The collapse of Silicon Valley Bank (SVB) has reignited the debate over financial sector deregulation in the United States, including the partial rollback of sweeping reforms introduced in the aftermath of the 2007-2008 financial crisis.
Some critics have blamed the failure of SVB and the subsequent collapse of cryptocurrency-focused Signature Bank and Silvergate Capital on the Trump administration’s relaxation of rules aimed at ensuring that financial institutions can withstand severe economic shocks.
Other economists have argued that existing regulations would have done little to save SVB, which collapsed after panicked customers began withdrawing funds in response to the California-based lender suffering heavy losses from the sale of US government bonds.
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 the 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 regulatory oversight to around a dozen, freeing small and medium-sized banks from stress tests designed to gauge an institution’s ability to weather a severe economic downturn.
Trump, who had described Dodd-Frank as a “disaster,” and his Republican Party said the reforms would free up business lending and stimulate the economy.
Although the legislation was a key part of Republicans’ push to reduce the government’s role in the economy, the legislation received bipartisan support, garnering the votes of 50 Democrats in the US Congress.
Signed into law in 2010 by former US President Barack Obama, Dodd-Frank 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 allowing institutions to be dismantled before they become “too big to fail”.
The weakening of the legislation follows years of lobbying by financial industry executives, including former SVB chief executive Greg Becker.
Are new banking regulations on the way?
On Tuesday, Senator Elizabeth Warren, who is among a number of Democrats who have directly blamed Trump for the bank failures, announced plans to unveil legislation to restore key Dodd-Frank provisions, including the threshold. of 50 billion dollars for “too big to fail”. banks.
President Joe Biden, who has also criticized Trump for weakening Dodd-Frank, previously called on Congress to come up with tougher rules for banks to make “this type of bank failure less likely to happen again and to protect jobs.” Americans and Small Businesses. .
Any bill would need to pass the U.S. House of Representatives, where Republicans — who backed the Dodd-Frank dilution in 2018 with near-unanimity — hold a narrow majority.
Trump has dismissed accusations that he played a role in the bank’s failures, instead blaming excessive interest rate hikes by the U.S. Federal Reserve and Biden’s “un-American policies.”
Trump also amplified claims by conservatives that “woke” diversity and inclusion efforts at banks may have diverted them from their core mission, a theme also echoed by Florida Governor Ron DeSantis, Trump’s chief rival. for the Republican presidential nomination in 2024.
“I think this will prompt a re-examination of the regulatory environment,” David Skeel, professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“The debate over whether raising the threshold for financial institutions with additional regulatory oversight from $50 billion to $250 billion in 2018 played a role in SVB’s collapse is already well under way. Michael Barr, the Fed Governor who oversees oversight, has been a big critic of the change, and I think it increases the odds that the rollback will be at least partially reversed as a result of SVB.
William T Chittenden, an associate professor of finance and economics at Texas State University, expressed doubts about passing a significant reform.
“I’m not sure anything will really come out of it from a regulatory standpoint,” 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 about it and moved on to the next shiny thing.”
Do economists think deregulation caused SVB’s collapse?
While politicians in Washington, DC have leveled partisan accusations, economists have generally been more circumspect about what role, if any, 2018 deregulation played in SVB’s collapse.
In a Guardian op-ed, Nobel Prize-winning economist Joseph Stiglitz described SVB’s collapse as “emblematic of profound failures in the conduct of regulatory and monetary policy”, although he did not directly attribute the responsibility for the 2018 reforms.
“We need tougher regulation, to keep all banks safe,” Stiglitz said.
Chittenden, an associate professor at Texas State University, said he was skeptical that pre-2018 Dodd-Frank guarantees would have done much to save SVB.
“As most banks do simulations of interest rate shocks, regardless of size, I’m not sure that increasing the threshold size made a difference,” he said.
“There’s a difference between performing a shock test and doing something with the information. Although the details are not reported in their public documents, it seems that SVB has carried out shock tests, i.e. sensitivity analysis.
James Angel, an associate professor of finance at Georgetown University, said determining the failures that led to SVB’s demise would require careful examination.
“There is always room for improvement in our financial regulatory systems. Obviously the Silvergate/SVB/Signature crisis will bring about a review of what has worked and what hasn’t,” Angel told Al Jazeera.
“Regulation is not a thermostat where you can just push it up or down – the details matter a lot. We will review how we account for held-to-maturity instruments, liquidity standards for banks, contingent capital and the role of regulators in guaranteeing deposits.