The collapse of Silicon Valley Bank (SVB) has renewed debate about deregulation of the financial industry 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 easing of rules aimed at ensuring financial institutions can withstand serious economic shocks.
Other economists have argued the regulations that existed would have done little to save SVB, which collapsed after panicked customers began withdrawing funds in response to the California-based lender suffering steep losses from the sale of US government bonds.
How did regulations on banks change under the Trump administration?
In 2018, then-US President Donald Trump signed a law partially rolling back 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 $50bn to $250bn. The changes reduced the number of banks subject to the strictest regulatory oversight to about one dozen, freeing small and medium-sized banks from stress tests designed to assess an institution’s ability to weather a serious economic downturn.
Trump, who had described Dodd-Frank as a “disaster”, and his Republican Party said the reforms would free up lending to businesses and boost the economy.
Though the legislation formed a key plank of Republicans’ push to lessen the role of government in the economy, the legislation received bipartisan support, gaining votes from 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 for the breaking up of institutions before they become “too big to fail”.
The watering down of the legislation followed years of lobbying by financial industry executives, including former SVB chief executive Greg Becker.
Are new regulations on banks 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 provisions of Dodd-Frank, including the $50bn threshold for “too big to fail” banks.
President Joe Biden, who has also criticised Trump for weakening Dodd-Frank, had earlier called on Congress to propose tougher rules for banks to make it “less likely this kind of bank failure would happen again, and to protect American jobs and small businesses”.
Any bill would need to pass the US House of Representatives, where Republicans – who supported the watering down of Dodd-Frank in 2018 with near-unanimity – hold a slim majority.
Trump has rejected accusations he had any role in the bank’s failures, instead blaming excessive interest rate hikes by the US Federal Reserve and Biden’s “anti-America policies.”
Trump has also amplified claims from conservatives that “woke” diversity and inclusion efforts at the banks may have distracted them from their core mission, a theme also taken up by Florida Governor Ron DeSantis, Trump’s top rival for the Republican presidential nomination in 2024.
“I do think this is going to prompt a reexamination of the regulatory environment,” David Skeel, professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“The debate as to whether increasing the threshold for the financial institutions that get extra regulatory oversight from $50bn to $250bn in 2018 played a role in SVB’s collapse is already well under way. Michael Barr, the Fed governor who oversees supervision, was a big critic of the shift. I think that increases the odds that the rollback will be at least partially reversed in the aftermath of SVB.”
William T Chittenden, associate professor of finance and economics at Texas State University, expressed doubt that significant reform would come to pass.
“I’m not sure anything will really come out of this from a regulatory perspective,” Chittenden told Al Jazeera. “Yes, there will be a more detailed investigation on why SVB failed but by the time that report comes out, most folks will have forgotten about it and moved on to the next shiny new thing.”
Do economists believe deregulation caused SVB’s collapse?
While politicians in Washington, DC have lobbed accusations along partisan lines, economists have generally been more circumspect about what role, if any, the 2018 deregulation played in the collapse of SVB.
In an op-ed in the Guardian, Nobel Prize-winning economist Joseph Stiglitz described SVB’s collapse as “emblematic of deep failures in the conduct of regulatory and monetary policy”, although he did not directly assign blame to the 2018 reforms.
“We need stricter regulation, to ensure that all banks are safe,” Stiglitz said.
Chittenden, the Texas State University associate professor, said he was sceptical that the pre-2018 Dodd-Frank safeguards would have done much to save SVB.
“As most banks conduct interest rate shock simulations, regardless of size, I’m not sure the increase in the size of the cutoff made any difference,” he said.
“There is a difference in conducting a shock test and actually doing something with the information. Although the details are not reported in their public filings, it appears that SVB did perform shock testing, aka, sensitivity analysis.”
James Angel, associate professor of finance at Georgetown University, said determining the failures that led to SVB’s demise would take a careful review of the situation.
“There is always room for improvement in our financial regulatory systems. Clearly, the Silvergate/SVB/Signature crisis will cause an examination of what worked and what didn’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 be reexamining how we account for held-to-maturity instruments, liquidity standards for banks, contingent capital and the role of regulators in guaranteeing deposits.”