SVB: Why it Happened; What to Do
By Bart Naylor
After witnessing the second biggest bank failure in U.S. history, Washington policy makers naturally want to know why it happened and what to do so that it doesn’t happen again. The simple policy answer to the “why” is deregulation; the simple solution is re-regulation.
Congress responded to the 2008 financial with the 2010 Dodd-Frank Wall Street Reform Act. The ink wasn’t even dry on the measure of needed reforms when Washington’s 3,000+ bank lobbyists – who direct millions in political contributions to both sides of the aisle – began pushing to gut the best parts of it.
They went after the U.S. Consumer Financial Protection Bureau (CFPB), created to make sure one banking agency put consumers ahead of bank safety. They went after the Volcker Rule, a provision meant to keep banks in their traditional lane of lending to people and businesses, not gorging themselves with trading frenzies in esoteric securities unlinked from the real economy. And they went after bank capital requirements. Capital is the simple difference between assets and liabilities.
Bank lobbyists wounded the CFPB with a successful lawsuit about the director’s independence; they gutted the Volcker Rule through Trump appointed Federal Reserve governors; and they weakened capital and other requirements, through a Trump-signed law, known as S. 2155.
S. 2155 did two things, one surgical, the other impressionistic. Surgically, it raised the asset threshold from $50 billion to $250 billion for banks subject to “enhanced” supervision by federal regulators who must apply “more stringent” standards. Those “more stringent” standards include higher capital standards.
SVB had $16 billion in capital. When it precipitously sold $20 billion worth of long-term Treasuries, it suffered a $2 billion loss. That was 12.5% of its $16 billion in capital. SVB should have maintained more capital. Another stringent standard involves stress testing, which are a series of what-if experiments, such as, “what if the Fed raises interest rates a lot.” SVB should have been subject to more stringent stress tests.
Impressionistically, Congress declared through S. 2155 that regulators needn’t worry about banks with less than $250 billion. The megabanks with $2 trillion in assets such as JP Morgan, Citigroup, Bank of America, and Wells Fargo deserve most of the attention. The meg-banks proved when they crashed in 2008 that the entire economy depended on sound regulatory oversight promoting sound management. Their near deaths led to the Great Recession, with millions thrown out of their jobs and their homes.
But banks with less than $250 billion in assets? Hey, don’t worry. They’re only one tenth the size of the megabanks. So regulators failed to stop SVB management from making stupid decisions.
SVB’s grave hasn’t even been filled, yet bank lobbyists are already disclaiming the role of deregulation in its failure. They’re paid to say this, and truth isn’t really a Washington debating standard. For the record, one of the chief spokesmen championing S. 2155 was SVB CEO Greg Becker, who’d also successfully won exemptions from the Volcker Rule.
To reduce the chance of preventable bank failures, Congress must reverse S. 2155. Banks with more than $50 billion in assets that fail can indeed cause serious damage. They must face enhanced supervision under more stringent standards. Specifically, banks should maintain higher capital levels. SVB’s capital was less than 8%. Capital levels should be 20%.
Congress should also mandate strict management accountability – through banker paychecks and bonuses. Hours before SVB failed, managers paid themselves fat bonuses for what they termed “superior performance.” Clawing that money back may be difficult. Instead, Congress should dictate that a fat slab of senior banker pay should be held in escrow for several years in a pot. If the bank goes bust, or engages in misconduct and pays a fine, the uninsured depositor money or penalty fee should come from the banker pay escrow pot.
Because of those 3000+ lobbyists and political contributions, Congress usually passes pro-bank laws. Inevitably, these pro-bank laws harm consumers and endanger the economy. Only in times of crisis does Congress respond to the needs of average Americans. Having suffered the crisis, Congress should not waste the opportunity to deliver pro-American banking reform.
Even as Congress considers these measures, regulators can finalize a banker pay reform still unimplemented from the 2010 Dodd-Frank law known as Section 956. On their own, regulators can raise capital requirements and revisit the Volcker Rule.
Banking needs to go back to its roots as the boring job of funding the real economy.
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Naylor is the financial policy advocate for Public Citizen.