Tag:Federal Reserve
Do More Bank Failures Equal More Bank Regulations?
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).
Growing Banking Crisis: Silicon Valley Bank Failure
Founded in 1983, Silicon Valley Bank (SVB) is a midsize California-based lender that shook the foundation of the entire global financial system. Regulators closed SVB on March 10, making it the largest bank failure since the 2008 financial crisis and the second largest in U.S. history. While SVB offered various services from standard checking accounts to loans, it was primarily home to venture capitalists in the tech industry. Therefore, the majority of the corporate deposits were larger than the Federal Deposit Insurance Corporation’s (FDIC) $250,000 insurance limit, leaving over $150 billion in uninsured deposits at the end of 2022. The sudden collapse caused a frenzy leaving companies and investors vulnerable having already experienced mass layoffs in the tech industry.
The Role of Regulators During the Collapse of Silicon Valley Bank
On March 10th, 2023, Silicon Valley Bank (SVB) collapsed practically overnight, followed only two days later by the collapse of Signature Bank. Prior to its collapse, SVB uniquely served a single category of customers – start-ups. As the largest bank failure since the 2008 financial crisis, SVB’s bankruptcy resulted in significant consequences for the tech industry. While SVB has since been acquired by First Citizens BancShares, the House Financial Services Committee is currently seeking answers from both regulators and SVB executives about how such a failure could have occurred and how to prevent it from happening again.
Preventing the Engine of Doom: A Lesson on Financial Crisis
The Great Financial Crisis of 2008 was a story of greed. In markets where incentives lead to bad behavior, disparately affecting a great deal of society, we rely on regulatory oversight. A domino effect of decisions spanning decades resulted in a global economic disaster, but it could have been prevented with effective regulators.
New Senate Dealings Prepare to Ease Banking Regulations Under the Dodd-Frank Act
New discussions in the U.S. Senate indicate a likely repeal of 2010’s controversial Dodd-Frank Act. Designed in response to the 2008 economic crisis, the Dodd-Frank Act implemented regulations on banks and lending agencies to provide greater financial stability and consumer protection. The fundamental purpose of Dodd-Frank was to increase oversight and transparency among financial institutions. However, the Dodd-Frank Act has been the target of much criticism, most notably that its imposed regulations stifle the growth of smaller institutions. As of March 2018, Senate discussions indicate an intent to lay the foundations to remove this regulation.
Unprecedented Federal Reserve Decision Foreshadows New Compliance Expectations for U.S. Banks
Following the 2016 Wells Fargo scandal in which the bank opened millions of unauthorized bank and credit card accounts to collect fees, federal regulators have worked to address and respond to the corporation’s illegal conduct. On February 2nd, 2018, the U.S. Federal Reserve imposed unprecedented restrictions against Wells Fargo & Co. when it capped the bank’s growth for 2018 such that it could not exceed the total assets owned at the end of 2017. This restriction marks a substantial departure from previous penalties issued for improper compliance. Changes in policies and procedures and this novel punishment reflect a notable shift in the national bank’s expectations of corporate directors.
Trump Administration Deregulates Financial Services
The Trump administration is delivering on its promise to deregulate America. Since taking office, numerous regulations spanning everything from energy to health care have been repealed or weakened. The financial services industry is not immune to the deregulation movement. The Trump administration is acting through appointments, executive agencies, and legislation to deregulate the financial services industry. Proponents of deregulation claim the movement is needed after Dodd-Frank and strict post-financial crisis regulation. However, in deregulating financial services, the Trump Administration—and compliance professionals—should proceed cautiously.