Amid the chaos associated with the collapse of California’s Silicon Valley Bank, and anxiety over the instability of other major banks, Representative Katie Porter (D-Calif.) reminded Americans that “Congress played a real role in Silicon Valley Bank’s collapse. In 2018, Republicans and some Democrats caved to Wall Street and passed a law that lets certain banks take more risk.” Porter, who literally wrote the textbook on banking regulation when she was a law professor, was referring to the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, which SVB President Greg Becker and other major bankers lobbied for in what turned out to be a successful effort to ease regulations that President Barack Obama had signed into law following the 2008 financial meltdown.
“Silicon Valley Bank’s implosion is the largest failure of a US bank since 2008—and it was totally avoidable,” Porter explained, as federal officials moved to protect uninsured depositors amid bankers begging for bailouts and regional bank stocks tanking.
Porter’s right. And she’s not speaking merely with the benefit of hindsight. She opposed the Economic Growth, Regulatory Relief, and Consumer Protection Act even before she was in Congress. And she wasn’t alone. On the Senate floor five years ago, Senator Bernie Sanders (I-Vt.) railed against the proposal, outlining specific warnings about the danger it posed. “[The] Republican Director of the Congressional Budget Office released a report [in 2018] finding that this legislation would ‘increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail,’” recalled Sanders. “Unfortunately, that is precisely what happened.” Another critic, Senator Elizabeth Warren, the Massachusetts Democrat who led the fight for enhanced bank regulation and oversight after the 2008 crisis, took to The New York Times’ op-ed pages to recall the banking industry’s intensive lobbying to weaken the modest regulations contained in the Dodd-Frank Act.
“No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” argued Warren. Wall Street chief executives and their lawyers and lobbyists spent millions to pass the “economic growth” act, and they scored their biggest triumph with support from both political parties. Fifty Republicans and 17 Democrats in the Senate, and 225 Republicans and 33 Democrats in the House, voted for the deregulation legislation.
“Regulators, including the Federal Reserve chair Jerome Powell, then made a bad situation worse, letting financial institutions load up on risk,” wrote Warren, recalling what happened after President Donald Trump signed the act into law. “Banks like SVB—which had become the 16th largest bank in the country before regulators shut it down on Friday—got relief from stringent requirements, basing their claim on the laughable assertion that banks like them weren’t actually ‘big’ and therefore didn’t need strong oversight.”
Porter, Sanders, Warren, and others who got things right in 2018 have every right to say, “I told you so.” But they recognize that the broader threat that now exists won’t be eliminated by the urgent interventions of federal regulators, who on Sunday announced that they will create a backstop to “fully protect all depositors” at SVB, and another collapsing bank, Signature. Indeed, explained Warren:
Not just small businesses and nonprofits, but also billion-dollar companies, crypto investors and the very venture capital firms that triggered the bank run on S.V.B. in the first place—all in the name of preventing further contagion.
Regulators have said that banks, rather than taxpayers, will bear the cost of the federal backstop required to protect deposits. We’ll see if that’s true. But it’s no wonder the American people are skeptical of a system that holds millions of struggling student loan borrowers in limbo but steps in overnight to ensure that billion-dollar crypto firms won’t lose a dime in deposits.
The skepticism is heightened by the fact that SVB’s Becker sold $3.6 million of his shares in the bank’s stock in the weeks before the collapse, and by reports that SVB distributed bonuses to it employees in the hours before the bank was seized by the Federal Deposit Insurance Corporation on Friday. Representative Ro Khanna, a Democrat who represents the Silicon Valley, says earnings from the executive stock sales should be “clawed back” and used to protect depositors. Good idea. But it will take more than clawbacks and backstops to prevent the next meltdown.
Any bailout “must be 100 percent financed by Wall Street and large financial institutions,” Sanders said on Sunday. “We cannot continue down the road of more socialism for the rich and rugged individualism for everyone else. Let us have the courage to stand up to Wall Street, repeal the disastrous 2018 bank deregulation law, break up too big to fail banks and address the needs of working families, not the risky bets of vulture capitalists.”
That’s a vital starting point, which the Biden administration and Democratic leaders in Congress should make a major focus in the coming days—and right on through the 2024 election cycle if House Republicans resist renewed regulation. But the response can’t end there. Warren wants the Federal Reserve’s Powell to provide stronger oversight immediately, and she’s calling for a reform of federal deposit insurance standards “so that both during this crisis and in the future, businesses that are trying to make payroll and otherwise conduct ordinary financial transactions are fully covered—while ensuring the cost of protecting outsized depositors is borne by those financial institutions that pose the greatest risk.”
Only by acting decisively to renew meaningful banking regulation can we make real the promise that Warren outlined when she said, “Never again should large companies with billions in unsecured deposits expect, or receive, free support from the government.”