By Zachary Atkins, Staff Writer
In the wake of the 2007-2009 Financial Crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2018, bipartisan legislation loosened these post-financial crisis safeguards.
The rapid failure of Silicon Valley Bank (SVB) and Signature Bank over the course of one weekend in early March created the potential for damage to the broader banking system and the U.S. economy.[1] Following this lively weekend, First Republic Bank would be shuttered into receivership in May.[2] These three banks had a business model focused on servicing the needs of technology companies, startups, and entrepreneurs.[3] Their respective deposit volumes had grown briskly in the three years leading up to their failures.
SVB’s failure, and the subsequent failures, were caused by bank runs. This is the first notable bank run since the 2007 Financial Crisis. Unlike bank runs of the past, the mass utilization of mobile banking has compounded the problem by making it near instantaneous. Gone are the days where a bank run could be slowed by implementing a bank holiday, or just the physical location of a bank. Now the consumer can see a tweet and in the same thought move the balance of an account to a new institution.[4]
While SVB was going through this ordeal, it experienced both a decrease in deposits and an insufficient supply of cash on hand to meet its demands. This led to a flash sale of securities resulting in a large after-tax-loss. Parallel to its announcement of the sale of securities, the firm also indicated it would seek to raise additional capital, but it had difficulty doing so and quickly abandoned its efforts.[5] Depositors came to believe that the bank would have difficulty meeting withdrawal demands, motivating them to move their cash before the bank possibly failed. The result was a depositor run of historic proportions. Over $140 billion in deposits, roughly 85 percent of SVB’s deposit base, left or attempted to leave SVB over the course of two days.[6]
The Federal Reserve has provided an analysis of the collapse of several regional banks, colloquially known in the industry as “Super-Regionals”[7] because of their size. The Fed’s analysis asserts that the bipartisan legislation in 2018 weakened post-crisis protections, reducing bank supervision, and contributing to capital weaknesses, that led to failures. However, this has prompted Republicans and industry advocates to argue against blaming the 2018 rollback of post-financial-crisis safeguards.
SVB’s failure did not occur in a vacuum and had knock on effects over the United States banking system. The report acknowledges some missteps by SVB’s management and bank examiners but also implies the culture of lax supervision, favoring inaction.[8]
The key provisions of the 2010 Dodd-Frank Wall Street reforms, increasing the threshold for intensive oversight from $50 billion to $250 billion in assets was rolled back by both Senate Democrats and Republicans. According to the report, this change led to looser oversight and reduced capital requirements exacerbating the situation. The report highlights how the 2018 law delayed stricter oversight of SVB and suggests that with tighter capital and liquidity requirements, SVB might have managed its financial position differently.
Assessing the financial stability implications of a bank’s failure requires understanding multiple scopes of that bank’s potential systemic importance.[9] At the end of the day, the safeguards that are designed and implemented are meant to protect the consumer. Even with the rollback, although some banks failed, the system did not. The rules and regulations still in place prevented calamity. What will the ultimate cost to the consumer be?
In this most recent episode, the regional banking system was undermined. Upon concern by well to do actors, alarm bells rang, and large sums of money were moved away from the institutions discussed above. That money does not sit idle. It moves to banks up the deposit ladder. Institutions that the government has either implicitly or explicitly communicated to cannot fail as a matter of their size. They are “too big to fail.” There is a real harm to the consumer when the economy experiences this deposit flow to large institutions.
In this most recent rate hiking environment, it’s the local and regional institution that can offer competitive rates to the consumer on savings accounts. It is not the bigger banks like Bank of America or Chase who will offer competitive rates to the consumer.[10] This opportunity loss in the short term has compounding effects into the future. It is worth asking what the real cost to the American consumer will ultimately end up being.
[1] https://www.nytimes.com/2023/04/13/us/politics/silicon-valley-bank-widespread-failure.html?searchResultPosition=3
[2] First Republic Hit by Silicon Valley Bank Failure. Wall Street Journal. https://www.wsj.com/articles/first-republic-hit-by-svb-failure-7431495e
[3] Id.
[4] Gillian Tett. (2023, April) Wake up to the dangers of digital bank runs. Financial Times. https://www.ft.com/content/a60e543d-c950-4ebb-8da9-d6b0b359ad7b
[5] SVB Financial Group Form 8-K, Item 8.01 Other Events (March 10, 2023), (“The Company has terminated its previously announced equity offerings.”), https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/bd88776f-cd49-486a-a9b3-56a2f72a3686.pdf.
[6] See Board of Governors of the Federal Reserve System, Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, at pg. 7 (April 28, 2023), https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
[7] Pate Campbell. (2022, December) Growing Pains: The Emergence of Super-Regional Banks. Capital Group Advisors. https://www.capitaladvisors.com/the-emergence-of-super-regional-banks/
[8] Douglas Gillison (2023, April) Fed points finger at Trump-era rollback for SVB demise. Reuters. https://www.reuters.com/business/finance/us-fed-points-finger-trump-era-rollback-svb-demise-2023-04-29/
[9] Pablo Hernández de Cos, Chair, Basel Committee on Banking Supervision, Banking Starts with Banks: Initial Reflections on Recent Markets Stress Episodes 5 (April 12, 2023), https://www.bis.org/speeches/sp230412.pdf.
[10] Rachel Louise Ensign, Gina Heeb. (2023, July) Everyone Wants Interest on Their Deposits. That’s Bad for Main Street Banks. https://www.wsj.com/articles/everyone-wants-interest-on-their-deposits-thats-bad-for-main-street-banks-1131f1b3
