SVB Collapse Revisits Bank Regulation Issues
The Silicon Valley Bank (SVB) collapse last week sent shockwaves across the stock market, with banks particularly taking a hit. This was the end of a familiar cycle: the boom, followed by the bust, and now the bailout. While the primary responsibility for the failure lies with SVB’s management, regulators have been called into question for not using their powers to detect the danger.
When SVB’s deposits tripled between 2020 and 2022, it should have been a warning sign to regulators. The bank was overly concentrated in one sector, and an unusually large proportion of its deposits — about 94% — was uninsured, above the $250,000 limit that the FDIC will guarantee per deposit. The lack of a chief risk officer and a plan to address the risk on its books should have also been noted.
The Federal Reserve, which regulated the parent company, and the California regulators, who oversaw the bank itself, could have required SVB to raise capital last year, when it was less vulnerable. The bank could have been mandated to raise the interest rates on its savings accounts, thus offering more to those who loan it money. This would have had a negative effect on profits, however, it would have prevented customers from leaving.
Part of the answer to why this was allowed to happen lies in the Trump administration’s penchant for installing regulators who are opposed to regulation. The appointment of Randal Quarles as the first-ever vice chair of banking supervision at the Federal Reserve saw a shift in the post-financial-crisis regime, with Quarles giving the impression that regulators were not required to show teeth.
This crisis raises the old issue of why the Federal Reserve regulates banks at all. The alphabet soup of regulators, such as the OTS, OCC, SEC, and CFTC, had responsibility for banking oversight along with the Fed, and banks and financial entities were able to shop for the least restrictive. Policy makers and legislators toyed with changing the architecture of banking-and-securities regulation but ultimately only closed down the least of them, the OTS, and kept the rest.
The collapse of the two banks proves once more that the culture of the regulators is as important as any rules, laws, or tools at their disposal. Banks need to be closely monitored and regulators need to take a proactive approach to detect vulnerabilities and take action before a crisis occurs.
0. “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/
1. “When trouble hit, Silicon Valley Bank had to sell US government bonds at a loss.” NPR, 19 Mar. 2023, https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank