The sudden departure in the economic environment from last year’s zero-interest rates could mean that the collapse of banking sector fraught with risk is always likely, but almost no one expects it, not even the regulators. Since the notoriously terrible bank runs that began the Great Depression of the 1930s, the Federal Deposit Insurance Corporation has guaranteed deposits up to a certain threshold, but that was thrown out the window Sunday night when the Federal Reserve, Treasury and FDIC jointly announced a “systemic risk exception” that they insist is not a bailout. Now all depositors of Silicon Valley Bank’s nearly $220 billion balance will be complete, although nearly 95% of them were not insured by the FDIC as of Friday. It’s clear that something needs to change, and Jason Furman, the Harvard economist who once advised President Barack Obama, has a three-point plan. However, he insisted that “no one should feel good about what happened here.”
SVB became the second largest bank failure in US history after the largest bank run, and while it insisted it was solvent until the end, it’s just not ready for the influx of withdrawals. The bank has reinvested much of its assets into risky long-term bonds that have lost value as the Fed raises interest rates, meaning that while the tech sector fears about the solvency of its favorite bank , it has no cash on hand to pay them.
But with the debates going on who and what is responsible for the crisis and if required by the government step to fix itsome things have become clear: Small and regional banks like SVB may not be as different from Wall Street behemoths as they would like us to think, and banking regulation is revealed to be incompatible with an exciting group of tech executives.
“Regulators probably need to do what they’re doing to avoid possible chaotic damage to the entire economy,” said Jason Furman, a Harvard economist who holds senior positions on two economic councils. advised the president during the Obama administration, wrote in the tweet Sunday
Furman pointed to the regulators’ decisions to annex and seize SVB’s assets and Crypto-focused Signature Bank on Sunday, but added that the need for them to do so came to a series of decisions and judgments that were probably “wrong” and allowed the banking spiral to occur. He outlined a three-point plan of next steps to prevent this from happening again, focusing on expanding the reach of regulators to keep all banks—even small and regional ones—afloat. who years ago declared themselves harmless to the financial system.
The last time banks had to deal with major changes in regulatory oversight was after the 2008 financial crisis, where many institutions were hit by bank runs. LIKE of the one that broke down in SVB last week. The Obama administration continues the Dodd-Frank Act in 2010, which significantly increased accountability and transparency requirements for financial institutions, regulatory changes that would increase banks’ preparedness for sudden surges of withdrawals and discourage excessive risk taking.
Dodd-Frank would have prepared all banks for a crisis through regular stress tests and detailed plans for stopping operations in an orderly manner in the event of bankruptcy. But the law weakened over time, after intense lobbying from bank executives including SVB CEO Greg Becker was successful. reduced action requirements for small and regional banks in 2018.
“SVB, like our mid-sized bank peers, does not present systemic risks,” Becker said in a 2015 testimony to the Senate Banking Committee. “Because SVB’s business model and risk profile do not pose systemic risk, the imposition of many of the requirements of the Dodd-Frank Act designed for the largest bank holding companies will place a greater burden on and to us, with little corresponding regulatory benefit.” Notably, when the Fed, FDIC and Treasury intervened this week, they cited a “systemic risk exception” to their normal operating process.
Furman outlined his three-point idea to understand what caused SVB’s failure and how to prevent it in the future. The first step the investigators must take is to “examine what went wrong in the regulation,” and how such a large systemic risk could have developed overnight. Second, existing regulation should be strengthened, Furman wrote, and expanded to cover smaller banks in addition to Wall Street giants. “I always thought that small and medium-sized banks were too easy,” he said.
The need to strengthen the regulatory foundation for banks of all sizes is sounded Monday by Democratic Senator Elizabeth Warren, who wrote a New York Times op-ed that if Congress and former President Donald Trump did not roll back Dodd-Frank, “SVB and Signature could be subject to stronger liquidity and capital requirements to withstand financial shocks” and be better prepared for last week’s flurry of withdrawals.
When smaller banks lobbied for looser regulation in 2016, Furman insisted the Obama-era changes weren’t as big a hurdle as banks made them out to be.
“There is no evidence that Dodd-Frank will have a negative impact on this sector,” he said spoke to Wall Street Journal at that time, referring to the growth of small banks since the law was enacted as evidence. “By all accounts, this sector has been really successful over the last six years, and so it’s hard to say that Dodd-Frank is the cause of a problem.”
Furman’s third point has less to do with regulation, and more to do with what the banks themselves can do to prevent a bank run. “Add deposit insurance—and have it all paid up front,” he wrote. (The market seems to agree that this change is coming, as many regional lenders, especially those based on the west coast, are seeing record decreased share value when the market opened on Monday. In other words, investors see less profitable lending in the region ahead.)
A larger deposit insurance fund to ensure clients’ funds are safe could soften the blow in the SVB case. Regulators confirmed Friday that all deposits are subject to the FDIC’s $250,000 insurable limit could have been used on Monday, but as far as 89% of SVB’s $175 billion in deposits is unsecured, according to 2022 regulatory filings, because the bank’s clients are largely comprised of relatively small technology companies with large balance sheets. Regulators promised Sunday that all depositors—even those who are uninsured—will have access to their funds, even on demand. extraordinary measures by the government.
But raising deposit insurance funds is another potential protection for consumers that SVB has lobbied for in the past. The bank was one of several that opposed the FDIC’s proposal last year to increase the number of banks payment of their deposit funds, The Lever reported Sunday, citing federal records. SVB and other banks reportedly insist that their risk of failure is low and that paying more on deposit funds will hurt their bottom lines.
Furman and the stricter banking regulations of the Obama era can be forgiven for feeling that recent events have confirmed, although the economist insisted in his tweet that the crisis arising from the collapse of SVB can yet with serious consequences for the economy.
“This is not the system that works. The system is failing and it’s jury rigged to keep it going. We need a better system,” he wrote.
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