How Trump’s Deregulation Sowed the Seeds for Silicon Valley’s Bank Collapse

Anyone who doubted how damaging the Trump regime has been should analyze the damage unfolding with those trampled by the collapse of Silicon Valley Bank. On May 24, 2018, Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Act”). This was a regional and community regulatory relief bill, which banking lobbyists and many politicians had fought hard for.

The argument at the time was that many of the provisions of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) were “one size fits all.” Despite the evidence, those pushing for the EGRRCPA argued that the capital, liquidity, and stress requirements for regional and community banks would be harmful to the economy. In a number of Forbes columns, I argued that Trump’s loosening of banking regulations would be the seed for the next financial crisis.

Thanks to Trump and his supporters everything has changed. Some of the key changes made by the EGRRCPA were:

· Increasing the asset limit for “systemically important financial institutions,” or “SIFIs,” from $50 billion to $250 billion.

· Immediate exemption of bank holding companies with less than $100 billion in assets from enhanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including, but not limited to, resolution planning and enhanced liquidity and risk management requirements) .

· 18-month exemption of bank holding companies with assets between $100 billion and $250 billion from enhanced prudential standards.

· Limiting Fed stress testing to banks and bank holding companies with assets of $100 billion or more.

Under Title I of Dodd-Frank, any US bank with an asset size of $50 billion or more could qualify as a domestic systemically important bank (D-SIB). This would then allow national bank regulators such as the Federal Reserve to impose what are called enhanced prudential standards. These include rules about:

· capital, the purpose of which is to preserve unexpected losses,

· liquidity, including the calculation of the liquidity coverage ratio (LCR) and liquidity stress tests, and

· bank resolution plans, referred to as living wills.

Many of the results of these supervisory exercises, as well as capital and liquidity ratios, are made public. This type of financial and risk transparency is critical for investors, lenders, depositors, rating agencies and many market participants.

Systemically important bank (SIB)

Simply by changing the size of EGRRCPA’s assets, banks like Silicon Valley Bank were no longer designated as systemically important. Only those $250 billion or greater will now receive the systemically important designation. EGRRCPA Su ignored the fact that while a failed or failed bank may not destabilize the entire national banking system, it certainly can destabilize a region. Just ask California how things are going now with SVB
chaos caused by management.

As early as 2015, CEO Greg Becker pushed for lighter regulations. He argued that his bank was not a large bank since it had assets under $40 billion. In the statement he submitted to the Senate Banking Committee, he said that “since the enactment of the Dodd-Frank Act, we have made significant investments in our risk systems, hired additional highly skilled risk professionals and created a stand-alone, independent Risk Committee of our Board of Directors ». Becker’s statement did not age well. From that year to last week, SVB was up 430%. It had $212 billion in assets on Friday, March 10, 2023, the day the California Department of Financial Protection and Innovation shut it down and appointed the Federal Deposit Insurance Corporation as receiver for the failed bank.

Dodd-Frank liquidity requirements

Because Trump’s EGRRCPA eliminated important elements of Dodd-Frank’s Title I, Silicon Valley Bank and other banks of this asset size are not required to calculate and report their liquidity coverage ratio, net stable funding ratio or conduct comprehensive assessments liquidity. Capital and liquidity are not the same thing. High quality capital consists of common equity and retained earnings. they help you absorb unexpected losses. Liquidity is having enough assets that you can deploy when you urgently need to meet obligations under pressure. It is clear that when SVB had to cover runaway deposits which are a significant part of a bank’s liability, it did not have liquid assets to cover them.

The purpose of the Liquidity Coverage Ratio (LCR) is for banks to aggregate all of their high-quality liquid assets, such as cash, US Treasuries, AAA investment grade fixed income securities and other cash equivalents. This amount is then divided by net cash outflows under stress. This is where banks have to calculate all the “what if” scenarios. This part of the LCR requires banks to simulate what happens when large deposits or a significant number of deposits escape. The LCR also asks banks to calculate what happens to them when large claims do not come in, or how a bank is affected when its largest counterparties fail. The dive of the numerator with the denominator shows you whether a bank is sufficiently liquid in times of stress. If the result is 100 or preferably much higher, the banks should be able to meet their obligations for at least one month even in extreme obligations.

In his statement to the Senate in 2015, Becker stated that “we conducted a series of different stress tests designed to measure and predict the risks associated with our business under different economic scenarios. As a result of these measures, we believe we are effectively managing our business risks and reasonably planning for potential adverse future business scenarios.” Since at the time SVB was under $50 billion and therefore not a systemically important bank, it is not clear whether the stress tests SVB conducted were capital or liquidity related. This is why requiring banks, especially those over $50 billion, to calculate their LCR report is so important. This gives market participants a view of a bank’s liquidity in a simulated stress environment. We never had this information about SVB.

Silicon Valley Bank was also not required to calculate or report its net fixed funding ratio (NSFR). Knowing a bank’s NSFR is important because it tells us what a bank is doing to rely on stable sources of funding. If Silicon Valley Bank had been required to calculate and disclose the NSFR, market participants would have had more details about all of its funding sources, such as the size, type and concentration of deposits. The NSFR makes banks look 12 months ahead to see what assets are there to cover all liabilities.

Another important enhanced prudential standard that Trump’s EGRRCPA rejected is the Comprehensive Liquidity Assessment Review (CLAR). The purpose of CLAR is for banks to conduct serious stress tests of their liquidity. Banks focus on how resilient they are in both normal and stressed conditions. While banks are not required to disclose the results to the public, the information is carefully analyzed by Federal Reserve analysts to determine a bank’s liquidity.

History matters

It makes me very sad that people are ignoring the story. Every couple of years lenders and dealers tell me that “this time, it will be different”. The style of the film may be different, but the ending is always the same. Whenever banking regulations are removed or relaxed, banks take on more risk, reduce detection and risk metrics. Then they explode. Pundits point the finger, especially at bank regulators, for being asked to do their jobs with one hand tied behind their backs. And much worse, the ordinary, unsuspecting citizen who doesn’t even work in a bank will lose her job. I sure hope that the Republicans and Democrats who happily sided with Trump in repealing sensible regulations will now pay the groceries and housing costs of all those people who will lose their jobs due to SVB’s mismanagement and greed.

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