IE 11 is not supported. For an optimal experience visit our site on another browser.

The Dodd-Frank Act could have at least helped Silicon Valley Bank ‘fail well’

Looking at the 2018 bill deregulating banks like SVB can not only help us understand what just happened, but it can also help us figure out what to do now.
People outside Silicon Valley Bank headquarters.
Customers waited outside Silicon Valley Bank headquarters in Santa Clara, Calif., on Monday to withdraw money. Noah Berger / AFP via Getty Images file

You can tell how sudden the collapse of Silicon Valley Bank, the second-largest bank failure in U.S. history, was because nobody had talking points ready. The initial trial balloons from conservatives were not promising. A Wall Street Journal opinion columnist argued that “the company may have been distracted by diversity demands’’ while Florida Gov. Ron DeSantis, a Republican, said SVB was “so concerned with DEI [diversity, equity and inclusion] and politics and all kinds of stuff” that it may have "diverted them from focusing on their core mission."

Now the talking points are quickly moving from what caused the failure to what didn’t: deregulation.

Now the talking points are quickly moving from what caused the failure to what didn’t: deregulation. Sen. Tim Scott, R-S.C., the ranking member on the Senate Banking Committee, said that “government intervention does nothing,” while House Financial Services Chair Rep. Patrick McHenry, R-N.C., expressed “confidence in … the protections already in place.”

But their argument is also wrong. There are many causes to the failures here, but a 2018 bill deregulating banks just like SVB — which I warned about at the time — must play a central role in understanding what has happened and how we should respond.

In the aftermath of the 2008 financial crisis, then-President Barack Obama signed the 2010 Dodd-Frank Act, which overhauled the financial regulatory system. Many of the elements of the 2008 crisis that were addressed in Dodd-Frank didn’t play a role in SVB’s failure. This time, there were no opaque credit default swaps or complicated asset-backed securities that Wall Street itself barely understood. It was, in fact, a pretty boring banking crisis underneath all the panic and terror.

But Dodd-Frank had reforms that could have prevented SVB’s sudden collapse. The law included a provision that said if a bank had over $50 billion in assets, it would be understood to present a risk to the system as a whole and, therefore, would be held to higher standards. These standards include capital requirements, which force banks to fund themselves with more equity, but also things to help when things go bad, including stress-testing balance sheets and creating resolution plans in case of failure.

In 2018, then-President Donald Trump, as part of a broader deregulatory agenda, wanted to move that line from $50 billion to $250 billion. But this wasn’t just one party’s failure: Because Republicans couldn’t overcome a Senate filibuster on their own, they needed some Democrats on board.

Thanks to a powerful lobbying campaign, 16 Democratic senators and 36 Democratic representatives joined Republicans to pass the Economic Growth, Regulatory Relief and Consumer Protection Act, generally referred to as S2155. Democratic supporters of the bill generally argued that they wanted to help community banks, which generally have less than $10 billion in assets — not the banks like SVB. The language of the bill was such that the Federal Reserve could reintroduce the regulations and restrictions on $100 billion to $250 billion banks. But it didn’t, and it was pretty clear at the time they wouldn’t. As I wrote while the bill was being debated, supporters “argue that the regulators could still enforce tighter rules,” however “history tells us they won’t until it is too late.”

Dodd-Frank had reforms that could have prevented SVB’s sudden collapse.

Now we’re seeing the elected officials who voted for the law and the regulators who executed it saying it didn’t matter. Randy Quarles, who as vice chair of supervision of the Federal Reserve led an aggressive execution of this deregulation beyond what was legally required, said in a speech Tuesday that deregulation “had nothing to do” with the crisis.

But there are three reasons it did. The first is that, as former FDIC lawyer and Roosevelt Institute fellow Todd Phillips describes, there is a wide range of things we know are relevant that SVB would have been subject to without deregulation. It would have had to keep better track of the funds it had available to make sudden payments, through what’s known as a “liquidity coverage ratio.” That’s reported monthly, so as the bank’s situation deteriorated, it would have been picked up. SVB would have had to undergo an annual Federal Reserve “stress test,” to understand how well it could handle difficult situations. It would have had to maintain a “living will,” a resolution plan for regulators to use in case the banks were to fail, like they just did.

Second, beyond the specific regulations, S2155 was a “stand down” order to regulators and examiners, both from Congress and the Federal Reserve. The law was created and executed to deliberately say that mid-sized regional banks such as SVB could not produce systemic risks, panics and runs that required costly and extreme interventions. What regulators are going to risk their necks and try to do their jobs well given this?

Third and last, it’s not just that stronger regulations would have made failure less likely. Maybe SVB would still be around with these regulations, and maybe not. But these regulations would have made it easier for the bank to fail well — in a way that minimizes panic and allows the FDIC to handle the failure better. Even a marginally stronger SVB going into receivership could have found a buyer, or otherwise not opened up the wider panic we’re seeing. Producing those kinds of “good failures” is exactly how capital requirements and FDIC tailored the heightened regulatory approach, and exactly what lawmakers cut off in 2018.

So, what should we do? We need to re-examine our system of deposit insurance — if only their limits, if not their nature — and consider how extensive this form of social insurance should be. In the same way the Fed creates new monetary tools and ideas to deal with an era of low-interest rates, we probably need some new ones for an era of higher interest rates. But most immediately, the Fed should move to reinstate the enhanced regulations for banks of this size. And Congress needs to know that systemic risk can appear anywhere in the financial sector, not just at the top.