The collapse of the Silicon Valley Bank (SVB) reignited debate over financial industry deregulation in the United States, including the partial rollback of sweeping reforms introduced after the 2007-2008 financial crisis.
Some critics have attributed the failure of SVB and the subsequent collapse of cryptocurrency-focused Signature Bank and Silvergate Capital to the Trump administration’s relaxation of rules designed to ensure financial institutions can withstand severe economic shocks.
Other economists have argued that existing rules did little to rescue SVB, which collapsed after panicked customers began withdrawing funds in response to the California-based lender suffering heavy losses selling US Treasuries.
How have banking regulations changed under the Trump administration?
In 2018, then-US President Donald Trump signed legislation partially reversing the Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank.
The legislation raised the asset size threshold for banks considered too big to fail from $50 billion to $250 billion. The changes reduced the number of banks subject to the strictest prudential oversight to about a dozen and exempted small and medium-sized banks from stress tests, which aim to assess an institution’s ability to weather a severe economic downturn.
Trump, who called Dodd-Frank a “disaster,” and his Republican Party said the reforms would ease corporate lending and boost the economy.
Although the legislation was a key element of the Republican push to reduce government’s role in the economy, the legislation received bipartisan support and won the votes of 50 Democrats in the US Congress.
Dodd-Frank, signed into law by former US President Barack Obama in 2010, marked the biggest reform of Wall Street since the Great Depression, introducing regulations such as strict capital requirements, a ban on speculative trading and measures that allowed institutions to be dissolved before them become too big to fail.
The watering down of the law followed years of lobbying by financial industry executives, including former SVB boss Greg Becker.
Are there new regulations for banks?
On Tuesday, Senator Elizabeth Warren, who is among a number of Democrats who have blamed Trump directly for the bank failures, announced plans to unveil legislation restoring key provisions of Dodd-Frank, including the $50 billion threshold for “too big to fail”. banks.
President Joe Biden, who has also criticized Trump for weakening Dodd-Frank, had previously urged Congress to propose tougher rules for banks to “make it less likely that these kinds of bank failures will happen again and to save American… to protect jobs and small businesses”. .
Any bill would have to pass the U.S. House of Representatives, where Republicans — who almost unanimously backed Dodd-Frank’s watering down in 2018 — hold a slim majority.
Trump has dismissed accusations that he played any role in the bank’s failure, instead blaming excessive Federal Reserve rate hikes and Biden’s “anti-America” policies.
Trump has also reinforced claims by conservatives that diversity and inclusion efforts at the banks may have been “awakening” them from their core mission, an issue also raised by Florida Gov. Ron DeSantis, Trump’s top rival for the Republican presidential nomination in the US year 2024.
“I think this will lead to another review of the regulatory environment,” David Skeel, a corporate law professor at the University of Pennsylvania Law School, told Al Jazeera.
“The debate over whether raising the threshold for financial institutions receiving additional regulatory oversight from $50 billion to $250 billion in 2018 played a role in the collapse of the SVB is already well underway. Michael Barr, the Fed governor who oversees oversight, has been a major critic of the shift. I think that increases the chances that the post-SVB rollback will be reversed, at least partially.”
William T. Chittenden, associate professor of finance and economics at Texas State University, expressed doubts that significant reform would materialize.
“I’m not sure anything will really come of this from a regulatory perspective,” Chittenden told Al Jazeera. “Yes, there will be a more detailed investigation into why SVB failed, but by the time this report comes out, most people will have forgotten it and move on to the next shiny new thing.”
Do economists think deregulation caused the collapse of the SVB?
While politicians in Washington, DC have made accusations of partisanship, economists have generally been more cautious about what role, if any, the 2018 deregulation played in the collapse of the SVB.
Commenting in the Guardian, Nobel Prize-winning economist Joseph Stiglitz described the collapse of the SVB as “symbolic of profound failures in the conduct of regulatory and monetary policy”, although he did not directly blame the 2018 reforms.
“We need stricter regulation to ensure all banks are safe,” Stiglitz said.
Chittenden, an associate professor at Texas State University, said he was skeptical that the Dodd-Frank safeguards prior to 2018 did much to save SVB.
“Since most banks, regardless of their size, do interest rate shock simulations, I’m not sure that raising the limit made a difference,” he said.
“There’s a difference between conducting a shock test and actually doing something with the information. Although the details are not given in their public filings, it appears SVB performed shock testing, also known as sensitivity analysis.”
James Angel, associate professor of finance at Georgetown University, said determining the failures that led to SVB’s demise would require a careful review of the situation.
“There is always room for improvement in our financial regulatory systems. The Silvergate/SVB/Signature crisis will clearly lead to an investigation into what has and hasn’t worked,” Angel told Al Jazeera.
“Regulation is not a thermostat that you can just push up or down – the details are very important. We will re-examine how we account for held-to-maturity instruments, bank liquidity standards, contingent capital and the role of regulators in guaranteeing deposits.”