The collapse of Silicon Valley and other banks of similar size in recent days has come into the spotlight Congressional Bipartisan Banking Deregulation Act of 2018Signed by then-President Donald Trump.
We will never know what would have happened if the law had not been enacted. But given that Silicon Valley would have been more tightly regulated under the old rules, more regulation may have slowed – or even prevented – the panic that erupted last week as depositors rushed to withdraw their money.
In the aftermath of the bank’s implosion, some Democrats and economists began to argue that the failure of the bank and its aftermath Concerns about infection In the financial sector they are actually direct results of this law, which repealed key parts of the 2010 Dodd-Frank Act intended to prevent banks from making the kinds of large bets that led to the 2008 financial crisis.
in editorial In the New York Times on Monday, Sen. Elizabeth Warren (D-MA), who led the charge against deregulation in 2018, wrote that SVB and the crypto-focused Signature Bank, which was also close By the FDIC on Sunday, it could not afford to run old banks that killed them precisely because there was no oversight to “expose their vulnerabilities and support their business.”
Notably, the 2018 law changed which banks are considered “systemically important” to regulators. The threshold has been increased from institutions with at least $50 billion in assets to those with $250 billion. This means that only major banks face stricter regulations, including requirements to maintain certain levels of liquidity and the ability to absorb losses; comply with corporate and government administered stress testing; And make a living testament to prepare for possible failure.
SVB had assets of $209 billion, which made it the 16th largest bank in the United States at the time. taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday. But it was not large enough to be subject to the strictest scrutiny standards under the 2018 law.
Sen. Bernie Sanders (I-VT) noted in a statement Sunday that the Republican director of the Congressional Budget Office warned From this scenario exactly five years ago – that the bill would increase what was thought to be a small probability of failure for a large financial corporation with assets between $100 billion and $250 billion.
“Unfortunately, that’s exactly what happened,” Sanders said.
SVB lobbied for its release – and may have caused its demise
in statement To a Senate committee in 2015, SVB CEO Greg Baker specifically called for raising the $50 billion threshold, arguing that not doing so would burden medium-sized banks like himself with “substantial burdens that would inherently and unnecessary to reduce our ability to provide the banking services our customers need.”
He argued that the compliance and human resource costs associated with having to meet regulatory requirements would force the bank to “divert resources and attention from making loans to the small and growing businesses that are the engines of job creation in our country, although our risk profile will not change.”
He also praised SVB’s “deep understanding of the market it serves”, its “strong risk management practices”, and the “core strength of the innovation economy” on which SVB relies, as well as the bank’s ability to lend to nearly 8,000 customers while maintaining strong credit.
The bank spent half a million dollars lobbying in the run-up to the law’s passage, including on Hiring two former senior employees The Speaker of the House is now Kevin McCarthy. I continued pressure on the FDIC Even after the law was passed.
The Dodd-Frank regulations that SVB fought against may have helped identify the bank’s shortcomings earlier. Because the bank caters to Silicon Valley startups and investors with deposits that generally exceed the $250,000 deposit insurance limit, 97 percent Of its deposits are uninsured – an abnormally large share compared to other consumer banks. This left the bank vulnerable to instability in the technology sector, which has seen more than 120 thousand layoffs In 2023 alone.
As noted by financial experts, these and other indicators indicated that the bank was entering dangerous territory long before its collapse. The new law did not completely exempt SVB from regulatory oversight, but it appears that regulators failed to notice any of these warning signs. They might have been more vigilant if they were asked to assess the Bank’s living will and subject it to an annual stress test.
“This is a black eye for regulators. Something happened that wasn’t supposed to happen,” said Ian Katz, financial policy analyst at Capital Alpha Partners. Financial Times. “You’re already seeing the finger-pointing taking place and that will continue.”
The bank also fails to hedge the risks posed by rising interest rates because it is betting on the long term Treasury bonds during a pandemic. These bonds proved to be a devastating investment when the bank suddenly needed to quickly release more cash. She didn’t even have a file Chief Risk Officer In the months leading up to the FDIC takeover, as required prior to the 2018 deregulation, although the bank Pay rewards Within hours of its collapse.
It is not clear if more oversight would predict these problems and reduce SVB exposure to risks. But it probably wouldn’t have hurt.