What happened to Silicon Valley Bank (SVB) and Signature Bank, and the subsequent actions taken by regulators and the Federal Reserve, highlight flaws in America’s banking architecture. SVB, a bank with $212bn in assets, failed after taking an unhedged bet on interest rates staying low. Depositors, mainly tech startups, fled, leaving many firms with large sums of money tied up in the bank and facing potential bankruptcy. On March 12th, regulators judged SVB too big to fail and guaranteed all the bank’s deposits, penalizing the whole industry for the recklessness of a single institution. Signature Bank, another mid-sized lender, was shut down on March 12th. The Fed offers support on strikingly generous terms to shore up other banks. A new program is ready to secure loans against long-term Treasuries and mortgage-backed securities. This dramatic expansion of the Fed’s toolkit is a result of policymakers needing more capital buffers and resolution planning in place to prevent improvised bank rescues. Congress and bank regulators watered down resolution planning and liquidity rules in 2018 and 2019, particularly for banks with $100bn-250bn of assets, which left regulators working on the fly when SVB failed.
To prevent such a scenario, regulators must ensure that banks have adequate capital buffers and resolution planning. This means reinstating and strengthening the Dodd-Frank Act’s rules and ensuring they are applied uniformly across banks of all sizes. The Dodd-Frank Act is a US law passed in 2010 to regulate the financial industry more closely and prevent another financial crisis. It created the Consumer Financial Protection Bureau (CFPB) to protect consumers and required banks from holding more money in the reserve to reduce risk. It also prohibits certain risky practices that led to the financial crisis. What do you think Bank should do going forward?
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.