Did a 2018 law allow Silicon Valley Bank’s collapse?

The failure of Silicon Valley Bank has led to renewed debate over a 2018 bill signed into law by then-President Trump that rolled back banking regulation. At the time it was passed, some experts predicted the exact scenario that befell SVB over the last week: The easing of oversight helped lead to the collapse of the nation’s 16th-largest bank and the biggest bank to go under since the Great Recession of the late 2000s.

What happened to Silicon Valley Bank

Founded in 1983 and based in Santa Clara, Calif., SVB was a key financial institution for the startup community, with roughly half of venture-capital-backed companies banking with them. SVB was facing a crunch due to an increase in interest rates from the Federal Reserve, which at the same time devalued their investment in longer-term securities while slowing the flow of money into a tech sector that was depositing less and withdrawing more. Last Wednesday, the bank announced it sold some of those securities at a loss, and it issued new stock in an attempt to address their liquidity issues. This rattled a number of the closely connected clients, who began withdrawing their funds.

In the end, it was a classic bank run, potentially exacerbated by the fact SVB was so highly focused on one area that also happened to have very online clients urging each other into a panic via group chats and social media (and, reportedly, from billionaire investors like Peter Thiel). With the stock price plummeting and rising concern over the bank’s viability, the Federal Deposit Insurance Corporation (FDIC) stepped in on Friday and took over, hours after SVB employees received bonuses, per CNBC. They are still seeking a buyer for the bank and its assets.

On Sunday, the Biden administration and the Fed said they would cover the deposits of all of SVB’s clients, and that it would not come at a cost to taxpayers because it would be covered by other banks. However, there are disagreements over whether “bailout” is proper term for the actions taken. At the same time, regulators said they were shutting down Signature Bank, a smaller, New York-based institution that dealt heavily in cryptocurrency.

What the 2018 regulation rollback meant

In the wake of the 2008 financial collapse, the Dodd-Frank bill put in more regulation for banks, starting with those with $50 billion or more in assets. Republicans and some Democrats argued this hurt smaller regional banks, subjecting them to the same oversight as big banks like JPMorgan that had assets in the trillions. In 2018, the banking industry and a Republican-majority Congress rolled back parts of Dodd-Frank, meaning many larger institutions would no longer be subject to stress tests.

“The Trump administration comes in and they begin bipartisan talks to, among other things, increase that limit, but they say, Let's increase it to $250 billion,” Mike Konczal, an economist and director at the progressive Roosevelt Institute, told Yahoo News. “And it’s one of the things like 50, 100, 250, is that really a big number? Is that a big difference? But these things get much more complex in the risks of failure compounds, so 250 is not just a little bit bigger than 100. It’s a lot bigger.”

Some Democrats on the Banking Committee went around the ranking member, Sen. Sherrod Brown, an economic populist, to negotiate with Republicans. SVB lobbied for the rollback, and used one former staffer with the office of Rep. Kevin McCarthy, R-Calif., then the House Majority Leader and now speaker of the House, in the effort.

“We’re going to move this Senate bill directly to the president’s desk to ensure these reforms help the economy to grow further by making community banks stronger,” McCarthy said of the legislation in 2018. “This is going to free up a great deal of capital and this will help a lot.”

Konczal noted that Democrats who were pushing the bill said that they would “write in that the Fed can put in extra regulations on banks between $100 and $250 billion, so they’ll have that option, and people, including our organization, said, ‘That's really unrealistic. The Fed’s not going to do that.’ If you give [the Fed] a little bit of a crumb they're gonna want the whole cookie and go wild deregulating banks in this area, and they did. Flashforward and a regional bank between $100 and $250 billion in size, quite literally what the bill was meant to deregulate, had a bank run and collapsed over the weekend.”

In the end, 17 Democratic senators joined Republicans in passing the bill, allowing it to overcome the legislative filibuster and make its way to Trump’s desk in May. Thirty-three Democrats supported it in the House, which was controlled by a Republican majority at the time.

“Dodd-Frank was something they said could not be touched. And honestly, a lot of great Democrats knew that it had to be done and they joined us in the effort,” Trump said at the bill signing. “And there is something so nice about bipartisan, and we’re going to have to try more of it. Let’s do more of it.”

What was said at the time

In a March 2018 New York Times op-ed, Konczal wrote, “This bill goes far beyond the health of community banks and credit unions. It removes protections for 25 of the top 38 banks; weakens regulations on the biggest players and encourages them to manipulate regulations for their benefit; and saps consumer protections.”

“Authors of the bill argue that the regulators could still enforce tighter rules on some of these banks,” Konczal added. “But history tells us they won’t until it is too late.”

Konczal was far from the only voice warning of this risk. Michael Barr, now vice chair of the Federal Reserve for supervision, wrote in American Banker that passing the bill would be “a significant mistake,” calling it a giveaway for large banks.

“The rules were not meant to only apply to the largest handful of systemically important firms,” Barr wrote.

Federal Reserve Chairman Jerome Powell did not share those concerns, saying in November 2018 that he saw little risk of a situation like the one that would ultimately befall SVB.

“Today we view funding-risk vulnerabilities as low,” Powell said. “Banks hold low levels of liabilities that are able and likely to run, and they hold high levels of liquid assets to fund any outflows that do occur.”

Just before the vote, Sen. Elizabeth Warren, D-Mass., echoed Konczal’s objections in a statement.

“Washington is about to make it easier for the banks to run up risk, make it easier to put our constituents at risk, make it easier to put American families in danger, just so the CEOs of these banks can get a new corporate jet and add another floor to their new corporate headquarters,” she said.

Warren cited that statement in a New York Times op-ed on Monday in which she called the failure of SVB “entirely avoidable” and said that without the rollback from Congress and the Federal Reserve the bank would have “stronger liquidity and capital requirements to withstand financial shocks” and “been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses.”

“SVB suffered from a toxic mix of risky management and weak supervision,” wrote Warren. “For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits‌. This meant that weakness in a single sector of the economy could threaten the bank’s stability.”

Would the old regulations have prevented SVB’s failure?

Konczal said it’s not certain the pre-2018 version of Dodd-Frank would have prevented SVB’s collapse, but the situation would have been less dangerous and damaging.

“They would have had to pay attention to their balance sheet in a more comprehensive and risk-planning way,” Konczal said. “And, separately, regulators would have asked them harder questions and forced them to think much more through the exposures that they had.” He also argued that SVB being forced to limit its exposure would have made the FDIC more likely to find a buyer for the bank if it did have to step in.

Advocates of the 2018 law have pushed back on the assertion it allowed for SVB’s failure. In an interview with ABC News on Sunday, Sen. Mark Warner, D-Va., said he didn’t regret his vote and that the bill “put in place an appropriate level of regulation on midsize banks.” Warner, the wealthiest Democratic senator, had fundraiser hosted by SVB’s CEO in 2016, according to reporting from Lever News and an invitation acquired by OpenSecrets.

E.J. Antoni, a research fellow for the conservative Heritage Foundation, told Fox Business that the crisis had “nothing to do with Trump or Dodd-Frank” and more to do with an “unusual confluence of events,” citing increased interest rates combined with the bank’s decision to invest so heavily in long-term bonds.

What comes next

In remarks delivered on Monday morning, President Biden said, “I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again, and to protect American jobs as a small business.”

With Republicans in control of the House, the odds of any major regulation passing are slim. Some of Biden’s political opponents are already using the administration’s actions against him, with former South Carolina Gov. Nikki Haley — a candidate for the Republican presidential nomination — attacking him over the “bailout.” Meanwhile, share prices of other midsize banks sank Monday over concerns they may face similar issues to those that downed SVB.