The collapse of two major banks in recent weeks has added scrutiny to deregulation in 2018.
Under Dodd-Frank, banking companies with assets of $50 billion or more were subjected to the most stringent rules that included enhanced capital requirements and so-called stress tests to determine liquidity risks.
The 2018 law that rolled back Dodd-Frank — passed with bipartisan support — raised the asset threshold to $250 billion. And as of the end of last year, Silicon Valley Bank had assets of about $209 billion.
Despite all that, SVB had other issues not necessarily related to regulation: Mainly rising borrowing costs, but also a struggling tech industry and ties to cryptocurrency.
Q: Did weakening bank regulations in 2018 set up Silicon Valley Bank for collapse?
Gary London, London Moeder Advisors
YES: Probably they did, with significant assistance from asleep-at-the-switch state regulators and incompetent bank management. The important takeaway from this bank failure is that repeated and rapid escalation of interest rates by the Fed over the past year to combat inflation had to eventually lead to something breaking! Most pundits have been hyper-focused on the end game being a recession. Maybe the bank failures are now enough to slow the economy without endangering it. We shall see.
Phil Blair, Manpower
NO: I think banks just became sloppy and over-aggressive to enhance their return to investors. This aggressiveness also may have been a result of the easy money made, and then lost by crypto trading firms.
Alan Gin, University of San Diego
Not participating this week.
Bob Rauch, R.A. Rauch & Associates
NO: One big problem was the Fed not stemming the run at SVB, another was the interest-rate risk. After this past year’s rate hikes, SVB’s portfolio losses were deep. This could have been avoided if the Fed had succeeded in doing its job as lender of last resort to SVB at the onset of the run. Now, a bailout of both insured and uninsured deposits has created the potential for financial instability.
Kirti Gupta, Qualcomm
NO: While weakening the bank regulations did not help, they were not the cause of the recent collapse. The 2018 law — passed with bipartisan support — changed the asset threshold for banking companies that were subjected to stringent rules to determine liquidity risks, raising it from $50 billion to $250 billion. Banks like SVB were not covered under the new relaxed threshold. That said, what happened was a race-to-withdrawal, equivalent to a stampede, which would have brought any bank to its knees.
James Hamilton, UC San Diego
NO: The Federal Deposit Insurance Corporation, which was created in 1933, has all the tools it needs to prevent bank runs. These are: (1) a federally backed guarantee that depositors will not lose money, and (2) requiring enough bank equity so that if the bank fails, it’s the owners who lose and not the taxpayers. It didn’t work for SVB because (1) many deposits were above the insured limits and (2) the FDIC was undervaluing interest-rate risk in determining required owner equity. Expanding FDIC insurance to all depositors and tightening FDIC equity requirements can completely fix this problem.
Austin Neudecker, Weave Growth
YES: The Dodd-Frank regulations were a step in the right direction to rein in the industry that recklessly caused the 2008 collapse. Congress should not have repealed aspects of this law that applied to capital requirements and stress tests, which may have helped these mid-sized banks survive. I prefer that we seek further requirements including lower leverage ratios and a return to separation between banking, investing, and insurance activities.
Chris Van Gorder, Scripps Health
NO: Not entirely. While the change in regulations and possibly lax oversight contributed to the bank’s demise by weakening liquidity requirements for smaller banks, other parties are equally culpable. Credit agencies failed to raise concerns regarding the bank’s rapid growth and deteriorating balance sheet. External auditors failed to recognize the bank’s weakening financial condition and lax risk controls. It was the Federal Reserve’s interest rate tightening that caused Silicon Valley Bank’s investments to drop precipitously in value.
Norm Miller, University of San Diego
YES: There is little doubt the lack of stress tests for banks under $250 billion led to additional risk-taking for some regional banks, although a few large banks (ex. BOA) are in the same boat as SVB based on buying low-yielding long-term bonds. It was not woke investing that created problems for SVB as much as buying long-term government bonds when rates were artificially low via stimulus strategies that are now coming back to haunt us. SVB also engaged in some insider lending that may have added to their problems.
Jamie Moraga, Franklin Revere
YES: Silicon Valley Bank failed not only from weakened bank regulations but also from the inability of the Federal Reserve to supervise and enforce regulations. The Fed (through its supervisory San Francisco Federal Reserve Bank) failed to see several of SVB’s red flags and what is even more alarming was the SVB CEO sat on the San Franciso Fed’s board of directors. Fed governance must be improved so that rules will be properly supervised, scrutinized and enforced.
David Ely, San Diego State University
NO: SVB collapsed because of its rapid growth, heavy reliance on uninsured depositors, and large holdings of long-term securities. The risks arising from these conditions were clear and should have led to regulatory action even with the changes adopted in 2018. This does not mean that changes to regulatory oversight are unnecessary. It is clear that the digital banking tools that are now available have increased the speed of bank runs and elevated liquidity risk.
Ray Major, SANDAG
NO: Although stronger banking regulations may prevent situations like this in the future, the fundamental problem SVB and other banks face stems from a unique set of circumstances. After a decade of near-zero interest rates and negligible inflation coupled with an influx of money, banks were forced to invest in bonds with lower returns. With the Fed rapidly raising interest rates, the bonds became less valuable. Banks encountered cash flow issues because they couldn’t cover the large depositors’ withdrawals at the same time.
Caroline Freund, UC San Diego School of Global Policy and Strategy
YES: While not the main villain, weakening regulation played a supporting role. Silicon Valley Bank fell off bank regulator’s radar screens because of deregulation and lapses in supervision. Had regulators been monitoring regional banks like SVB, they would have foreseen the balance-sheet risks from rising interest rates. The 2018 regulatory rollback was premised on midsize banks being unimportant to financial stability, which is clearly false.
Haney Hong, San Diego County Taxpayers Assoc.
Not participating this week.
Kelly Cunningham, San Diego Institute for Economic Research
NO: After a slight rise from historically low-interest rates, SVB was swamped once investors realized treasuries were worth less than invested. Risky run banks must be allowed to fail, not privatize benefits and socialize losses. Scrutiny by regulatory bureaucratic bank examiners is no substitute for competitive market discipline. There are no incentives for banks to play by rules when the cautious are punished with special assessments imposed on all banks to cover losses of recklessly impudent.
Lynn Reaser, economist
YES: SVB’s failure surprised regulators. From a credit point of view, treasuries and mortgage-backed securities were safe. The interest rate risk might have been overlooked after a long period of ultra-low rates. Relaxing the scrutiny threshold from $50 billion to $250 billion might have been a mistake by not requiring SVB to have more liquid assets rather than seeing large losses when Treasury prices plunged.
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