The warning signs were all there. Silicon Valley Bank was expanding at a breakneck pace and pursuing wildly risky investments in the bond market. The vast majority of its deposits were uninsured by the federal government, leaving its customers exposed to a crisis.
None of this was a secret. Yet bank supervisors at the Federal Reserve Bank of San Francisco and the state of California did nothing as the bank rolled over the cliff.
“Their duty is to make sure that the bank is being run in a safe and sound manner and is not a threat,’’ said Dennis Kelleher, president of Better Markets, a nonprofit that advocates tougher financial regulations. “The great mystery here is why the supervision was AWOL at Silicon Valley Bank.’’
The search for causes and culprits — and solutions — is refocusing attention on a 2018 federal law that rolled back tough bank regulations put in place after the 2008-2009 financial crisis and, perhaps even more, on the way regulators wrote the rules that put that law in place.
The Silicon Valley Bank collapse — the second-biggest bank failure in U.S. history — is also raising difficult questions about whether the FDIC needs to offer more protection for deposits.
On Friday, regulators shuttered and seized the bank, based in Santa Clara, California. For months it had made a losing bet that interest rates would stay low. They rose instead — as the Federal Reserve repeatedly raised its benchmark rate to fight inflation — and the bank’s bond portfolio plunged in value. As its troubles became public, worried depositors started to withdraw their money in an old-fashioned bank run.
And over the weekend the federal government, determined to restore public confidence in the banking system, decided to protect all the bank’s deposits, even those that exceeded the FDIC’s $250,000 limit.
The demise of Silicon Valley Bank Friday and of New York-based Signature Bank two days later has revived bad memories of the financial crisis that plunged the United States into the Great Recession of 2007-2009.
In the wake of that cataclysm, set off by reckless lending in the U.S. housing market, Congress passed the so-called Dodd-Frank law in 2010, tightening financial regulation. Dodd-Frank focused especially on “systemically important’’ institutions with assets of $50 billion or more — so big and interconnected with other banks that their collapse could bring the whole system down.
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