 2014, according to data from OpenSecrets. The bank’s employees have been McHenry’s top individual source of campaign cash over the course of his career.
Last week, McHenry attempted to distance himself from Signature Bank, after Bloomberg News reported that the bank’s executives hosted a fundraiser for him just ten days before the firm went bust.
McHenry told reporters that he returned the donations, adding: “When people contribute to me, it’s an endorsement of my agenda — not the other way around.”
“Regulators Were Trying To Send A Message”
Signature’s rapid growth, its accumulation of uninsured deposits worth more than the $250,000 guaranteed by the federal government, and its decision to court major clients in the highly volatile crypto industry should have prompted regulators to take a closer look at the bank, analysts bemoaned after the collapse.
Before the crypto bubble burst, there was as much as $3 trillion worth of investor money in the cryptocurrency industry.
Despite the vast amount of money behind the industry, boosters have never been able to demonstrate a clear use-case for crypto, other than as a means of facilitating crime, scams, money laundering, or regulatory arbitrage, the pursuit of legal loopholes to evade government oversight.
These problems are exemplified by Signature Bank’s crypto clientele, which played a major role in its recent collapse. The bank’s partners included the crypto exchange FTX and the crypto lender Celsius, both of which went bankrupt last year amid allegations of large scale embezzlement.
Another Signature Bank client, the crypto exchange Binance, has reportedly been helping clients launder money and evade taxes for years. On Monday, the Commodity Futures Trading Commission (CFTC) accused Binance of operating unregistered derivatives exchanges, which enabled the company to disregard rules “designed to prevent and detect money laundering and terrorism financing.”
Former Rep. Barney Frank (D-Mass.), who served on Signature Bank’s board of directors, has publicly speculated that “regulators were trying to send a message about crypto” when they took over the bank, though he failed to articulate why that might be inappropriate.
Crypto’s “Great Promise”
Despite the controversy around crypto, the industry has won staunch defenders in Congress — including McHenry, who became the House financial services chair in January.
McHenry has been among lawmakers who have, since 2021, pushed back against top officials at the Securities and Exchange Commission (SEC) who were interested in charging crypto firms like Binance with operating unregistered securities exchanges.
Regulators at the SEC, including Chair Gary Gensler, have said that most cryptocurrencies are securities and, therefore, come under their jurisdiction. McHenry has pushed for the CFTC to have regulatory power over cryptocurrencies, rather than the SEC, which is known as a much tougher regulator.
Such a move — long sought by lobbyists — would give the public the impression that crypto companies are subject to comprehensive oversight when, in reality, they would be under the authority of a relatively weak regulator of their own choosing.
In August 2021, for example, McHenry lashed out at Gensler for asserting SEC authority over crypto exchanges, accusing the agency head of “a blatant power grab that will hurt American innovation.” McHenry has also introduced legislation that would exempt cryptocurrency token issuers from SEC disclosure requirements.
The Republican has additionally pushed back on other regulators who have expressed an interest in subjecting banks involved in cryptocurrencies to higher levels of scrutiny.
In November 2021, as the crypto market was near the height of its frenzy, McHenry criticized a top bank regulator, acting head of the Office of the Comptroller of the Currency (OCC) Michael Hsu, for arguing that banks with partners in crypto and other forms of financial technology, or fintech, required more government oversight.
“The nascent fintech industry and the development of digital assets offer great promise to strengthen the U.S. financial system and improve access to credit and investment for all American consumers and small businesses,” the lawmaker wrote in a letter.
McHenry again cautioned Hsu in October 2022, when the acting OCC head said that fintech firms who partnered with banks should face “enhanced engagement” and a shift away from a “lighter supervisory approach.”
As it happens, Signature grew unsustainably in part by relying on a fintech platform, made by a company called Tassat Group Inc., that enabled the bank’s corporate clients to trade cryptocurrency at any time of day.
The system, called Signet, helped Signature Bank enjoy an “enormous growth in deposits,” as Tassat CEO Kevin Greene boasted in February 2022, before the crypto market downturn. Two other banks that have used TassatPay to facilitate crypto transactions, including Customers Bancorp and Western Alliance, have also experienced distress after the collapse of Signature Bank and SVB.
A class action lawsuit filed last month against Signature Bank argues that the platform gave the bank “actual knowledge” of the now-infamous FTX fraud, and “substantially facilitated” embezzlement by company executives.
Brought by Statistica Capital, a crypto trading firm and former Signature Bank client that used Signet to deposit funds with FTX, the suit alleges that “by virtue of operating Signet, Signature directly observed the improper commingling and misappropriation of customer funds.”
Now, the shape of the congressional inquiry into Signature Bank — and its crypto dealings — will depend in large part on McHenry, who has received substantial financial support from the bank’s executives and its former crypto interests.
In addition to being the top recipient of campaign cash from Signature Bank executives, McHenry also benefited from $167,000 in spending last year by a super PAC called Crypto Innovation — which was primarily funded by a separate crypto-focused political group bankrolled by FTX executives, including its alleged fraudster CEO Sam Bankman-Fried.
“That Chair McHenry was on the wrong side of the crypto debate is now even more clear with the failure of his Signature benefactor,” said Bartlett Naylor, financial policy advocate for the consumer watchdog organization Public Citizen.