The Fed on Silicon Valley Bank Collapse: We May Have Dropped the Ball There

After the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was supposed to institute protections that would prevent bank failures of the kind that characterized the 08′ crisis. However, in 2018, after a substantial lobbying effort, a new banking law was passed that rolled back some of those protections. The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) did a number of things, but one of is that it lowered the bar for supervision of banks of SVB’s size. In its report, the Fed notes that the rollback of such Dodd-Frank protections contributed to SVB’s collapse, as the EGRRCPA “resulted in lower supervisory and regulatory requirements, including lower capital and liquidity requirements” for banks like SVB. It also changed the culture at the Fed, ushering in “changes in expectations and practices, including pressure to reduce burden on firms, meet a higher burden of proof for a supervisory conclusion, and demonstrate due process when considering supervisory actions.” In other words, staff were pressured to take it easy on the banks.

Appropriately, one of the industry figures who lobbied heavily for the shift in regulations was the CEO of SVB, Greg Becker, who argued that a failure to ease up on banks of SVB’s size would “stifle our ability to provide credit to our clients.” That’s funny because you know what also negatively impacts credit for clients? Having your bank implode.