Silicon Valley Bank Initially Exempted from Regulations Due to its Size, Now It's Deemed 'Too Big to Fail'

Silicon Valley Bank Initially Exempted from Regulations Due to its Size, Now It's Deemed 'Too Big to Fail'

It was believed that Silicon Valley Bank would never require support from the government. However, this perception changed once its supporters began advocating on social media for a bailout that was quickly approved following the bank's sudden failure last week.

In the past, the CEO of the bank, Greg Becker, asked Congress to exclude SVB from regulations that were introduced after the 2008 financial crisis. He justified this by emphasizing that the bank presents low risks and helps companies that create jobs in innovative industries. These companies include cryptocurrency businesses and venture capital firms that are often against government interference. However, these very same companies benefitted from government involvement when the regulators intervened on Sunday to ensure that SVB customers could access their deposits that were mostly without insurance.

Even after 15 long years since the worldwide financial crisis, the concept of "too big to fail" remains dominant. Even though students who are in debt and people who own houses underwater suffer financially, it is considered to be their personal problem. But when large tech and finance companies suffer losses, it becomes a pressing public concern. This seems to imply that there is a double standard in terms of moral responsibility.

Additionally, SVB's sharp ascent and descent serves as a testament that numerous protective measures established after the previous financial crisis have been taken apart- according to the wishes of banks such as SVB, and with the support of politicians from both sides of the aisle who are reliant on influential finance and technology groups.

Prior to its collapse as the second largest bank in US history, SVB had established itself as a dominant force in northern California, serving as the preferred lender for startups, as well as a key player in Capitol Hill. SVB spent nearly a million dollars in five years lobbying for regulations that furthered its interest, which ultimately led to its demise.

On its website, SVB proudly states that there are multiple ways to portray their business, and the term 'bank' is only one option.

It seems that SVB's leadership overlooked the fundamental principles of banking. For a significant portion of last year, the bank didn't have someone in charge of their financial risk management. Additionally, they didn't protect themselves against interest rate fluctuations, which contributed to their eventual downfall. Despite this, the bank's deposit levels skyrocketed from under $50 billion in 2019 to nearly $200 billion in 2021.

Ever since the 2010 Dodd-Frank law implemented banking reforms, SVB has continuously pushed for lessening the regulations that could have aided regulators in identifying issues at an earlier stage. The bank has lobbied various times to persuade lawmakers and regulators, from both sides of the aisle, to meet its demands.

At the start of their mission, SVB focused on a significant Dodd-Frank regulation designed to stop banks that are federally protected from utilizing deposits for dangerous investments. Back in 2012, they requested that the Obama administration exempt venture capital from the Volcker Rule, a regulation that disallowed banks from financing or supporting private equity or hedge funds.

The bank stated to regulatory bodies that investment ventures are not the kind of uncertain and unsafe activities that the Volcker Rule was created to eradicate. They explained that investing in venture capital is a way to support fledgling companies with immense growth potential that will eventually fuel innovation and generate employment, foster economic growth, and enhance our ability to competitively engage in the international market.

When the Volcker Rule was implemented by the Obama administration in 2014, SVB was not happy with the lack of provision for venture capital carveout. As a result, they sought for their own exception that would permit them to keep investing in venture capital funds directly, as well as providing standard banking services for almost 50% of startups affiliated with venture capital.

Ribbit Capital, which was a significant investor in the now-defunct FTX digital currency exchange, is one firm that has praised SVB's technology-friendly approach. In a 2015 article about the bank in The New York Times, Ribbit's founder spoke highly of SVB's deep understanding of the tech industry. According to the founder, dealing with large traditional banks often requires educating them about the investment process, while SVB's team is immersed in the tech world and fully comprehends its nuances.

During the changeover from Obama to Trump, SVB achieved its desired outcome: a series of deregulations due to the belief that the bank didn't pose any danger to the financial sector.

Becker, the Chief Executive Officer, gave evidence to Congress in 2015 stating that SVB, along with other mid-sized banks, did not pose any significant risk to the system. For this reason, they should not be bound to strict regulations, capital requirements or undergo stress tests. Back then, these were only imposed on banks with assets that equaled or exceeded $50 billion.

After a couple of years, SVB became one of the few banks that was granted a five-year exception from the Volcker Rule. This gave them the freedom to keep investing in venture capital funds that carry a high level of risk.

The calls to decrease regulations became more prominent in Congress, and in 2018, legislators approved a law that raised the limit to $250bn for banks to receive additional monitoring. This was done under the assumption that smaller banks would never be overwhelming enough to cause a financial collapse.

Jerome Powell, chairman of the Federal Reserve, has expressed his support for the deregulation process. As a former executive of a private equity firm, Powell oversaw the implementation of the "tailoring rule" in 2019, which enables mid-size banks to be excluded from certain stress tests and liquidity requirements.

However, despite opposition, lobbying groups for banks persisted in their efforts to secure a complete exemption for venture capital funds from the Volcker Rule. Powell supported this exemption and it was ultimately granted by banking regulators in 2020.

In 2021, SVB successfully obtained approval from the Federal Reserve for its acquisition of Boston Private Bank and Trust for $900 million. The approval was granted based on the fact that the merged bank would not pose a significant risk to the financial system in case of any financial difficulties.

Federal Reserve officials stated that SVB Group's management has the necessary skills and assets to guarantee the smooth and secure operation of the merged organization.

After the economic downturn, SVB declared that they had invested over $2 million towards lobbying initiatives in the federal sphere. Additionally, the bank's political action committee and top officials have contributed almost $650,000 to political campaigns, with the majority of the funds being given to Democrats.

One noteworthy component of this exertion to sway was a gathering held in 2016 to raise funds for Democratic senator Mark Warner from Virginia, coordinated by Greg Becker at his house located in Menlo Park. Following that event and a couple of months later, Warner and three additional senators from the Democratic Party composed a letter to regulators pushing for less strict financial requirements for regional banks.

Warner became one of the members of the Democratic Party in Congress who teamed up with the Republicans to enact the Dodd-Frank rollback bill in 2018. Recently, he was questioned about his decision, and he responded that he believed the bill established reasonable regulations for medium-sized banks. Warner added that these types of banks necessitated some degree of regulatory ease to prosper.

After SVB's downfall, the Republicans did not rescind their support for deregulation. Likewise, majority of the Democrats, who also favored the decision, have not retracted their stance, despite Biden's pledge to tighten regulations.

Warner appeared on ABC's This Week to justify his decision to vote in favor of the deregulatory law. Meanwhile, Senator Jeanne Shaheen, a member of the Democratic Party from New Hampshire, commented on NBC that implementing rules and regulations won't necessarily rectify poor management. On the other hand, Senator Jon Tester, also a Democrat from Montana and a co-author of the 2018 law on deregulation, organized a fundraising event in the Silicon Valley right after news broke out of the SVB bailout.

If the Democrats don't change their decision, the bailout of Silicon Valley Bank might have a negative impact on their political image. They have recently provided financial assistance to wealthy people living on the coast while majority of the population is still struggling with economic difficulties.

Fortunately, Democrats have easy measures that they can implement to initiate the process of solving issues.

One instance is when Senator Elizabeth Warren proposed a bill to abolish the financial deregulation measures that were put in place during the Trump administration.

The Democrats may want to go back to the issues that Dodd-Frank didn't address well enough. This could involve setting higher minimum capital requirements and exploring ideas that discourage unsafe behavior by banks, such as changing the way bankers are compensated. Furthermore, they should call for Powell to withdraw from overseeing the Federal Reserve investigation into recent bank collapses. Additionally, they should examine whether Powell's inadequate record justifies his instant dismissal according to the Federal Reserve Act, which authorizes the president to fire the central bank chairman "for cause."

Despite the chaos caused by the removal of regulations, some attempts to improve bank regulations may not be successful due to opposing views from Republicans and corporate Democrats who previously supported the removal of regulations but have not shown any regret.

Fourteen years following the financial crisis, the words shared by Dick Durbin, the Illinois Democratic Senator, still hold relevance.

In 2009, he expressed his disbelief that the banks were still the dominant lobbying force in Capitol Hill, considering the crisis they had caused. He further stated that they had a significant influence over the government and essentially ran the entire show.

If this statement holds true presently, the likelihood of alteration appears bleak.

The article was also published in the Lever, an autonomous investigative news platform, and its authors are Rebecca Burns and Julia Rock.

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