New Regulations Won’t Stop the Next Bank Collapse

“I believe in ready, aim, fire—not ready, fire, aim,” said Maine Sen. Angus King, an Independent who caucuses with Democrats, in a discussion about passing new financial regulation in the wake of Silicon Valley Bank’s (SVB) collapse. Somewhat astoundingly, he’s not alone among left-of-center lawmakers in resisting the temptation to rush through new banking rules in response.

Plenty of Democratic lawmakers are angling for new regulations, of course. President Joe Biden, Sen. Elizabeth Warren (D–Mass.), and many others have been quick to blame SVB’s problems not simply on poor decisions by private actors but on an alleged lack of oversight of midsize banks. Specifically, they blame a Trump-era rollback of Dodd-Frank regulations that said banks with $50 billion or more in assets were subject to increased regulatory scrutiny. Under the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, this threshold for stricter regulation was raised to $250 billion.

“I’m going to ask Congress and the banking regulators to strengthen the rules for banks, to make it less likely this kind of bank failure would happen again,” said Biden on Monday. Warren, meanwhile, has introduced legislation that would repeal the 2018 rollback.

But whether SVB’s situation would have been different had these regulations remained in place is highly questionable. “You knew just by looking at this bank that it was growing at exceptionally rapid rate, which should have been a red flag to look at,” Thomas Hoenig with the Mercatus Center at George Mason University told Marketplace. “So I don’t blame it on so much on the rollback of Dodd-Frank. I blame it on the fact that the bank management didn’t understand the fact that interest rates change and they need to be managing their portfolio accordingly.”

Besides, even without the stricter rules, bank regulators still could have acted but did not. So, the idea that new regulations are needed to stop the next midsize bank collapse is suspect, to say the least.

Of course, it’s not surprising that some Democrats are using this debacle to push for giving government more control over banks. (Never let a good crisis go to waste, right?) What is surprising is that some Democrats are resisting calls to blame the 2018 regulatory rollback or to rush through new regulations.

“Moderate Senate Democrats who voted to loosen regulations on midsize banks in 2018 are standing by their votes in the wake of Silicon Valley Bank’s collapse, joining Republicans in resisting enhanced scrutiny for financial institutions,” reports Sahil Kapur at NBC News:

Sens. Tom Carper, D-Del., and Jeanne Shaheen, D-N.H., both said they stand by their votes for the 2018 deregulatory bill.

“It’s early. I think we need to complete the investigation of what actually happened at Silicon Valley Bank. All the regulation in the world isn’t going to fix bad management practices, and it appears that that’s one of the problems at SVB,” Shaheen said, while keeping the door open to revisiting the bill if the findings sway her….

Asked whether the 2018 bill was a mistake, Sen. Michael Bennet, D-Colo., responded: “I would say no. The work that I did on it was targeted toward small banks and toward rural banks.”

Sen. Mark Warner (D–Va.) also defended the 2018 rollback while appearing on ABC’s This Week last Sunday. “I think it put in place an appropriate level of regulation on midsize banks,” he said.

Sen. Tim Kaine (D–Va.) told VPM he voted for the 2018 regulatory rollback “because my community banks had been telling me about Dodd-Frank challenges for years, and they strongly believed and still believe that it was the right thing.” He suggested that lawmakers should wait for the Federal Reserve review of what happened with SVB before passing any new policies.

“It appears that the leading causes of the failure of Silicon Valley Bank were managers who maintained a woefully under-diversified asset sheet, and a small group of investors who sparked a panic that led depositors to withdraw money at a rate that would be unsustainable for any bank,” said Sen. Chris Coons (D–Del.) in a statement. “SVB was subject to federal and state supervision, and it’s not clear what additional regulatory requirements might have yielded a different outcome.”

Obviously, senators who voted for the 2018 change have self-interested reasons to resist blaming it for SVB’s collapse. But for a change, lawmaker self-interest is working out in favor of rationality and restraint.

Republicans, meanwhile, are also highly critical of the idea that the 2018 law is to blame for SVB’s problems or that undoing it is necessary to prevent the next midsize bank collapse.

Bank regulators “had the tools that they needed,” said Rep. John W. Rose (R–Tenn.). “Based on all of my conversatio