How Silicon Valley Bank Came to a Critical End: Analyzing the Reagan-Ryan Financial System with a Small-Scale Employee
Lanhee J. Chen is a frequent contributor to CNN, as well as a fellow of the American Public Policy Studies at Hoover Institution. He was a candidate for the controller’s position. He worked in both Republican and Democratic administrations and was the policy director for the Romney-Ryan campaign. The views expressed in this commentary are his own. View more opinion on CNN.
When Silicon Valley Bank collapsed this month, analysts and policymakers quickly began considering how to prevent similar failures from happening in the future. While there are changes that lawmakers should consider, when it comes to financial regulation, history shows us that politicians are usually reacting to the last crisis and one step behind the next one.
The savings and loan crisis of the 1980s led to the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 which created new regulatory agencies and placed restrictions on how savings and loan institutions could invest deposited funds.
The 2007-2008 financial crisis led to passage of the sweeping Dodd-Frank Act in 2010, which revamped federal regulation of the financial services sector and placed restrictions on how banks do business. The Dodd-Frank law that was passed by Congress was criticized as too restrictive in regulating banks, but a bipartisan coalition of Congress passed a package of bills to roll back parts of the law.
When there was a lack of cash on hand, which left it unable to make payments to depositors when they came looking for money, the demise of the bank came. The bank had invested a disproportionate amount of assets in long-term debt that was purchased at a time when interest rates were much lower than they are today. When the bank attempted to liquidate this debt over the last few weeks, it was forced to do so at a significant loss. By investing more in different sectors of the economy, and less in risk, the SVB failed to hedge against risk.
Source: https://www.cnn.com/2023/03/19/opinions/silicon-valley-bank-svb-democrats-republicans-financial-system-chen/index.html
The Yellen Effect: How Deposit Insurance Can Save the U.S. Banks from Bankruptcy and Other “Poor” Mistakes
They should. While Democrats and Republicans both think that the regulatory scheme is sufficient, the right answer is somewhere in the middle.
Just as individual investors are often advised to diversify their investment strategies to minimize risk, so too might politicians look to requirements that banks ensure that they have proper diversification in how they are investing their assets.
The deposit insurance limit can be raised to $250,000. It would have to be done by Congress and the chances of legislation are not known.
Finally, some changes will undoubtedly come through the Federal Reserve, rather than Congress. This is a good thing, as these policymakers know the political force that directly affects them.
For example, the Federal Reserve is likely to examine the amount of both capital and liquid asset requirements at banks. A bank’s capital is the difference between its assets and its liabilities, or in other words, the resources a bank has to absorb losses. Liquidity, by comparison, is a measure of the cash and assets a bank has immediately on hand to pay obligations (such as money that depositors might ask for).
The Dodd-Frank Act designed a number of tests to assess the health of financial institutions across the country. For the last decade, the tests have been benchmarked to a low-interest rate environment.
Treasury Secretary Janet Yellen suggested depositors at small banks might be eligible for the same kind of emergency government aid extended to customers at two regional banks that failed this month, while emphasizing that lenders of all sizes are critical to the U.S. economy.
The comments, made at a banking conference Tuesday, were intended to stress the U.S. commitment to protect the U.S. banking system – and the customers who trust their money in it.
They come nine days after the government announced extraordinary measures to guarantee all deposits at Silicon Valley Bank and Signature Bank, which collapsed when panicked depositors moved to withdraw their money.
Yellen fed that concern last week when she told a Senate committee that deposits over $250,000 at a small bank would not be guaranteed unless the bank’s failure seemed likely to cause more widespread problems.
She said the steps were not focused on aiding specific banks. “Our intervention was necessary to protect the broader U.S. banking system.”
Deposit insurance is usually capped at $250,000 per account, but the Treasury secretary defended the Federal Deposit Insurance Corporation’s decision to cover all deposits at the failed banks.
If not, they worried, big customers would have an incentive to move money to larger banks, believing these larger institutions would be more likely to draw government backing.
Resilient Banking: “Every step we’ve taken” to make sure that the public is reassured about the government’s response
“Every step we have taken has been intended to reassure the public that our banking system is resilient,” Yellen said, adding that the government’s emergency measures are working.
Smaller banks were worried about if their customers would get the same relief as at Silicon Valley Bank and Signature Bank.
“They can provide services that larger banks can’t replicate,” Yellen said. They know about the special features of their markets and people who are active in them.