The sudden departure of the economic environment from zero-interest rates last year may mean that the collapse of the banking sector is always a possibility, but almost no one expects this, even regulators. Since the famous bank that caused the Great Depression in the 1930s, the Federal Deposit Insurance Corporation has guaranteed deposits up to a certain threshold, but this was removed overnight when the Federal Reserve, the Treasury and the FDIC jointly announced a “systemic risk exemption” that also emphasized not a bailout. Now all depositors at Silicon Valley Bank’s roughly $220 billion balance sheet will be liquidated, although about 95% are not insured by the FDIC as of Friday. Clearly something needs to change, and Jason Furman, a Harvard economist who once advised President Barack Obama, has a three-point plan. However, he insisted “no one should feel what happened here.”
SVB became the second largest bank failure in US history after the largest bank, and while it insisted it was solvent until the end, it was simply not prepared for a full withdrawal. 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 as the tech sector fears the solvency of its favorite banks, it is out of cash. pay them.
But with the debate still raging about who and what is responsible for the crisis and whether the government should solve it, a few things are becoming clear: Small and regional banks like SVB may not be as different from Wall Street giants as they think. as we thought, and banking regulations were revealed to be unsuitable for a group of skittish tech executives.
“Regulators may need to do what they’re doing to prevent possible chaotic damage throughout the economy,” said Jason Furman, a Harvard economist who held senior positions on two economic councils that advised the president during the Obama administration. wrote in a tweet Week.
Furman referred to the regulator’s decision to step in and seize the crypto-focused assets of SVB and Signature Bank on Sunday, but added that the need to do so led to many decisions and decisions that were likely to be “wrong” and allow the banking spiral to happen. He outlined a three-point plan of next steps to stop this from happening again, mainly focused on expanding the reach of regulators to protect all banks-even small and regional ones that only a few years ago declared themselves innocuous for the financial system.
Make the regulator up to speed
In the last time the banks had to deal with major changes in regulatory oversight after the 2008 financial crisis, when many institutions were hit by bank runs similar to those that decimated SVB last week. The Obama administration pushed the Dodd-Frank Act in 2010, which increased accountability and transparency requirements for financial institutions, regulatory adjustments that would increase banks’ readiness to withdraw and prevent excessive risk taking.
Dodd-Frank is supposed to keep all banks prepared for the crisis through regular stress tests and detailed plans for winding down operations in an orderly manner in the event of bankruptcy. But the law is slowly changing, after strong lobbying from bank executives including SVB CEO Greg Becker succeeded in reducing the requirements for small and regional banks in 2018.
“SVB, like its mid-sized bank peers, does not present systemic risk,” Becker said in 2015 testimony to the Senate Banking Committee. “Since SVB’s business model and risk profile do not pose systemic risk, imposing many of the Dodd-Frank Act’s requirements designed for the largest bank holding companies will place a greater burden on us, with minimal regulatory benefits.” In particular, when the Fed, FDIC and Treasury intervened this weekend, they called the “systemic risk exception” to the normal operating process.
Furman outlined a three-point idea to understand what caused SVB’s failure and how to prevent future ones. The first step the investigators must take is to “find out what went wrong with the regulation,” and how such an enormous systemic risk could develop overnight. Second, existing regulations 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 did not die very easily,” he said.
A call to strengthen the regulatory framework for banks of all sizes was announced Monday by Democratic Senator Elizabeth Warren, who wrote in a New York Times op-ed that Congress and former President Donald Trump did not roll back Dodd-Frank, “SVB and Signature must have been subject to strong liquidity and capital requirements to withstand financial shocks” and have also been more prepared for the flurry of withdrawals last week.
While smaller banks lobbied for lighter supervision in 2016, Furman insisted that the Obama-era changes weren’t as much of a stumbling block as the banks made them out to be.
“There is no evidence at all that Dodd-Frank has a negative impact on this sector,” he said The Wall Street Journal at the time, referring to the growth of small banks since the law was implemented as evidence. “By all accounts, the sector has been very successful over the past six years, so it’s hard to say Dodd-Frank is causing problems.”
Furman’s third point has less to do with regulation, and more to do with what banks themselves can do to keep from bank runs. “Add deposit insurance—and make everyone pay first,” he wrote. (The market seems to agree that this change is coming, as many regional lenders, especially on the west coast, saw record stock values when the market opened on Monday. In other words, investors see less profitable regional debt ahead.)
A larger deposit insurance fund to ensure client funds are safe may soften the blow in the SVB case. The regulator confirmed on Friday that all deposits under the FDIC-insured limit of $250,000 will be available on Monday, but up to 89% of SVB’s $175 billion in deposits are not insured, according to the 2022 regulatory filing, because the bank’s clients are mostly made up of relatives. small number technology company with a large balance sheet. The regulator promised on Sunday that all depositors – even the uninsured – would have access to the funds, even if it required extraordinary government measures.
But raising the deposit insurance fund is another potential protection for consumers that SVB lobbied in the past. The bank was one of several that opposed the FDIC’s proposal last year to increase the number of banks paying deposit funds, The Lever reported Sunday, citing federal records. SVB and other banks reportedly insist that the risk of failure is low and that paying more into deposit funds will hurt the bottom line.
Furman and the tighter Obama-era banking regulations could be forgiven for feeling right about the recent developments, although the economist stressed in his tweet that the crisis caused by the collapse of SVB could still have serious consequences for the economy.
“This is not the system we are working on. The system is failing and the jury is being hijacked to keep it going. We need a better system,” he wrote.
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