The collapse of Silicon Valley Bank (SVB) has reignited the debate over financial sector deregulation in the United States, including the partial reversal 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 easing of rules to ensure financial institutions can withstand severe economic shocks.
Other economists have argued that the existing regulations would have done little to save SVB, which collapsed after panicked customers began withdrawing money in response to the California-based lender taking huge losses from selling US Treasury bonds.
How did banking regulation change under the Trump administration?
In 2018, then-US President Donald Trump signed into law a bill that partially reverses the Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank.
The legislation raised the asset size threshold for banks considered too big to fail from $50 billion to $250 billion. The changes have reduced the number of banks subject to the strictest regulatory oversight to about a dozen, freeing small and medium-sized banks from stress tests designed to assess 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 corporate lending and boost the economy.
While the legislation was an important part of Republicans’ push to reduce the government’s role in the economy, the legislation received bipartisan support and received the vote of 50 Democrats in the US Congress.
Signed by former U.S. President Barack Obama in 2010, Dodd-Frank marked Wall Street’s biggest reform since the Great Depression, introducing regulations such as strict capital requirements, a ban on speculative trading, and measures that allow for institution break-ups before they become too big to fail.
The watering down of the legislation followed years of lobbying by financial industry executives, including former SVB CEO Greg Becker.
Will there be new regulations for banks?
On Tuesday, Sen. Elizabeth Warren, who is among several Democrats who have directly blamed Trump for the bank failures, announced plans to unveil legislation to reinstate key Dodd-Frank provisions, including the $50 billion threshold for “too big to fail” banks.
President Joe Biden, who has also criticized Trump for weakening Dodd-Frank, had previously called on Congress to propose stricter rules for banks to “make it less likely that bank failures like this will happen again, and to protect American jobs and protect small businesses”.
Any bill would have to pass the U.S. House of Representatives, where Republicans — who supported the 2018 Dodd-Frank dilution by near unanimity — have a narrow majority.
Trump has dismissed allegations that he played a role in the bank’s failure, instead blaming excessive rate hikes by the US Federal Reserve and Biden’s “anti-America policies.”
Trump has also reinforced claims by conservatives that diversity and inclusion efforts have “awakened” the banks and may have diverted them from their core mission, a theme also echoed by Florida Governor Ron DeSantis, Trump’s biggest rival for the Republican presidential nomination in 2024.
“I think this will lead to a regulatory reexamination,” David Skeel, a professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“The debate over whether raising the threshold for the financial institutions receiving additional regulatory oversight from $50 billion to $250 billion in 2018 played a role in SVB’s collapse is already well underway. Michael Barr, the oversight Fed governor, has been a strong critic of the shift. I think that increases the likelihood that the rollback in the aftermath of SVB will be at least partially reversed.”
William T Chittenden, an associate professor of finance and economics at Texas State University, doubted that sweeping reforms would be forthcoming.
“I’m not sure if anything will really come out of this from a regulatory perspective,” Chittenden told Al Jazeera. “Yes, there will be a more detailed investigation into why SVB failed, but by the time that report comes out, most people will have forgotten about it and moved on to the next shiny new thing.”
Do economists think that deregulation is the cause of the collapse of the SVB?
While politicians in Washington, D.C. have lobbied accusations along partisan lines, economists have generally been more cautious about the possible role of 2018 deregulation in the collapse of the SVB.
In an op-ed in The Guardian, Nobel Prize-winning economist Joseph Stiglitz described the collapse of the SVB as “symbolic of profound failures in regulatory and monetary policy conduct”, though he did not directly blame the 2018 reforms.
“We need stricter regulation to make sure all banks are safe,” Stiglitz said.
Chittenden, an associate professor at Texas State University, said he was skeptical that the pre-2018 Dodd-Frank security measures would have done much to save SVB.
“Since most banks run interest rate shock simulations regardless of size, I’m not sure the increase in the size of the border has made any difference,” he said.
“There is a difference between doing a shock test and actually doing something with the information. Although the details are not disclosed in their public filings, it appears that the SVB has conducted shock testing, also known as sensitivity analysis.
James Angel, an associate professor of finance at Georgetown University, said determining the failures that led to SVB’s demise requires careful assessment of the situation.
“There is always room for improvement in our financial regulatory systems. It is clear that the Silvergate/SVB/Signature crisis will lead to an investigation into what worked and what didn’t,” Angel told Al Jazeera.
“Regulating is not a thermostat where you can just push it up or down – the details are very important. We will re-examine how we account for held-to-maturity instruments, liquidity standards for banks, contingent capital and the role of regulators in guaranteeing deposits.