SVB Failure Sparks Blame Game Over Trump-Era Regulatory Rollback

(Bloomberg) — Eight years ago, Greg Becker delivered a blunt message to lawmakers in Washington: the bank he ran was not like Wall Street.

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As chief executive officer of SVB Financial Group, he urged Congress to pass legislation that would let workers at his firm avoid thousands of hours every year undergoing stress tests and prepping resolution plans. His was a simple lender, not like the global systemically important banks that regulators should be focused on.

“The evidence is clear that the Dodd-Frank Act’s framework for G-SIBs is not appropriate for SVB and our peers,” Becker said in comments to the powerful Senate Banking Committee. “The costs are not just high for us, but for our customers.”

Becker was hardly alone. Legions of executives from other smaller and mid-sized banks, collectively known as regional lenders, were making a similar case. Eventually, they all got their wish.

In 2018 — a decade after a crisis that nearly brought down the global financial system — then-President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law. It freed up mid-sized firms like SVB from some of the strictest post-crisis regulations and cut their compliance costs.

“One size fits all — those rules just don’t work,” Trump said at the White House, touting the removal of “crippling” rules. “They shouldn’t be regulated the same way as the large complex financial institutions, and that’s what happened and they were being put out of business one by one.”

More than a dozen Democratic senators joined Republicans in backing the measure.

Fast forward five years: three regional banks, including SVB’s Silicon Valley Bank, have collapsed in the past week and some are arguing that the lighter touch that Becker wanted so badly actually hastened their demise.

Debate Rages

Silicon Valley Bank’s fall on Friday was the biggest US bank failure in more than a decade. It sent shock waves across the globe. By the time regulators stepped in two days later to say all depositors would be made whole, calm fears, and to take over another regional lender, Signature Bank, critics of the 2018 rollback were waiting to pounce.

“We’ve known since 2008 that stronger regulations are needed to prevent exactly this type of crisis,” said Democratic Representative 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 put in place under Trump to avert future instability.”

Wall Street giants dwarf lenders like SVB, Signature and Silvergate Capital Corp., which said it was voluntarily liquidating last week. But, collectively, regional lenders have grown rapidly and now count trillions of dollars in assets. They serve critical roles across the US economy, providing funding for industries from wineries to technology startups.

Following SVB’s collapse, Federal Reserve regulators – in private deliberations with top industry executives – have been taking stock of the 2018 regulatory pullback.

The biggest banks are seeking to flip on its head the argument that Becker and other regional bank executives successfully made last decade. Rather than tighten the screws even more on the Wall Street giants with tougher stress tests, they argue, regulators should spend more time on those smaller firms, which they’ve largely ignored in recent years, according to people familiar with the discussions.

Some executives are pointing to Fed vice chair for supervision Michael Barr’s comment last week that the regulator has been handling the smallest of lenders known as community banks with “a very light-touch approach.” To be sure, Silicon Valley Bank was the 16th largest US lender before its failure and would not be considered a community bank.

A representative for the Fed declined to comment.

Interest Rates

In their private discussions with officials, big bank executives have also pointed to moves by the Fed, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation in 2019 – when they allowed banks with less than $700 billion in assets to opt out of recognizing swings in so-called accumulated other comprehensive income in their regulatory capital.

That was meant to make key capital ratios less volatile, but may have helped make smaller lenders more comfortable taking risk in their bond portfolios, since losses there would be less likely to immediately endanger stock buybacks and dividends.

That certainly played out at SVB. In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.

Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.

Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.

Neither Becker nor an SVB representative responded to requests for comment.

“I have no doubt that if this bank had been subject to the much tougher regulation that they would not have been allowed to buy long-term Treasuries and long-term debt instruments insured by the federal government — basically, mortgage-backed securities,” Brad Sherman, a Democratic congressman also from California, said Sunday. “They would have been pushed to buy short-term instruments and we wouldn’t be having this conversation,” he added.

Big Losses

Big losses weren’t unique to SVB: In all, US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the FDIC. But SVB’s investment portfolio had swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%.

And some banks saw this coming. JPMorgan Chase & Co. initially faced investor pushback when it didn’t immediately plow excess deposits into securities, but the firm’s executives said they’d rather have more cash on hand if needed.

JPMorgan had the credibility to make such a call in part because its 2021 haul of $48 billion marked the most profitable year of any US bank in history. And that spoke to the concern that sparked some of the regulatory rollback: consumers were gravitating to digital banking, and with JPMorgan and its giant rivals spending tens of billions every year on technology, there was a fear that smaller firms simply couldn’t keep up. Reducing their compliance costs, the thinking went, at least gave them a better shot in the race.

FDIC Auction

After last week’s failure, the FDIC is still figuring out what to do with what’s left of SVB. The regulator tried to arrange a sale of the bank, and requested bids from potential buyers. But regulators realized the timetable was too tight before markets opened Monday, and they instead invoked a so-called systemic-risk exception, allowing the FDIC to backstop SVB’s uninsured deposits. The move eased jitters in the market and the agency may still considering options for selling all or parts of SVB.

There was a feeling that if any bank one-17th the size of JPMorgan went down, it wouldn’t be catastrophic. But the turmoil in the tech industry and fears of contagion are questioning that logic.

In December 2022, more than 12 years after the Dodd-Frank Act became law, SVB filed its first resolution plan with the FDIC. No one knew they’d be using it weeks later.

–With assistance from Craig Torres, Allyson Versprille and Ed Ludlow.

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