Experts seek ideas to stop next failure
The warning signs were all there. Silicon Valley Bank was expanding at a breakneck pace and pursuing wildly risky investments in the bond market. The vast majority of its deposits were uninsured by the federal government, leaving its customers exposed to a crisis.
None of this was a secret. Yet bank supervisors at the Federal Reserve Bank of San Francisco and the state of California did nothing as the bank rolled over the cliff.
“Their duty is to make sure that the bank is being run in a safe and sound manner and is not a threat,'' said Dennis Kelleher, president of Better Markets, a nonprofit that advocates tougher financial regulations. “The great mystery here is why
the supervision was AWOL at Silicon Valley Bank.''
The search for causes and
culprits — and solutions — is refocusing attention on a 2018 federal law that rolled back tough bank regulations put in place after the 2008-2009 financial crisis and, perhaps even more, on the way regulators wrote the rules that put that law in place.
The Silicon Valley Bank collapse — the second-biggest bank failure in U.S. history — is also raising difficult questions about whether the FDIC needs to offer more protection for deposits.
On Friday, regulators shuttered and seized the bank, based in Santa Clara, Calif. For months it had made a losing bet that interest rates would stay low. They rose instead — as the Federal Reserve repeatedly raised its benchmark rate to fight inflation — and the bank's bond portfolio plunged in value. As its troubles became public, worried depositors started to withdraw their money in an
old-fashioned bank run.
And over the weekend the federal government, determined to restore public confidence in the banking system, decided to protect all the bank’s deposits, even those that exceeded the FDIC’s $250,000 limit.
The demise of Silicon Valley Bank Friday and of New York-based Signature Bank two days later has revived bad memories
of the financial crisis that plunged the United States into the Great Recession of 2007-2009.
In the wake of that cataclysm, set off by reckless lending in the U.S. housing market, Congress passed the so-called Dodd-Frank law in 2010, tightening financial regulation. Dodd-Frank focused especially on “systemically important’’ institutions with assets of $50 billion or more — so big and interconnected with other banks that their collapse could bring the whole system down.
Those institutions had to maintain a bigger capital buffer against losses, keep more cash or other liquid assets on hand to handle a bank run, undergo annual “stress tests’’ from the Federal Reserve and write a “living will’’ to arrange for their affairs to be settled in an orderly manner if they fail.
But as the crisis faded into the past, and more and more banks grumbled about the burden of complying with the new rules, Congress decided to provide relief from the DoddFrank legislation. Among
other things, it ditched the $50 billion asset threshold for the most stringent oversight, pushing it up to $250 billion. Many large lenders, including Silicon Valley Bank, were thereby freed from the tightest regulatory scrutiny.
Critics like Democratic Sen. Elizabeth Warren of Massachusetts, a leading critic of the banking industry, denounced the bill at the time, saying it would encourage banks to take more risk.
The law gave Federal Reserve officials the authority to reimpose tougher regulations on banks with assets between $100 billion and $250 billion if they felt it necessary.
But they chose not to be tough on those banks. For example, they only required a stress test every two years, not annually. So Silicon Valley Bank didn’t have to undergo a stress test in 2022 and wasn’t due for one until later this year.
Todd Phillips, a fellow at the left-leaning Roosevelt Institute and a former FDIC lawyer, said Congress’ deregulatory push during the Trump years created a “vibe shift.”
“It basically gave regulators permission to take their eyes off ” lenders like Silicon Valley Bank, he said. “The regulators ran with that.’’
Warren and other lawmakers on Tuesday introduced legislation to undo the 2018 law and restore the tougher Dodd-Frank regulations.
But Kelleher at Better Markets said that U.S. bank regulators “don’t have to wait for a divided Congress to act in the best interests of the American public.’’