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Diversity Activists Helped First Republic Bank Push for Weaker Regulations
The National Diversity Coalition’s effort to frame bank deregulation as a boon for minority groups highlights the way that some social justice groups provide cover for a corporate agenda.
Federal regulators, aiming to prevent another financial crisis, were on the verge of forcing First Republic Bank to submit to risk-assessment tests and other special oversight rules in 2014. That’s when Faith Bautista, president of the National Diversity Coalition, wrote to the Federal Deposit Insurance Corporation and Federal Reserve in fierce opposition.
At the time, as the result of post-financial crisis rules, any bank with more than $50 billion in assets automatically faced stricter scrutiny from federal regulators. The idea was that the federal government had a particular interest in monitoring the health of “systemically important” banks whose collapse would pose a threat to the larger economy, and thus warrant a federal bailout.
Growing mid-sized banks, including First Republic Bank, sought to fend off these regulations on an ad hoc basis and lobbied to exempt themselves from the higher level of scrutiny.
Bautista, the self-described advocate for the interests of minorities, echoed the arguments of First Republic and other mid-sized banks that they simply weren’t big enough to be considered “systemically important.” Banks the size of First Republic, wrote Bautista, do not "present any systemic or substantial risk."
Bautista wrote that any special supervision of First Republic in particular could cost as much as $40 million a year in "additional regulatory burdens.” Bautista added that “in every case, the cost of becoming systemically important exceeds by multiples of four to ten the total amount annually” the bank spends on important community philanthropy.
Bautista also suggested that policymakers consider regulatory exemptions for banks that provide "extraordinary contributions to underserved communities.”
In the end, the First Republic won exemptions to additional regulatory scrutiny and Bautista was financially rewarded by the San Francisco-based bank. First Republic appointed Bautista to a special advisory board and donated to both of her organizations, the National Diversity Coalition and the National Asian American Coalition, which she led through 2022.
Later, First Republic and other mid-sized banks enshrined their carveout in a 2018 law that had bipartisan support. The bill, signed by then-President Donald Trump, raised the official threshold for “systemically important” banks from $50 billion to $250 billion in assets. The move exempted both First Republic and Silicon Valley Bank from the systemic designation, preventing routine stress tests and other rules passed after the 2008 financial crisis to prevent bank failures.
The systemic regulations would have also forced First Republic and Silicon Valley Bank to draw up specialized "living wills” in the event of a crisis. The wind-down plans include emergency steps that could be taken to avoid costly bailouts at an expense to taxpayers. By dodging the systemic regulations, neither bank was forced to craft such a plan.
Instead of an orderly drawdown, regulators have scrambled to unwind First Republic’s death as it collapsed in spectacular fashion in recent days.
Earlier today, regulators officially took control of First Republic. In a deal negotiated over the weekend, J.P. Morgan Chase simultaneously purchased most of the bank's deposits and assets as the bank was seized by the FDIC. The FDIC will reportedly take a loss of about $13 billion from its insurance fund and will extend $50 billion in financing to J.P. Morgan.
Now with the rapid demise of the two banks, the largest bank failures since 2008, the deregulatory push is being reevaluated. Both banks faced a sudden decline as rising interest rates triggered investment losses and a flight of customer deposits.
The institutions were also highly specialized: Silicon Valley Bank focused largely on extending loans to high-tech startups, while First Republic became famous for catering to private banking for high-net worth individuals. Neither bank diversified its portfolio with credit card, auto loans, or other more traditional lending products.
But both banks were confident that any new oversight over its portfolio or business practices were unnecessary and would only hinder growth.
Greg Becker, former CEO of the now-collapsed Silicon Valley Bank, was particularly vocal in demanding exemptions to such regulations. In 2015, he testified before Congress, claiming that the systemic risk rules "stifle our ability to provide credit to our clients."
Michael Roffler, the chief executive of First Republic, as recently as January of this year, argued in a letter to the FDIC that his bank should not face the same level of scrutiny in lending standards as large banks. First Republic does “not pose the same, if any, financial stability risk,” Roffler claimed.
First Republic, disclosures show, retained the white shoe law firm Arnold & Porter Kaye Scholer LLP to press for the Economic Growth, Regulatory Relief, and Consumer Protection Act, the 2018 law that changed the threshold to qualify as a systemically important bank. Silicon Valley Bank similarly retained a team of lobbyists, including former senior congressional aides, to press for the enactment of the exemption.
But the most comprehensive research to date pins the meltdown on the exemptions sought by both banks in recent years.
The Federal Reserve last Friday published a sweeping report on the failure of Silicon Valley Bank, tying the meltdown to the push to the 2018 law that exempted the bank from a systemic risk designation.
Silicon Valley Bank, wrote the Federal Reserve’s regulatory chief Michael Barr, was a “textbook case of mismanagement." The regulator called for better oversight over banks below the $250 billion threshold set by the 2018 law.
"Increased capital and liquidity would have bolstered the resilience of [Silicon Valley Bank]," the report noted. If the bank had faced the systemically important regulations, it could “have more proactively managed its liquidity and capital positions or maintained a different balance sheet composition,” Barr concluded.
The simmering bank crisis has also cast new light on the role of diversity groups that work to mask corporate interests as they shape public policy.
The National Diversity Coalition in particular has a curious history of intervening on behalf of corporate interests while purporting to represent minority communities. The group touts itself as an "empowering voice for our nation's minority and low-income communities," in support of "African American, Asian, and Latino advocacy and civil organizations."
Yet the organization stands out for its role as a vehicle for corporate influence peddling under the banner of advancing racial diversity.
Indeed, the National Diversity Coalition has lent its moral veneer to controversial corporate stances on animal rights, the gig economy, clean energy, and antitrust policy. In 2021, the group lobbied against new animal welfare standards that mandate minimum space requirements for breeding pigs. The California law, the National Diversity Coalition claimed, would harm "Asian and Latino families who rely on pork as their primary source of protein."
In similar fashion, Bautista's group filed a brief to California state courts on behalf of Uber and Lyft in 2020. The National Diversity Coalition sought to overturn a ruling that would have allowed rideshare drivers to qualify for the state minimum wage and other standard labor protections, claiming such rules would somehow harm “workers of color.”
In 2019, the National Diversity Coalition lobbied regulators to approve the merger of T-Mobile and Sprint. The telecom merger, Bautista wrote in a letter to the Department of Justice Antitrust Division, "holds tremendous potential to greatly benefit people of color throughout California."
Bautista, who did not respond to a request for comment, has a remarkable knack for winning corporate board appointments to firms that benefit from her diversity-branded lobbying. She serves on the special advisory boards of First Republic Bank, T-Mobile and PG&E.
Photo by Jakub Porzycki/NurPhoto via Getty Images