After bankruptcies, there is always the blame game. For the collapse of Silicon Valley Bank, and two other banks, everything points to a process of bank deregulation that began with Donald Trump in 2018. The Federal Reserve also excluded regional banks from monitoring portfolios. And, of course, Silicon Valley Bank took the opportunity to take more risks than it should have, the bond portfolio was barely covered with financial derivatives.
Eight years ago, the director of Silicon Valley Bank (SVB), Greg Becker, appeared in the US Congress and before the powerful senators of the House Banking Committee said: “The Dodd-Frank Act is not for us“. The banker of the bankrupt entity was referring to all the legal scaffolding, which the Obama Administration had prepared to protect the real economy from future banking crises. It was the political response to the Lehman Brothers crisis, which was about to destroy the world financial system.
A decade after the 2008 financial crisis, Donald Trump was in charge of dismantling all the regulations that forced banks to be cautious with their capital and reinforce their solvency. Trump signed the economic growth law and with it the deregulation of the US banking sector.
The SVB’s top executive was heavily involved in parliamentary work. He even went to testify to the famous Banking Committee. “The evidence is clear, the framework of the Dodd-Frank Act for SVB and banks of our size is not appropriate,” the minutes collected by Bloomberg point out. The banker assured that “the costs to comply with the regulations were too high for the sector and for clients.”
The tech banker was arguing for selective deregulation. SVB and the regional banks were not like the financial giants on Wall Street. Smaller banks do not need to meet capital ratios, undergo solvency tests, or spend working hours to comply with regulations. Becker was no exception, the entire sector of regional banks knocked on the door of the Oval Office to achieve their goal.
Trump complied with the wishes of the bankers. At the solemn signing of the law, he said: “One size does not fit all, those Dodd-Frank rules just don’t work.” “They shouldn’t be regulated in the same way as large, complex financial institutions, and that’s what happened and they were put out of business one by one,” he explained. More than a dozen Democratic senators joined Republicans in backing the measure. In fact, Barney Frank, one of the promoters of the Dodd-Frank Act, advocated making the regulations more flexible. Today he is part of the Board of Directors of Signature Bank, one of the bankrupt banks.
The collapse in a few days of Silvergate, Silicon Bank and Signature Bank is partly explained by the lifting of capital requirements and demands. “We have known since 2008 that stricter regulations are needed to prevent exactly this type of crisis.“says Democratic Rep. Ro Khanna, who represents a district in California that includes parts of Silicon Valley. “Congress must come together to reverse the deregulation policies that were implemented under Trump to avoid future instability.”
With the banks down, accusations of responsibility point to Donald Trump. Trump spokesman Steven Cheung said in a statement that Democratic critics were trying to blame the former president “for their failures with desperate lies” on a variety of topics. “This is nothing more than a sad attempt to deceive the public to evade responsibility,” the former president defends himself.
Within the Fed, there are critics pointing in this direction of lack of oversight. Fed Vice President of Supervision Michael Barr said last week that the regulator has been handling smaller lenders with “a very light approach.” In the extraordinary meeting last Monday, the Fed has decided to open an investigation to see if SVB correctly complied with the regulatory requirements and to understand if the supervision system failed. Fed Chairman Jerome Powell said in the statement that “[la quiebra de] Silicon Valley Bank demands a thorough, transparent and prompt review” to understand its causes.
Less tests for regional banks
“We need to be humble and do a careful and thorough review of how we oversee and regulate this company, and what we need to learn from this experience,” said Vice President Michael Barr, who will lead the process. The current US president, Joe Biden, has declared that he will ask Congress and banking authorities to “strengthen banking regulations.”
Since 2019, banks with less than 700,000 million assets have been freed from subjecting their bond portfolios to stress tests, denounce executives of the big US banks. This allowed regional banks to assume more risks in asset management, as they were not influenced by the volatility of capital levels.
The Dodd-Frank Act meant that regulators required all banks to hold a number of high-quality liquid assets—there is no asset of higher quality than US debt—large enough to satisfy a stressed deposit outflow. for 30 days. In practice, it means having more than one liquidity coverage ratio above 100%. The fall of SVB has been a huge liquidity problem, when at the end of 2022 clients began to withdraw deposits
As detailed by Bloomberg, internal bank documents recommended at the end of 2020 that the bank’s balance sheet should be more exposed to short-term bonds. This measure was designed to protect the bank’s balance sheet against fluctuations in asset valuations. Management objected and the entity continued to invest cash in riskier assets. Until 2021, the strategy worked. The results shot up to a record level, but when the bond market turned around with the largest interest adjustment in history, 16,000 million capital losses appeared in the portfolios.
“I have no doubt that if this bank had been subject to much stricter regulation, it would not have been allowed to buy long-term Treasury bonds and mortgage-backed securities,” said Brad Sherman, a Democratic congressman also from California. . “They would have been pushed to buy short-term instruments and we wouldn’t be having this conversation.”
The politician’s explanations point in the direction that the bank would have had much more liquidity if the bonds had been short-term. Losses would not have skyrocketed when selling assets. The big losses weren’t unique to SVB: In total, US banks posted $620 billion, according to documents filed with the FDIC.
The big banks quickly understood the play. Long-term bonds were transferred to held-to-maturity portfolios. In other words, the debt on the balance sheet no longer counted as capital and the first source of liquidity, it remained in the bank until the end of the life of the loan. For the financial entity, it implies that the volatility of prices does not affect the price, although it ceases to count as an asset.
For its part, SVB’s bond portfolio had increased to 57% of its total assets. No other competitor among the top 74 US banks had more than 42%, according to the agency.
It has not only been a liquidity problem, but also a risk management problem. Alfonso Peccatiello from The Macro Compass points out that the average bond portfolio in US banks stands at 24% and for large banks it stands at over 30%. For the expert, the most important thing is not the percentage, but whether the portfolio is protected. “SVB did not have the bond portfolio covered,” he explains. While in 2021 the bank had 10,000 million dollars in financial swaps, at the end of 2022 there were only 500 million left.
The most curious thing about the entire regulatory maze is that at the end of 2022, SVB presented its first Resolution Plan, the emergency plan in case of liquidity problems, before the Federal Deposit Insurance Corporation, thanks to the Dodd-Frank Act. .
