How Silicon Valley Bank skirted Washington's toughest banking rules

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pasayten
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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Here is the moment when Donald Trump scrapped regulations that would have prevented the Silicon Valley Bank collapse
Story by Milla • 8h ago

The 2018 deregulation of Dodd-Frank freed some banks from policies placed in the late 2000s to try to stop banks and the financial system from collapsing.

Banks with at least $50 billion in assets were required to undergo an annual Federal Reserve “stress test,” maintain certain levels of capital and liquidity, and file a “living will” plan for their immediate and orderly dissolution if they failed.

The 2018 deregulation eliminated the $50 billion threshold and made the improved regulations standard only for banks with over $250 billion in assets.

Deregulation of Dodd-Frank
The bill eased regulations imposed by Dodd–Frank Wall Street Reform and Consumer Protection Act. It was described as a significant victory for banks below the $250 billion threshold, including Silicon Valley Bank, whose CEO, Greg Becker, had urged Congress to raise the threshold.

On May 24, 2018, Trump signed the Economic Growth Regulatory Relief and Consumer Protection Act into law.

Experts are divided to which extent the Trump law played a role in SVB’s collapse, as it is impossible to predict if the pre-2018 version of Dodd-Frank would have prevented the fall of Silicon Valley Bank. However, the situation would have been less dangerous and damaging, experts claim.

Sanders, Warren Blame Trump
For Bernie Sanders, Trump is the only person to blame, as he stated, “Let’s be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed.”

Elizabeth Warren questioned regulators during a Senate Banking Committee hearing in early 2018. Now, Warren claims, “Signature is a prime example of the fallout.”

Silicon Valley Bank was the nation’s 16th-largest bank. It was also the biggest bank to go under since the Great Recession, between 2007 and 2009.

One Tweet Summs It Up
A viral tweet is making rounds, as it reads, “The moment in 2018 when Donald Trump removed the Dodd-Frank regulations that would have prevented the Silicon Valley Bank collapse. Don’t let anyone forget this.”

Comments, however, do not put all the blame on the former president, as one person wrote, “Democrats had all three branches yet did nothing to prevent the collapse.”

Others wanted to know how many other banks were in trouble.

Some simply stated, “Dang – years later, we still suffer the consequences of this idiot.”

Another pointed out how the Republicans are defending themselves, “Now GOP is calling SVB ‘one of the most woke banks.'”

The tweet surpassed 11 million views.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

Post by Fun CH »

The Grift that keeps on giving.

"GloriFi attracted $50 million in investment from conservative backers last year."

Then that

"bank that promoted itself as an "anti-woke" alternative to Wall Street and won the support of Peter Thiel and Candace Owens is closing down just three months after it started operating. "

https://www.businessinsider.com/anti-wo ... hs-2022-11
What's so funny 'bout peace love and understanding--Nick Lowe
Can't talk to a man who don't want to understand--Carol King
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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Silicon Valley Bank committed 'one of the most elementary errors in banking,' Larry Summers says
Chris Pandolfo
Tue, March 14, 2023 at 6:50 AM PDT

Silicon Valley Bank, the nation's 16th-largest bank, failed because its managers made a textbook mistake, according to former Treasury Secretary Larry Summers.

Summers, a Harvard University professor who served in both the Clinton and Obama administrations, said Monday the bank "committed one of the most elementary errors in banking: borrowing money in the short term and investing in the long term."

SVB collapsed Friday after depositors ran on the bank, which didn't have cash on hand to cover their withdrawals. It was the second-biggest bank failure in U.S. history and the largest since Washington Mutual went under in 2008.

What happened is fairly simple: when interest rates were at historic lows, SVB invested depositors' funds in long-term Treasury bonds. But as the Federal Reserve increased interest rates to combat inflation, the price of those bonds cratered, taking SVB with it.

"When interest rates went up, the assets lost their value and put the institution in a problematic situation," Summers explained on Twitter.

On Wednesday, SVB suffered a $1.8 billion after-tax loss and attempted to address its liquidity crisis by selling equity. The move backfired – in just 24 hours, SVB lost over $160 billion in value and spooked depositors, who rushed to withdraw their money before the situation got worse.

Regulators stepped in on Friday, when the Federal Deposit Insurance Corporation took control of the bank. The FDIC said in a statement that SVB had $209 billion in assets and $175.4 billion in deposits at the end of 2022. It guaranteed that insured deposits, up to the statutory limit of $250,000, would be made available by Monday.

The FDIC created a new entity, called Silicon Valley Bank N.A., and transferred all of SVB's deposits there, where depositors can access their money.

"I look forward to getting to know the clients of Silicon Valley Bank... I also come to this role with experience in these kinds of situations," Mayopoulos wrote in a letter to clients. "I was part of the new leadership team that joined Fannie Mae in the wake of the financial crisis in 2008-09, and I served as the CEO of Fannie Mae from 2012-18."

In an interview on CNN, Summers called for increased supervision and regulation of the banking industry.

"It doesn't appear on current facts that a very good job was done regulating and supervising Silicon Valley Bank," he said.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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Yep... That is what I read also... Poor mix of bond/cd exspiration dates... Lousy management.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

Post by just-jim »

.
Another good explanation here:

https://www.theguardian.com/business/20 ... ing-crisis
.
Sound like the bank went in for ‘long bonds’ in too great an amount, believing - wrongly - that long range interest rates wouldn’t go up. When rates did rise, the bank was caught in the classic ‘short squeeze’, trying to sell those bonds when there were no takers.
.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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PAL wrote: Tue Mar 14, 2023 7:42 am I heard the words "crypto currency" associated with this bank. Could it be one of the reasons...
A large stablecoin fund, USDCoin, was that $30 billion account I mentioned earlier.

On the day last week that SVB announced a new stock sale to raise capital, an unrelated bank (Silvergate) that was prominent in crypto went bust. That was one of the reasons, but certainly not the only reason, that they were unable to raise any capital.

Keep in mind that the VC world in the valley is a very small one, and they all know each other, gossip, drink at the same bars and have lunch at the same Mexican restaurants. And SVB is right in the middle of that world with their people drinking at the same bars. And they are all human so there are petty rivalries and weird rumors going around all the time. One of the reasons this all blew up so fast and that nobody was able to get ahead of it at either SVB or FDIC was that those rumors spread through that small community very quickly.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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I heard the words "crypto currency" associated with this bank. Could it be one of the reasons...
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

Post by mister_coffee »

I think we have a ways to go before it gets that bad.

Just for perspective, over 4000 banks failed in 1933. Between 2008 and 2012 465 banks were taken over and shut down by the FDIC. Let's also keep in mind, that as of today (14 March 2023) there isn't any systemic reason to expect large-scale bank failures.

To be honest, I find the reasons that SVB failed to be bizarre at best. There was never really any question that SVB had the assets to pay out all deposits if necessary -- my sense is that they were hesitant to eat the losses on long-term treasuries that would require, which is why they were trying to raise money so that wouldn't be necessary. It honestly isn't clear to me that the regulatory changes made any significant difference -- the issues that SVB faced involved very low risk and liquid investments (long-term treasuries) and not goofy stuff like art or lithium mines.

Full disclosure: I do have a commercial account with SVB. And I have full access to my account as of Monday morning.

I think the key thing to remember is that many hundreds of thousands of people were potentially out a paycheck or a job because of this bank failure. In California, like most states (including Washington), if a business doesn't make payroll it automatically goes into bankruptcy and shuts down. And a lot of companies that were otherwise in fine shape would have been put out of business.

There were some bizarre things that I do not understand. One SVB client had over $30 billion in their bank account. Who does that? That's enough money to start your own bank, or at least run it as a private closed money-market fund at less risk. And keep in mind that a 0.1% change in your rate of return on that much money is $30 million, so you can obviously afford your own management team to run that money. Similarly, there are systems like CDARs that let you spread your short-term cash needs around to multiple banks and keep under the $250k FDIC limit. I am not a finance person but I do know how to do that.

There is an open question about how a business manages its short-term monthly cash flow requirements without running over the $250k FDIC limit, and that might argue for a much higher limit and correspondingly tighter banking regulation by the FDIC.
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Re: How Silicon Valley Bank skirted Washington's toughest banking rules

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Looks like SVB isn't the only bank taken over by the FED, New York Signature Bank bit the dust as well.
One by one, the Goliath's begin to fall. Is there going to be a domino effect and a run on smaller banks? Maybe a rerun of the 30's?
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How Silicon Valley Bank skirted Washington's toughest banking rules

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How Silicon Valley Bank skirted Washington's toughest banking rules
Dan Fitzpatrick, David Hollerith and Jennifer Schonberger
Mon, March 13, 2023 at 2:55 PM PDT

Before Silicon Valley Bank went down, it was the 16th-biggest US bank and had more than $200 billion in assets. Yet it didn’t have the same level of regulatory scrutiny as JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) or Wells Fargo (WFC).

Why? Because lawmakers and regulators decided to loosen requirements for regional banks at the end of last decade. Congress and the Trump administration approved some changes in 2018 with a bipartisan bill that re-defined which banks were deemed "systemically important" to $250 billion in assets instead of $50 billion. The Federal Reserve, FDIC and OCC refined those rules in 2019.

The changes released certain regional banks from some of the strictest requirements imposed in the aftermath of the 2008 financial crisis, a downturn that pushed the banking system to the brink. The revised regulatory framework left Silicon Valley Bank and other mid-size peers in a new air pocket of the banking universe: too small to be deemed "systemically important" but now, as we've learned, big enough to bring the system to the brink again.

One key revision was the Fed’s decision to exempt banks with $100-$250 billion in assets from maintaining a standardized "liquidity coverage ratio" as long as they kept their short-term wholesale funding levels below a certain amount. The ratio is designed to show whether a lender has enough high-quality liquid assets to survive a crisis. A lack of liquidity turned out to be a major problem for Silicon Valley Bank as deposits left the bank and the value of its assets declined as interest rates rose.

Fed Chair Jerome Powell spoke in favor of the refinements during 2019, but not all regulators were happy with them at the time. They "weaken core safeguards against the vulnerabilities that caused so much damage in the crisis," then-Fed governor Lael Brainard said in an October 10, 2019 letter released by the Fed.

Days later, FDIC board member Martin Gruenberg highlighted regional banks as "an underappreciated risk" in an October 16, 2019 speech. He expressed concern about another change, noting that bank holding companies between $100-$250 billion in assets no longer had to supply resolution plans showing how they could be wound down in the event of a failure.

"These measures are unwarranted and misguided," he said, according to a transcript of his remarks published by the FDIC. "They only increase the challenges posed by the resolution of these institutions and the potential for disorderly failure, and disregard the lessons of the financial crisis."

The changes were part of a long, national debate following the 2008 crisis about which banks should be regulated more aggressively and how. A big question: Which banks are big enough to be "systemically important"? Or, put another way: Which banks are "too big to fail"?

JPMorgan, Bank of America, Citigroup and Wells Fargo clearly belonged in that group because they were so much bigger than the rest of the industry; each institution has more than $1.5 trillion in assets, and JPMorgan has more than $3 trillion. Goldman Sachs (GS), Morgan Stanley (MS), State Street (STT) and BNY Mellon (BK) were other obvious choices.

But what about the scores of smaller regional banks spread throughout the country? Congress and President Obama provided the first definition: $50 billion in assets. Any bank of that size or bigger would be considered "systemically important," as a result of a 2010 law known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, and thus subject to the strictest scrutiny. That included annual Fed stress tests designed to see if banks could survive adverse economic circumstances, among other regulatory requirements.

Eight years later, a new threshold emerged: $250 billion. That resulted from a 2018 law known as the Economic Growth, Regulatory Relief, and Consumer Protection Act that was signed by President Trump. Banks below that asset size, which would have included Silicon Valley Bank, would be exempted from the Fed’s annual stress tests.

Silicon Valley Bank and other regional banks had lobbied for such a change. In fact, Silicon Valley Bank’s CEO Greg Becker told a Senate committee in 2015 that if the $50 billion threshold was not raised his company would be "subject to the array of regulatory requirements designed for the largest, most complex banks." He also said that his business model and risk profile didn't "pose systemic risk."

The 2018 law, however, wasn’t the final word on regional banks. The legislation gave the Fed the power to make decisions about banks with assets of $100 billion, and decide whether those institutions should be held to standards that applied to bigger banks. Silicon Valley wasn’t yet that big; it had $56 billion in assets as of June 30, 2018.

What the Fed decided to do in consultation with the FDIC and OCC was to group banks in five categories according to the risk they posed, using a variety of measures. When the new framework was announced in October 2019, Powell said in a release that "our rules keep the toughest requirements on the largest and most complex firms" and "maintain the fundamental strength and resiliency that has been built into our financial system over the past decade."

Banks between $100 billion and $250 billion would be required to undergo supervisory stress tests every two years. But if they had less than $50 billion in average weighted short-term wholesale funding, they would not be required to maintain a standardized "liquidity coverage ratio," which measures how much high-quality assets a bank has to raise cash when funding disappears during challenging economic circumstances. They did need to continue internal liquidity stress testing that was specific to each institution.

At the time those rules were released, Silicon Valley Bank was in the $50-100 billion asset category, a group that didn’t have stress test requirements or standardized liquidity coverage ratio rules. It joined the $100 billion club in the fourth quarter of 2020.

In a recent federal filing before its collapse, the bank acknowledged it was not part of the Fed’s standardized liquidity coverage ratio requirements. If that were to change "as a result of further growth," the Fed "would require us to maintain high-quality liquid assets in accordance with specific quantitative requirements and increase the use of long-term debt as a funding source."

Senator Elizabeth Warren challenged Powell about the liquidity adjustments during a 2021 hearing. "So, let me just ask, do you regret slashing liquidity requirements designed to protect markets from crashing like they did in 2008?" Powell said: "I don’t see that there has been any evidence that that was a bad idea, but it’s one that could certainly be looked at again."

Fed officials on Sunday were unwilling to say whether any liquidity or stress test requirements could change for smaller banks in the aftermath of Silicon Valley Bank’s failure, saying they would be focused on drawing appropriate lessons learned in the days, weeks and months to come. On Monday, the Fed said Vice Chair for Supervision Michael Barr will lead a review of the supervision and regulation of Silicon Valley Bank. The review will be publicly released by May 1.
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