One Year after Silicon Valley Bank’s Collapse, Not Much Has Changed

March 10, 2024, marked the one-year anniversary of the collapse of Silicon Valley Bank (SVB), which set off a period of prolonged disquiet in the US financial system—one that, before it was over, saw the collapses of two more large financial institutions, Signature Bank and First Republic Bank (FRB). These three bank failures became the second, third, and fourth largest by assets in US history. The failures themselves and the panic they induced exposed vulnerabilities in—or at the very least, cast doubt on—the regulatory requirements, government oversight standards, and depositor protections in place to insulate individual bank customers and ensure the stability of the US financial system.

But in the year since SVB, while experts, agencies, and advocates have offered their own diagnoses of what went wrong and how we can bolster our financial system, very little policy has changed. To the extent that the bank crisis last spring revealed deep problems in our banking sector, those problems, for the most part, remain.

Rollbacks Have Made It Harder for Regulators to See Warning Signs

After the 2007–2008 financial crisis that triggered the Great Recession, Congress increased regulations and oversight of most banks in an attempt to prevent such turmoil from occurring again. The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, the biggest legislative vehicle for these reforms, subjected banks with more than $50 billion in assets to bank- and regulator-run stress tests, under the assumption that banks of that size pose some risk to the system as a whole and therefore should be subject to higher standards. Dodd-Frank also enhanced capital and liquidity rules and required resolution plans (so-called “living wills”) from bank holding companies and certain subsidiaries. These provisions made the financial sector more secure—until they were rolled back during the Trump administration.

As Roosevelt Fellow Todd Phillips wrote for Roosevelt last year,

[A]s the scars from 2008 faded, the banking industry began chafing at the tight regulations imposed on midsize and regional banks, which would be considered systemically important anywhere else. Bank lobbying groups called for “regulatory relief” for community banks and “tailored” regulations, such that smaller firms would be less tightly regulated than their larger, national bank peers—ignoring that the rules were already tailored. As a result of this lobbying, Congress enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155) in 2018.

S.2155 rolled back several of Dodd-Frank’s provisions, including by raising the threshold for enhanced regulations from $50 billion to $250 billion (though it allowed the Federal Reserve to reimpose regulations for institutions between $100 billion and $250 billion if it chose to). At the time of their collapses, SVB, Signature, and FRB all had more than $100 billion but less than $250 billion in assets. While S. 2155 alone didn’t cause any of the banks to fail, it likely prevented them from “failing well,” or in a more orderly way that wouldn’t have induced such widespread public panic.

Moreover, if Dodd-Frank signaled to large banks that strict standards would be imposed and enforced, S. 2155 signaled a stand-down order that helped create an environment at the regulatory agencies not conducive to urgency or action. As the vice chair for supervision at the Federal Reserve, Michael Barr, stated in his report on 2023’s bank failures, a “shift in culture and expectations” caused delays and, on occasion, led Fed staff not to take action. Vice Chair Barr has committed to reversing the culture changes that weakened enforcement, but bank regulatory reforms are still pending. The Fed has been working on a new bank regulatory framework for the last several years: Basel III Endgame. Once implemented, Basel III Endgame would enhance, among other things, capital requirements and liquidity standards for banks. The banking industry is waging an all-out war against implementation of stricter standards—with some worrying signs that coordinated industry opposition might be working.

Federal Deposit Insurance (FDI) Might No Longer Be Maximally Effective

Federal deposit insurance, first implemented in the US following the banking crisis of 1933, has been a linchpin to US financial stability and a godsend to otherwise-anxious depositors since the Great Depression. But it’s a system that largely operates in the background. In fact, that is one of its key features. The existence of FDI—and the Federal Deposit Insurance Corporation (FDIC) that administers it—offers eligible bank customers peace of mind so that they are not inclined to withdraw their deposits en masse. It thus acts as a stabilizing force to the banking system as a whole. Most of the time, this intangible government guarantee is sufficient to keep banking stable. However, last spring showed us that depositors, especially those over the $250,000 FDI limit, can still panic. And, when they do, it can threaten the entire US banking system.

Following SVB’s collapse, various experts and academics offered proposals to reform FDI to maximize its ability to meet its dual objectives of ensuring financial stability and protecting depositors.Though these recommendations—synthesized in a Roosevelt Institute brief last summer—span from nonintervention to differential account treatment to permanent universal and unlimited coverage, each aims to maximize financial stability and depositor protection. For a while last summer, it seemed like Congress was preparing to reform FDI in some way (though there was no consensus around a particular proposal). Since then, however, potential progress has stalled. While the vast majority of depositors remain fully insured under FDI’s current terms, SVB left us with questions about FDI’s continuing ability to safeguard the US financial system and protect all depositors.

“Too Big to Fail” Banks Benefit from Crises and a Relative Lack of Industry Competition

Bank industry consolidation is a problem that predates (and now postdates) the failures of SVB, Signature, and FRB. The bank industry has consolidated dramatically over the last several decades. In 1990, there were over 12,000 commercial banks in the US. In 2022, there were 4,000. Control of assets has also consolidated amongst the largest banks: The six biggest banks—JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—hold more assets than all other banks combined. This reduces competition and results in fewer choices, higher fines and fees, and lower interest rates for customers.

But what last spring’s crisis demonstrated is that depositors might sense additional personal security in banking at an institution seen as “too big to fail” (TBTF). These megabanks offer their customers much of the same explicit protections as any other traditional FDIC-insured financial institution. But, they enjoy at least one thing that smaller banks can’t necessarily count on: implicit universal backing from the federal government. TBTF banks, necessarily some of the largest banks in the US, are seen as posing great systemic risk to the US financial system, and thus customers may feel confident that the government would intervene in the instance of failure. (This implicit backstop is one of the reasons why some advocates argue for raising the FDI limit or doing away with it entirely). Big banks experienced deposit inflows immediately following SVB, suggesting that at least some customers perceived them as a safe home base. When deposits flow to TBTF banks, it reduces competition for the small and community banks on which many communities and small businesses rely. In turn, this can exacerbate larger bank industry consolidation trends.

Though the US financial system has largely stabilized and depositor panic has quieted since the failures of SVB, Signature, and FRB, we shouldn’t simply move on from a crisis as scary, unexpected, and costly as what we saw last spring. Though it inspired some initial reflection, more than a year on, actual structural change has been slow to come. Instead of serving as a springboard to larger reforms to make our financial system safer and more secure for the people and businesses that rely on it, SVB, Signature, and FRB are in danger of being forgotten as a blip instead of heeded as a warning sign.