The Collapse of Silicon Valley Bank: Examining Regulatory Failure and Responsibility
The collapse of Silicon Valley Bank (SVB) has sent shockwaves through financial markets and raised questions about the efficacy of banking regulations. Primary responsibility for the debacle lies with SVB’s management, but regulators should also shoulder some of the blame for not intervening in a timely manner.
SVB had grown dramatically in the five years leading up to its collapse, quadrupling its assets and deposits. An unusually large proportion of its deposits were uninsured, and the bank was overly concentrated in one sector of the economy. These factors should have been red flags for regulators, but they failed to act.
Some commentators are now calling for banking rules to be tightened, which is a wise move. The failure of the two banks demonstrates yet again that the mentality of the regulators is just as essential as any regulations, laws, or instruments available to them. The San Francisco Fed and the California regulators could have required SVB to raise capital or increase rates on its savings accounts, but they did not.
The Trump administration’s penchant for installing regulators who are opposed to regulation also contributed to the failure. Randal Quarles has been chosen by Donald Trump to fill the newly created role of vice chair of banking supervision at the Federal Reserve. Quarles saw it as his mission to relax the post-financial-crisis regime, sending unambiguous signals about how he felt about aggressive regulators. When Jerome Powell was nominated to be the chair of the Fed, in 2017, he told Congress that Quarles was a “close friend” and that they were “very well aligned on our approach to the issues that he will face as vice chair for supervision.”
The roots of regulatory failure run deeper than the Trump administration, however. The alphabet soup of regulators who ostensibly shared responsibility for banking oversight along with the Fed—the OTS, the OCC, the SEC, and the CFTC—were all playing their own game, and policy makers and legislators knew this. Ultimately, their only action was to close down the least of them, the OTS.
The Federal Reserve regulates banks, but this crisis raises the old issue of how strange it is that it does so. Regulators have an ingrained fear of stepping in, making people uncomfortable, making demands and using their clout, and this has led to a culture of learned governmental helplessness.
0. “So Where Were SVB’s Regulators?” The Atlantic, 17 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/silicon-valley-signature-bank-collapse-regulator-culture/673423/