The failures of Silicon Valley Bank and Signature Bank should inspire Congress to reinstitute strict regulations on financial institutions. While finger-pointing on both sides will be used to distract from the situation, in fact there is plenty of blame to go around.
Last week, Silicon Valley Bank — based in Santa Clara, Calif. — defaulted, leaving doubt about the future of its assets and investments. With assets of $209 billion, it constitutes the second largest bank failure in U.S. history. Federal bank regulators seized control and have assured depositors that they will be able to access their funds.
Bank failures and the world of high finance can seem ethereal to most of us, but a Columbian article about a local company, Slumberkins, helps explain how the situation is impacting thousands of businesses.
While it will be little consolation to investors trying to access their funds, it is instructive to examine why Silicon Valley Bank — and the smaller New York-based Signature Bank — failed in recent days. And it is not difficult to connect the dots between those failures and congressional action from 2018.
Following the economic meltdown of 2008 and 2009, Congress worked to increase oversight of financial institutions. The Dodd-Frank legislation of 2010, signed by President Barack Obama, aimed to prevent banks from making the kinds of risky investments that led to the 2008 crisis.
Almost from the outset, many Republicans demonstrated they learned little from the Great Recession. Insisting that an unencumbered free market would be better for all, they sought to scale back or overturn Dodd-Frank regulations and give bank executives more leeway in how to invest other people’s money.
Upon taking office in 2017, President Donald Trump supported “doing a number” on the Dodd-Frank legislation. In 2018, Congress rolled back some of the regulations, primarily those overseeing “small” banks. Led by Sen. Mike Crapo, R-Idaho, the Economic Growth, Regulatory Relief, and Consumer Protection Act adjusted the size of banks that were subject to regulatory scrutiny. It also exempted small banks from some requirements for loans, mortgages and other investments.
Deregulation was not solely a Republican venture. In the Senate, 16 Democrats supported the legislation (Washington Sens. Patty Murray and Maria Cantwell voted against it); in the House, 33 Democrats joined the majority Republicans. Meanwhile, Silicon Valley Bank executives were among those lobbying for the bill, helping to hasten their bank’s demise.
As Vox.com wrote this week: “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.”
We would hope lawmakers eventually realize that pandering to industries lobbying on their own behalf amounts to legislative malpractice. But that lesson repeatedly lands on deaf ears.
Instead, it routinely falls on taxpayers to fix the errors of careless financial institutions; the Troubled Assets Relief Program of 2008 cost $442 billion. That eventually was paid back by firms that benefited from the legislation, providing a costly lesson that was ignored by too many in Washington, D.C.