What Congress Should Ask Regulators in SVB’s Aftermath

What Congress Should Ask Regulators in SVB’s Aftermath

By Randal K. Quarles

Congress will hold hearings this week on lessons from the failure of Silicon Valley Bank. Some lawmakers are calling for the financial stampede that brought down SVB to be followed by a political stampede of new, restrictive laws and regulations. That would be a mistake. We can learn much from this episode, but not if we move heedlessly in reaction to the loudest, most partisan voices.

First, note what the crisis doesn’t teach. Several politicians have called for rolling back the carefully calibrated regulatory changes stemming from the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018—a banking-reform law enacted by strong bipartisan majorities. As Wolfgang Pauli once said of a fellow physicist’s hypothesis, that’s so nonsensical, it isn’t even wrong.

SVB’s failure wasn’t related to regulatory changes. Rather, it was a “textbook case of mismanagement,” as Michael Barr, the Federal Reserve’s Vice Chairman for Supervision, said Monday. The bank failed as the public began to focus on changes in the value of securities in the bank’s “held to maturity” account. The 2018 law didn’t change the capital treatment of such securities. SVB didn’t have a capital shortage—it remained solvent. Instead, it succumbed to a bank run. Thus the focus of any critique should be on liquidity, not capital.

But even applying to SVB the full-strength liquidity rules governing our largest banks wouldn’t have changed its fate. Those rules, first established in 2014 as mandated by Dodd-Frank, impose the toughest restrictions on banks with large amounts of short-term wholesale funding and treat banks funded with deposits from their customers—even uninsured deposits—as being reasonably resistant to runs. That treatment was crafted by the Obama-era regulators and hasn’t been amended.

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