NRPLUS MEMBER ARTICLE T he Democrats and the Fed have been circling the wagons to blame everyone but themselves for the collapse of SVB and the calamity that followed. In a speech before the National Association for Business Economics, Secretary Yellen added that “when the president and I took office in January 2021, we inherited a financial-stability apparatus at Treasury that had been decimated.”
President Biden pointed specifically to President Trump in his remarks about the crisis, lauding the Dodd-Frank bill, then saying, “Unfortunately, the last administration rolled back some of these requirements.”
Elizabeth Warren piled on: “In 2018 the Republicans under Donald Trump said, no, we need to loosen regulations. . . . And sure enough, we saw the consequences of that over the weekend.”
The Federal Reserve, for its part, stayed away from partisan politics, although Michael Barr, the Fed’s vice chairman for supervision, stated in testimony before the Senate that “SVB’s failure is a textbook case of mismanagement.”
In other words, it is the position of the government officials in charge of making sure such a collapse does not happen that they had nothing to do with the problem, and that, if anything, it was the fault of stupid bank managers and Donald Trump.
Their position is indefensible for two reasons. First, the blame-shifters misrepresent the reforms that were passed in 2018. Second, they deny responsibility for the manner in which their own actions contributed to the crisis.
First to history. The Dodd-Frank Act added massive new regulatory burdens to banks. The problem was that these high regulatory costs were destroying the community banking sector. Already by 2014, one study showed that the number of community banks serving America had dropped by 14 percent, and that the nation was losing about one bank a day. Policy-makers on both sides of the aisle were concerned about this because small community banks account for 75 percent of agricultural loans and half of small-business loans. A Federal Reserve study specifically attributed the problems to the fact that Dodd-Frank made many small banks unprofitable.
By 2018, the bipartisan momentum was strong enough that a banking reform that reduced regulatory costs for small banks passed with broad bipartisan support (the House voted 258 to 159 to pass it, for example). The bill exempted banks smaller than $250 billion from the most costly Dodd-Frank regulations. But the bill’s sponsors were aware that banks periodically can create economic havoc, and that hard-and-fast rules can sometimes cause trouble. So the bill also allowed the Federal Reserve to, at its own discretion, insist that any bank with assets over $100 billion adhere to all the Dodd-Frank requirements. In other words, if the Fed noticed something worrying about a bank that exceeded those limits, it could overrule the 2018 rollback.
So let’s look back at what happened. First, the Federal Reserve and the Biden administration let inflation run out of control. Second, when it was clear that inflation was lifting off, the Fed and the Treasury told everyone that the problem was temporary. Don’t worry about it! Then, as the Fed finally lifted interest rates, no alarms were sounded for banks to watch out for the kind of duration risk that brought SVB down. Finally, the Federal Reserve never invoked its powers to bring back the Dodd-Frank regulations for SVB, even though its assets were rapidly rising toward the $250 billion limit. The Fed’s supervisors of SVB were asleep at the wheel and failed to use their full legal authority.
What’s more, if the Democrats were really so sure that the bipartisan reform of 2018 were a problem, well, they controlled the government until this year. They could have brought back the regulations that they held so dearly. But, of course, they did not.
This is not to absolve Silicon Valley Bank’s management for its abysmal failures. But the regulators in charge today have a simple job to do. Supervise financial institutions and sound early alarms when there are warning signs. They have failed to do so. One might feel quite a bit more assured about the stability of our system if there were more frank discussion among policy-makers about what went wrong and less finger-pointing.