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A 2018 banking law paved the way for Silicon Valley Bank’s collapse

Silicon Valley Bank was a test case for Congress’s 2018 bipartisan banking deregulation law. It failed.

The front glass door of a business showing its name, SVB, main lobby, and hours.
A security guard at Silicon Valley Bank monitors a line of people outside the office on March 13, 2023, in Santa Clara, California.
Justin Sullivan/Getty Images
Nicole Narea covers politics and society for Vox. She first joined Vox in 2019, and her work has also appeared in Politico, Washington Monthly, and the New Republic.

The collapse of Silicon Valley Bank and other similarly sized banks in recent days has put a spotlight on Congress’s 2018 bipartisan banking deregulation law, which was signed by then-President Donald Trump.

We’ll never know what might have happened if the law hadn’t been enacted. But given that Silicon Valley Bank would have been subject to stricter oversight under the old rules, more regulation may have slowed — or even prevented — the panic that set in last week as depositors rushed to withdraw their funds.

In the wake of the bank’s implosion, some Democrats and economists have begun to argue that the bank’s failure and subsequent concerns about contagion in the financial sector actually are direct results of that law, which rolled back key parts of the 2010 Dodd-Frank Act aimed at preventing banks from making the kinds of big bets that led to the 2008 financial crisis.

In an op-ed in the New York Times Monday, Sen. Elizabeth Warren (D-MA), who led the charge against deregulation in 2018, wrote that SVB and the crypto-focused Signature Bank, which was also shut down by the FDIC on Sunday, couldn’t shoulder the old-fashioned bank runs that killed them precisely because there wasn’t oversight to “expose their vulnerabilities and shore up their businesses.”

Notably, the 2018 law changed which banks are considered “systemically important” to regulators. It increased the threshold from institutions holding at least $50 billion in assets to those with $250 billion. That means only the largest banks face stricter regulation, including requirements to maintain certain levels of liquidity and capacity to absorb losses; comply with company- and government-run stress testing; and submit a living will to prepare for potential failure.

SVB had $209 billion in assets, making it the 16th-largest bank in the US by the time it was taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday. But it still wasn’t big enough to be subject to the strictest standard of scrutiny under the 2018 law.

Sen. Bernie Sanders (I-VT) noted in a statement Sunday that the Republican director of the Congressional Budget Office warned of this exact scenario five years ago — that the bill would increase what he thought was a small “likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.”

“Unfortunately, that is precisely what happened,” Sanders said.

SVB lobbied for deregulation — and may have brought about its own demise

In a statement to a Senate committee in 2015, SVB CEO Greg Becker specifically advocated for raising the $50 billion threshold and argued that failing to do so would saddle mid-sized banks like his with “significant burdens that inherently and unnecessarily will reduce our ability to provide the banking services our clients need.”

He argued that the compliance costs and human resources associated with having to meet the regulatory requirements would have forced the bank to “divert resources and attention from making loans to small and growing businesses that are the job creation engines of our country, even though our risk profile would not change.”

He also touted SVB’s “deep understanding of the market it serves,” “strong risk management practices,” and the “fundamental strength of the innovation economy” on which SVB relied, as well as the bank’s ability to lend to almost 8,000 clients while maintaining strong credit.

The bank spent half a million dollars on lobbying in the leadup to the law’s passage, including on hiring two former senior staffers for now House Speaker Kevin McCarthy. It continued to lobby the FDIC even after the law was passed.

The Dodd-Frank regulations that SVB fought against might have helped identify the bank’s pitfalls earlier. Because the bank catered to Silicon Valley startups and investors with deposits that generally exceeded the $250,000 FDIC deposit insurance limit, 97 percent of its deposits were uninsured — an abnormally large share compared to other consumer banks. That left the bank vulnerable to instability in the tech sector, which has seen more than 120,000 layoffs in 2023 alone.

As financial experts have noted, these and other signs suggested the bank was entering dangerous territory long before its collapse. The new law didn’t completely exempt SVB from regulatory oversight, but regulators apparently failed to note any of these warning signs. They may have been more vigilant if they were required to evaluate the bank’s living will and subject it to annual stress testing.

“This is a black eye for regulators. Something happened that wasn’t supposed to happen,” Ian Katz, a financial policy analyst at Capital Alpha Partners, told the Financial Times. “You’re already seeing finger-pointing going on and that is going to continue.”

The bank also failed to hedge against the risk posed by rising interest rates as it bet on long-term Treasury bonds during the pandemic. Those bonds proved to be a ruinous investment when the bank suddenly needed to free up more liquidity quickly. It didn’t even have an official chief risk officer in the months before the FDIC takeover, as would have been required prior to the 2018 deregulation, even though the bank paid out bonuses within hours of its collapse.

It’s not clear that more oversight would have foreseen those problems and mitigated SVB’s risk exposure. But it probably wouldn’t have hurt.