Has the dilution of regulatory norms initiated by the US regime contributed to the recent collapse of 3 regional banks in the US? Appears so:
The sudden collapse of 2 regional banks in the U.S., California-based Silicon Valley Bank, and New York’s Signature Bank, is defined as a major failure of the banking system in country since 2008, when Washington Mutual, which had assets of more than $300 billion at that time, crumbled and created havoc. The current failures are majorly attributed to heavy losses on the banks’ bond portfolios and a massive run on the deposits. While experts do not believe these failures to affect the banking sector in a major manner in the coming days, U.S. regulators nevertheless have taken swift measures to strengthen market confidence and prevent more bank runs. Additional liquidity has been provided in exchange for eligible assets. The Federal Reserve, the Federal Deposit Insurance Corporation (FIDC) and the Treasury Department have together committed to ensuring that all depositors in the 2 banks would regain access to their funds and losses if any suffered by the deposit insurance fund will be recovered through a special levy on other banks, and not levy of taxes.
In an unrelated development prior to the collapse of these institutions, Californian bank Silvergate came out with a public announcement about its failure and its intention to wind up. It said its dependence on the cryptocurrency industry is the major cause for the failure. In a public notice the bank also said it will wind down operations and voluntarily liquidate itself in an orderly manner and in accordance with applicable regulatory processes. Earlier, Silvergate shares tumbled nearly 44%.
The bank said it will want to return deposits to customers, but many observers feel this is unlikely in the immediate future.
Silicon Valley Bank had huge exposure to risky technology startups and had an unusually large portfolio of bonds. This made the bank highly vulnerable to interest rate hikes. Likewise, Signature Bank was involved in the cryptocurrency sector, which is facing uncertain future now.
Alongside, there were 2 other bank mishaps too. San Francisco-based First Republic Bank encountered severe fund constraints and its stocks fell as much as 50% before it was propped up by 11 large US banks by rushing in some $30 billion in funds. And global banking major Credit Suisse was on the verge of close down but fortunately the Swiss central bank made some swift manoeuvres to ensure that rival UBS acquired it.
COST TO REGULATORS
What has been the cost that regulators in the US and Switzerland incurred to avoid this catastrophe? It is an estimated $400 billion in direct support. The US Federal Reserve put in $140 billion to guarantee the deposits at Silicon Valley Bank and Signature Bank. The Swiss National Bank had to provide $54 billion to Credit Suisse as direct credit and about $225 billion by way of loans to UBS for the takeover. The incidents also caused panic among other banks, which borrowed nearly $153 billion from the Fed to ensure a sound liquidity.
Meanwhile, the FDIC had undertaken an exercise to find buyers for Silicon Valley Bank and Signature Bank. It has now been finalized that First Citizens Bank and Trust Company would buy Silicon Valley Bank and New York Community Bancorp’s Flagstar Bank will acquire Signature Bank. FDIC has gone on record stating some 550 banks in the US have collapsed since 2001.
REGULATORY FAILURE?
Many banking experts believe the failure of Silicon Valley Bank and Signature Bank could have been prevented had there been better regulation and supervision by the Federal Reserve. They point out that the Trump regime’s roll-back of the Dodd-Frank regulations is the main reason for many banks getting weaker.
The Dodd-Frank regulations, enacted as a response to the 2008 financial crisis, stipulated that all banks over $50 billion in assets would be subject to enhanced prudential standards. The Trump administration changed this mandate and said banks having assets between $50 billion and $100 billion need not be subjected to this regulation and it is optional for those banks between $100 billion and $250 billion. Both the failed banks were in the category of between $50 billion and $250 billion, and were not subject to any real scrutiny.
DODD-FRANK ACT WATERED DOWN
The Dodd-Frank Wall Street Reform and Consumer Protection Act sought to make the U.S. financial system safer for customers and taxpayers. Named after its sponsors – Sen. Christopher J. Dodd (Democratic) and Rep. Barney Frank (Democratic) the 848-page act has several provisions that were to be implemented over a period of time. The law was opposed by some, who argued that the regulatory burdens resulting from the implementation, imposed constraints on the system that could make banks and financial institutions less competitive than foreign entities.
President Trump moved a legislation in 2018 rolling back some of the restrictions brought by Dodd-Frank Act. Surprisingly, the changes sought by the Trump Administration had an unlikely supporter – Barney Frank, who had co-authored the Act. Ever since his retirement in 2013, he had been supporting the call for softening one of the provisions in the law – that any bank with more than $50 billion in assets should be under strict federal oversight. And more surprisingly, he was on the board of the now fallen Signature Bank.
Frank had argued that the legislation he had co-authored had its goal of focusing on the country’s very largest banks and not subject smaller institutions to stringent rules or oversight. However, experts argue if the $50 billion threshold had remained in place, Signature Bank would have either needed to stop expanding or been subject to the Federal Reserve’s stress tests and other requirements.
MAY BE THE CAUSE!
Many experts point out that if the law in its original format was prevailing, banks like Silicon Valley Bank would have been made to undergo more stress tests and compelled to take pre-emptive steps to maintain enough liquidity. The tweak sought by Trump Administration ensured that many very large banks came out of the annual stress tests of the Federal Reserve and were subject to easier risk management norms.
It is, however, a major sigh of relief that the major provisions of the regulatory infrastructure that was brought in place post the 2008 meltdown are still in place and the banking industry is very much on a sound financial footing than it was in 2008.
IMPACTS OF THE COLLAPSE
Silicon Valley Bank was a major lender in the world for technology startups. Its collapse impacted its parent company and other regional banks, including Signature Bank, and midsize banks like Pacific Western. It is also expected to impact many industries, and the country as a whole expecting similar failures in the immediate future.
The failures of the 2 banks have also raised questions about the prospects of banks servicing tech enterprises.
Meanwhile, details have come to the fore showing that the estimated level of unrealized losses on bank balance sheets and borrowing by banks at the Federal Reserve’s discount window and from the Federal Home Loan Banks indicate a scenario where many regional and smaller institutions are in need of financial assistance.
CENTRAL BANKS STEP IN
Some of the leading central banks have since announced plans to increase dollar liquidity through international swap line agreements. Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank have together initiated a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.
Post the fast-paced developments, central banks and banking regulators across the world have promptly stepped-up liquidity support for financial institutions and taken measures to ensure bank resolutions are conducted in a way that preserves the stability of the financial system. Regulators across the world appear to have taken the lessons from the events in a serious manner and realized that investor and depositor confidence needs to be reinforced, particularly for banks with known vulnerabilities or those having more exposures to risks like those that have been catering to the cryptocurrency firms.
This article has been compiled based on publicly available information on the web, particularly the bank’s own website.
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