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The warning signs are all there. Silicon Valley Bank is expanding at a rapid pace and continues to make risky investments in the bond market. The majority of its deposits are not insured by the federal government, leaving its customers exposed to a crisis.
None of this is 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 job is to make sure the bank is run in a safe and sound manner and not a threat,” said Dennis Kelleher, president of Better Markets, a nonprofit that advocates for tougher financial regulations. “The big mystery here is why the management of Silicon Valley Bank is AWOL.”
The search for causes and causes – and solutions – refocus attention on a federal law in 2018 that restores the tough banking regulations put in place after the financial crisis of 2008-2009 and, perhaps even more, in the way written by regulators are the rules that set that law.
Silicon Valley Bank collapsed — the second-largest bank failure in US history — also raises tough questions about whether the FDIC should provide more protection for depositors.
On Friday, regulators shut down and seized the bank, which is based in Santa Clara, California. For months it has been making a losing bet that interest rates will stay low. They rose instead – as the Federal Reserve repeatedly raised its benchmark rate to fight inflation – and the bank’s bond portfolio fell in value. As its troubles became public, worried depositors began withdrawing their money in an old bank run.
And at the end of the week the federal government, determined to restore public confidence in the banking system, decided to protect all bank deposits, even those exceeding the $250,000 FDIC limit.
The death of Silicon Valley Bank on Friday and the New York-based Signature Bank two days later bad memories relived of the financial crisis that plunged the United States into the Great Recession of 2007-2009.
After that disaster, which was initiated by the unstoppable lending in the US housing market, Congress passed the so-called Dodd-Frank law in 2010, which tightened financial regulation. Dodd-Frank specifically targeted “systemically important” institutions with assets of $50 billion or more — so large and interconnected with other banks that their collapse could bring down the entire system.
Those institutions must maintain a larger capital buffer against losses, hold more cash or other liquid assets on hand to manage 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 should they fail.
But as the crisis faded into the past, and more and more banks complained about the burden of complying with the new rules, Congress decided to provide relief from the Dodd-Frank legislation. Among other things, it removed the $50 billion asset threshold for the most stringent management, pushing it up to $250 billion. Many large lenders, including Silicon Valley Bank, are thus freed from the strictest regulatory scrutiny.
Critics like Democratic Sen. Elizabeth Warren of Massachusetts, a leading critic of the banking industry, criticized the bill at the time, saying it would encourage banks to take on more risk.
the The law gives Federal Reserve officials the authority to re-impose stricter regulations on banks with assets between $100 billion and $250 billion if they feel it is necessary.
But they chose not to harden the banks. For example, they only require a stress test every two years, not every year. So Silicon Valley Bank won’t have to undergo a stress test in 2022 and won’t be due for one until later this year.
Todd Phillips, a fellow at the left-leaning Roosevelt Institute and a former FDIC attorney, said the deregulatory push in Congress during the Trump years has created a “vibe shift.”
“It basically gives the 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 roll back tougher Dodd-Frank regulations.
But Better Markets’ Kelleher says US bank regulators “shouldn’t wait for a divided Congress to act in the best interests of the American public.”
They could rewrite the 20 bank-friendly rules put in place by the Fed and other banking agencies during the Trump years. For example, for banks with $100 billion or more in assets, Phillips wrote in a report Wednesday, regulators should reinstate annual stress tests and raise capital requirements, among others. other things.
“When we return the regulations so that bank executives can use these banks to increase their profits, to increase their own salaries, to get more bonuses, they do it by taking more risk,” Warren told reporters Wednesday. “Banking should be boring. And we have an opportunity here in Congress to make banking more boring again.”
The sudden collapse of Silicon Valley Bank also brought attention to federal deposit insurance.
The FDIC covers only $250,000. But Silicon Valley Bank, the go-to institution for tech entrepreneurs, holds money for many startups: 94% of its deposits – including the money companies need to meet their payrolls – are above the $250,000 threshold and could easily be lost if the bank failed.
The idea that many depositors will lose their savings threatens to shake public faith in the banking system. So the Biden administration announced Sunday night that the FDIC will cover 100% of deposits at Silicon Valley Bank, and also at Signature Bank
Now some are calling for a permanent increase in the deposit insurance limit.
“I hope that now going forward they will not consider this increase in guaranteed deposits as a one-shot answer … Signature Bank. He also proposed an increase for businesses so that they can reach payrolls.
But the Roosevelt Institute’s Phillips said the issue is complex. If you cover business payrolls, do you need to cover the deposits they provide to pay rent or suppliers? And the unlimited deposit range means that even the richest and most financially capable people should not be responsible for monitoring the financial health of their banks.
Covering all deposits would also require the FDIC to charge banks more for additional insurance, a prospect the industry has not previously embraced. The industry unsuccessfully lobbied to reduce FDIC insurance assessments last year.
However, having full insurance can be a competitive advantage.
A group of small Massachusetts banks created their own private deposit insurance fund in the 1990s, allowing depositors to be insured up to a $250,000 limit through this state-based program. While it costs more for small banks to participate than to be insured only through the FDIC, Massachusetts bankers said they have been attracting customers since the failure of Silicon Valley Bank.
“Perhaps our rates are not as competitive as the biggest banks, but customers like that we ensure 100% of their funds,” said Catherine Dillon, chief operating officer of Bank Five in Fall River, Massachusetts.
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Sweet reporting from New York.
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