Archive for March 12th, 2023
Trump’s Deregulation Sowed The Seeds For Silicon Valley Bank’s Demise
Mayra Rodriguez Valladares reports in Forbes:
Anyone who doubted how detrimental Trump administration policies would be should analyze the damage unfolding for those trampled by Silicon Valley Bank’s collapse. On May 24, 2018, Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Reform Act”). This was a regulatory relief bill for regional and community bill, which bank lobbyists and numerous politicians had fought hard for.
The argument at the time was that many of the provisions in the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) were ‘one size fits all.’ Despite any proof, those lobbying for the EGRRCPA argued that capital, liquidity, and stress requirements for regional and community banks would be detrimental to the economy. In a number of Forbes columns, I argued that the weakening of bank regulations under Trump would be the seeds for the next financial crisis.
Thanks to Trump and his supporters this all changed. Some of the key changes that EGRRCPA made were:
- Increasing the asset threshold for “systemically important financial institutions” or, “SIFIs,” from $50 billion to $250 billion.
- Immediately exempting bank holding companies with less than $100 billion in assets from enhanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including but not limited to resolution planning and enhanced liquidity and risk management requirements).
- Exempting in 18 months bank holding companies with between $100 billion and $250 billion in assets from the enhanced prudential standards.
- Limiting stress testing conducted by the Federal Reserve to banks and bank holding companies with $100 billion or more in assets.
Under Dodd-Frank’s Title I, any bank in the U.S. with an asset size of $50 billion or more could be designated as a domestically systemically important bank (D-SIB). This would then allow national bank regulators like the Federal Reserve to impose what are called enhanced prudential standards. These include rules about:
- capital, which purpose is to sustain unexpected losses,
- liquidity, including calculating the liquidity coverage ratio (LCR) and liquidity stress tests, and
- bank resolution plans, referred to as living wills.
A lot of the results of these supervisory exercises, as well as the capital and liquidity ratios, is made public. This type of financial and risk transparency is critical for investors, lenders, depositors, rating agencies, and numerous market participants.
Systemically Important Bank (SIB)
Just by EGRRCPA changing the asset size, banks like Silicon Valley Bank were no longer designated as systemically important. Only those $250 billion or larger would now receive the systemically important designation. EGRRCPA supporters ignored the fact that while a failing or failed bank may not destabilize the entire national banking system, it sure can destabilize a region. Just ask California how things are going now with the SVBVB 0.0% management-caused chaos.
Even as early as 2015, CEO Greg Becker lobbied for lighter regulations. He argued that his bank was not a big bank, since it had under $40 billion in assets. In the statement that he submitted to the Senate Banking Committee, he stated that “since the enactment of the Dodd-Frank Act, we have made meaningful investments to our risk systems, hired additional highly skilled risk professionals, and established a standalone, independent Risk Committee of our Board of Directors.” Becker’s statement did not age well. From that year to last week, SVB had grown by 430%. It was $212 billion in assets on Friday, March, 10, 2023, the day that California’s Department of Financial Protection and Innovation closed it down and appointed the Federal Depository Insurance Corporation as the receiver for the failed bank.
Dodd-Frank Liquidity Requirements
Because Trump’s EGRRCPA eliminated important elements of Dodd-Frank’s Title I, Silicon Valley Bank and other banks of that asset size, are not required to calculate and report the Liquidity Coverage Ratio, the Net Stable Funding Ratio, or to conduct comprehensive liquidity assessment reviews. Capital and liquidity are not the same thing. High quality capital
“Malicious incompetence” is a phrase that springs to mind.
Later On 