Do More Bank Failures Equal More Bank Regulations?

Hannah Newman

Associate Editor

Loyola University Chicago School of Law, JD ‘24

The recent closures of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in U.S. history, have sparked intense discussions pertaining to banking regulations and resulted in both statements and ongoing investigations by the Biden administration, members of Congress, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and U.S. Government Accountability Office (GAO).

Are more regulations required to prevent failures?

In 2021, the Federal Reserve informed management of Silicon Valley Bank of the inevitable risks that were a result of their business model. However, the managers failed to prevent the collapse. Therefore, the question becomes whether it is the fault of the managers of the regulations.

As a result, the Federal Reserve is considering whether strong bank rules are necessary in preventing more bank failures. The rules being discussed include stricter regulations, supervisors having tools to follow up on warnings, tougher rules for liquidity, and capital requirements. There is an investigation into whether a 2018 law created under the Trump Administration, which exempted certain size banks from some regulations which were introduced under the 2010 Dodd-Frank Act. The 2018 law exempted banks with assets ranging from $100 billion to $250 billion, which was Silicon Valley’s size, from requirements to maintain sufficient cash for 30 days of withdrawals and subjected those banks to less “stress tests” which attempted to determine how the banks would respond in a sharp recession or a financial meltdown.

Differing opinions

One economist at the Massachusetts Institute of Technology stated that he believed the 2018 regulatory rollback “contributed to a big relaxation of supervision and fed into this lackadaisical attitude around Silicon Valley Bank.” However, a senior research associate at the Yale program on financial stability believed Silicon Valley Bank’s business model “was so flawed that requiring it to hold more liquidity would not have helped it withstand the lightning-fast bank run that toppled it.” These differing opinions reflect the larger scale discourse in response to these bank failures.

For example, on March 23, 2023, the American Bankers Association put out a statement on the White House Call for New Bank Regulations, coming from their President and CEO, Rob Nichols. The statement states that the Association takes “the closures of Silicon Valley Bank and Signature Bank very seriously” and the Association agrees “with the administration and members of Congress on the need to know what happened and why.” However, “with Federal Reserve, FDIC, and GAO reviews ongoing,” the Association states that “it is premature to call for rule changes by independent regulatory agencies before determining the extent to which supervisors failed to make use of their existing regulatory tools and authority. Allowing for a thoughtful and deliberate process will yield better and more lasting results.” House Financial Services Chairman, Patrick T. McHenry, agreeing with the Association, holds the opinion that the administration is politicizing the bank failures and blaming regulations instead of the regulators.

The White House disagrees. On March 30, 2023, the Biden-Harris administration released a statement urging “regulators to reverse Trump administration weakening of common sense safeguards and supervision for large regional banks.” The proposals by the Administration would not require Congressional approval and would be made by independent banking regulators. The President believes that the weakening of common-sense bank safeguards and supervision during the Trump Administration for large regional banks should be reversed in order to strengthen the banking system and protect American jobs and small business.

What should happen now?

In America, it is an age-old debate of more or less government intervention and regulation in the economy. It may become evident with time and further investigation whether more government regulation would have prevented these bank failures, or it may not. Regardless, there are individuals responsible for poor decision making and the mismanagement of money within the banks. However, the mismanagement of funds by bank employees can and should be prevented by individuals within the organizations themselves, instead of the government, through increased compliance mechanisms and dedicated compliance departments. If the negligence and mismanagement of individuals is the main cause of these massive bank failures, the political aspect of these conversations is nothing but a centuries long debate of the government’s role in the country’s finances. The negligence of individuals should not be overlooked and all responsible should be held accountable for their acts or omissions. Regardless of the solution you see fit, it is undeniable something must be done to prevent further failures, as these catastrophes have been felt worldwide.