Banks Face Stricter Rules After SVB's Collapse

Silicon Valley Bank’s collapse has raised questions about how large and regional banks are overseen. That concern galvanizes a regulatory review that could result in stricter rules for banks not large enough to be considered globally systemic.

The call for stricter rules echoes the aftermath of 2008 when risky bets by big financial firms plunged the U.S. into a deep recession, exposing bank oversight. 

The crisis led to the 2010  Dodd-Frank, a comprehensive set of financial regulatory reforms aimed at promoting financial stability, preventing another financial crisis, and protecting consumers. It includes provisions that address a range of issues, including:

• Systemic risk: Dodd-Frank aims to reduce the risk of another financial crisis by requiring large financial institutions to hold more capital, limiting their ability to take on excessive risk, and subjecting them to enhanced regulatory oversight.
• Consumer protection: The law establishes a new agency, the Consumer Financial Protection Bureau (CFPB), with the goal of protecting consumers from abusive financial practices and promoting transparency in financial transactions.
• Derivatives: Dodd-Frank contains provisions aimed at increasing transparency and oversight of the derivatives market, which played a significant role in the 2008 financial crisis.
• Investor protection: The law includes provisions aimed at protecting investors, such as requiring brokers to act in the best interests of their clients and requiring companies to disclose the ratio of CEO pay to median worker pay.

Randal K. Quarles, former Fed Reserve vice chairman for supervision (2017 to 2021), created a bipartisan law easing some regulations for small and medium banks. Such changes could have led to the banking system's problems.

Take Silicon Valley Bank, which overgrew, taking on many depositors from tech. A large share of the bank’s deposits was uninsured, with customers more likely to run for the exit in a moment of trouble. 

Silicon Valley Bank didn’t protect against risks posed by rising interest rates. Which resulted in the recent bank run. Under post-crisis rules, Silicon Valley Bank would’ve faced a full Federal Reserve stress test earlier.

Going forward, the Federal Reserve will scrutinize banks’ cushions against losses and their ability to quickly convert assets into cash to pay back depositors.

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