After Silicon Valley Bank collapsed late last week following a run on the bank, Sen. Bernie Sanders of Vermont argued that the culprit was clear: an “absurd” 2018 law, signed by then-President Donald Trump, that rolled back regulations on banks of SVB’s size.
President Joe Biden wasn’t as direct as Sanders in blaming the 2018 rollback for SVB’s implosion, but he, too, criticized the Trump law in his Monday comments on the banking system. Trump, meanwhile, rejected any role in the SVB mess and his spokesperson has accused Democrats of trying to deceive the public to evade their own responsibility.
Here’s a look at how the 2018 rollback affected banks like SVB, who supported that law in Congress, and what some analysts have to say about the extent to which the law might have contributed to the SVB situation.
What did the 2018 law do?
In short, the 2018 rollback freed some banks from policies put in place in the wake of the financial crisis of 2007 and 2008 to try to stop these banks and the financial system from crumbling.
A 2010 law signed by then-President Barack Obama, widely known as Dodd-Frank, had created stricter regulations for banks with at least $50 billion in assets. These banks, which were deemed “systemically important” to the financial system, were required to undergo an annual Federal Reserve “stress test,” to maintain certain levels of capital (to be able to absorb losses) and liquidity (to be able to quickly meet cash obligations), and to file a “living will” plan for their quick and orderly dissolution if they were to fail.
The 2018 rollback got rid of the $50 billion threshold, which many banks had argued was needlessly encumbering them. Instead, among many other changes, the rollback law made the enhanced regulations standard only for banks with at least $250 billion in assets – only about a dozen banks at the time.
The rollback law did give the Federal Reserve the right to choose to apply the regulations to particular banks with at least $100 billion in assets, and it said that banks that met that $100 billion threshold would still face “periodic” Fed stress tests. Still, the change from a standard $50 billion threshold to a standard $250 billion threshold was widely described as a major victory for banks with assets below $250 billion.
The list included SVB, whose chief executive officer, Greg Becker, had urged Congress to raise the threshold.
Becker argued in 2015 congressional testimony that imposing the regulations when a bank hit the $50 billion level would “unnecessarily” burden SVB, which then had assets approaching $40 billion, and require the company to spend time and money complying with rules instead of providing loans to job-creators. He also argued that SVB, like other “mid-sized” banks, “does not present systemic risks.”
“Given the low risk profile of our activities and business model,” Becker wrote, having to deal with the Dodd-Frank regulations “would stifle our ability to provide credit to our clients without any meaningful corresponding reduction in risk.”
Other banks and their supporters in Congress made similar arguments. But many congressional Democrats and advocates of banking regulation warned that loosening the regulations on important lenders was a recipe for another crisis, noting that the banks with $50 billion to $249 billion in assets weren’t inconsequential local entities. The nonpartisan Congressional Budget Office wrote before the bill’s passage that raising the threshold would “increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.”
SVB had $209 billion in assets at the end of last year, according to the Federal Deposit Insurance Corporation.
Who supported the 2018 law?
The rollback law Trump signed in May 2018 can fairly be described as bipartisan, though it had overwhelming support among congressional Republicans and was opposed by most congressional Democrats.
The Senate passed the bill 67 to 31. All 50 Republicans who voted were in favor; 31 members of the Democratic caucus voted no, while 17 voted yes. CNN noted at the time that almost all of the Democratic supporters in the Senate were “either up for re-election this fall and/or from red or purple states.”
Trump criticized Dodd-Frank and “job-killing regulations” in signing the bill, which is officially known as the Economic Growth, Regulatory Relief, and Consumer Protection Act. He said of the bill’s supporters: “This is all about the Dodd-Frank disaster. And they fixed it, or at least have gone a long way toward fixing it.”
What experts say about the 2018 law and SVB
For obvious reasons, it’s impossible to say for sure whether SVB might have been able to survive in an alternate universe without the 2018 rollback. And any bank collapse has numerous complex causes. So experts and advocates are divided on the extent to which the Trump law played a role in SVB’s downfall.
John Coffee, a Columbia University law professor and an expert in corporate governance, said in an email that SVB might well have been “less exposed to a bank run” under the Dodd-Frank rules from 2010. Matthew Richardson, a professor of finance at New York University’s business school, said in an email that although he disagreed with the big 2018 increase to the $50 billion threshold, he doesn’t believe it “would have made any difference in this case” if the threshold had never been raised.
Richardson said that even without the change, the Fed’s severe-stress test, which involves a hypothetical big recession, wouldn’t have captured the current rising-interest-rates scenario that bedeviled SVB on account of its hefty holdings of long-term bonds. And he said that the way the Fed calculates its capital requirement means that calculation wouldn’t have captured the decline in the value of SVB’s bonds.
Dennis Kelleher, chief executive officer of Better Markets, a nonprofit that advocates financial reform, has always been a vehement opponent of the 2018 rollback law, but he said in a Monday interview that the law likely had only a “modest impact” on SVB’s collapse. He wasn’t absolving Trump, however. Kelleher argued that a bigger factor than the rollback was how Trump’s appointees to top Federal Reserve posts adopted a practice of going easy on the supervision of banks – declining to use the many supervisory powers they still possessed even after the 2018 law.
Nothing in the law, Kelleher noted, prevented the Fed from telling SVB to come up with a plan to address known problems with its balance sheet, from its high percentage of uninsured depositors to and its customers’ concentration in a particular industry and geographic area. “There’s this whole panoply of tools and sanctions to back up Federal Reserve supervisors to ensure that a bank doesn’t act like this bank did. And yet none of that appears to have happened,” Kelleher, who served on Biden’s presidential transition team, said Monday.
Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a progressive think tank, said he believes the message Congress sent with the 2018 rollback – that banks below $250 billion in assets aren’t systemic threats – caused bank examiners and regulators to “step back” in their scrutiny of banks below the new threshold, though he noted that a direct link between the legislation and the softening is hard to prove. And Konczal argued that while SVB could still have failed without the 2018 law, “they would have failed in a way that was less catastrophic.” The Dodd-Frank rules, he argued, would have strengthened SVB’s balance sheet in significant ways that might have at least allowed the government to find a post-collapse buyer for the bank over the weekend.