How a 2018 banking law led to the collapse of Silicon Valley Bank
How a 2018 banking law led to the collapse of Silicon Valley Bank

How a 2018 banking law led to the collapse of Silicon Valley Bank

The recent failures of Silicon Valley Bank and other regional banks have brought attention to the bipartisan banking deregulation law passed by Congress in 2018 under former President Donald Trump. Critics argue that had the old rules been in place, the collapse of Silicon Valley Bank may have been prevented or slowed down.

Under the old rules, Silicon Valley Bank would have been subject to stricter oversight, which may have exposed its vulnerabilities and prevented bank runs. The 2018 law changed the criteria for which banks are considered “systemically important,” increasing the threshold to those with $250 billion in assets.

How a 2018 banking law led to the collapse of Silicon Valley Bank

This means only the largest banks face stricter regulation, leaving smaller banks vulnerable to collapse.

Critics, including Sen. Elizabeth Warren and Sen. Bernie Sanders, have argued that the collapse of Silicon Valley Bank and Signature Bank is a direct result of the 2018 law, which rolled back parts of the 2010 Dodd-Frank Act aimed at preventing banks from making risky bets that led to the 2008 financial crisis.

According to reports, Silicon Valley Bank (SVB) CEO Greg Becker advocated raising the $50 billion threshold during a statement to a Senate committee in 2015. He suggested that failing to do so would unnecessarily burden mid-sized banks like SVB and reduce their ability to offer banking services to clients.

He further argued that compliance costs and human resources related to meeting regulatory requirements would force the bank to shift focus away from small businesses and job creation.

The Bipartisan Banking Deregulation law passed in 2018

SVB spent around $500,000 on lobbying ahead of the passage of the 2018 banking deregulation law, and even after its approval, it continued to lobby the FDIC. However, some analysts now suggest that this advocacy for deregulation may have contributed to the collapse of SVB and similar banks.

SVB’s rejection of the Dodd-Frank regulations could have potentially led to early identification of the bank’s flaws. SVB had a high percentage of uninsured deposits from Silicon Valley startups and investors, which made up 97 per cent of its deposits, leaving the bank vulnerable to instability in the tech sector.

However, regulators failed to detect any warning signs despite the new law not completely exempting SVB from regulatory oversight. They might have been more vigilant if the regulators had been required to evaluate the bank’s living will and conduct annual stress testing.

The bank’s inability to hedge against the risk posed by rising interest rates and its investment in long-term Treasury bonds proved to be a costly mistake. Additionally, the bank failed to appoint an official chief risk officer, previously required before the 2018 deregulation, further increasing its vulnerability.