The collapse of Silicon Valley Bank (SVB) earlier this year was nothing short of disastrous.[0] The bank’s assets had grown dramatically in the five years leading up to the collapse, quadrupling in size.[1] An unusually large proportion of its deposits—about 94 percent—was uninsured, above the $250,000 limit that the FDIC will guarantee per deposit.[2] This, coupled with the bank’s overly concentrated exposure to one sector of the economy, was a warning sign that went unheeded.[2]
Primary responsibility for the debacle lies with SVB’s management, however regulators are also to blame.[2] Despite warnings from journalists, the Federal Deposit Insurance Corp.’s chair, and even some short sellers, the combination of reckless bankers and lax regulators has left us with a financial crisis and a federal-government bailout.[2]
The San Francisco Fed and the California regulators could have required SVB to raise capital, or to pay higher rates on its savings accounts in order to keep customers from fleeing.[2] Donald Trump appointed Randal Quarles as the first-ever vice chair of banking supervision at the Federal Reserve, which sent clear signals that aggressive regulation would not be tolerated.[2] When Jerome Powell was nominated to be the chair of the Fed, in 2017, he told Congress that Quarles was a “close friend,” adding, “I think we are very well aligned on our approach to the issues that he will face as vice chair for supervision.”[2]
The roots of regulatory failure run deeper than the Trump administration’s actions.[2] Regulators have a fear of stepping in, making demands and using their clout, even in President Joe Biden’s administration.[2] While pockets of learned governmental helplessness remain, Biden’s appointees at the Federal Trade Commission, the Department of Justice, and the Consumer Financial Protection Bureau appear to be trying to wield their powers to make the economy more efficient, safer and more equitable.[3]
It’s clear that we need more stringent banking regulations and better communication between regulators and bankers in order to prevent bank panics and financial instability. Ultimately, it’s up to regulators to pay more attention to the warning signs and use their powers to protect consumers and the economy.
0. “Silicon Valley Bank’s Distress Wasn’t Reflected in Credit Ratings” The Wall Street Journal, 17 Mar. 2023, https://www.wsj.com/articles/silicon-valley-banks-distress-wasnt-reflected-in-credit-ratings-93cd9dff
1. “How did SVB collapse, and what is the fallout? : Planet Money” NPR, 16 Mar. 2023, https://www.npr.org/transcripts/1163155347
2. “So Where Were SVB’s Regulators?” The Atlantic, 17 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/silicon-valley-signature-bank-collapse-regulator-culture/673423/
3. “What Silicon Valley Bank Collapse Reveals About Regulation” ProPublica, 17 Mar. 2023, https://www.propublica.org/article/silicon-valley-bank-failure-fdic-fed-failure