One year ago, I was sitting in my office at the Treasury Department, where I served as a member of the department’s leadership overseeing our nation’s banking industry when we got word from our colleagues at the banking agencies that a large bank was facing imminent failure. Silicon Valley Bank, commonly known as SVB and headquartered almost 3000 miles from Washington, was little known to those outside the tech industry. Still, its collapse triggered panic throughout the U.S. financial system. SVB failed on a Friday. Another large financial institution, Signature Bank, would fail two days later. Over that weekend, to prevent these failures from spreading into an all-out banking crisis, regulators and the Treasury Department agreed to guarantee all deposits held at the two failed banks—not just those under the standard $250,000 insurance limit—and provide the entire banking system access to emergency funding. Another giant bank, First Republic, was also teetering at the time, and it, too, would fail.
For two months last spring, we experienced the second, third, and fourth largest bank failures by assets in U.S. history. During this period, my Treasury colleagues and I received reports of long lines of depositors, steady withdrawals, and declining stock prices at banks nationwide. Panicked bankers and members of Congress were calling our offices, imploring us to put the full force of the federal government behind the nation’s banking system to ensure that we did not experience a widespread, Great Depression-style bank run that could push our economy into a recession. The immediate crisis was quelled thanks in part to the Treasury Department’s and other regulators’ actions. However, it exposed more profound questions about underlying risks to the financial system.
In the wake of SVB’s failure, President Joe Biden urged the banking regulators to reform the banking system to reduce the risk of crises like the one we had just experienced. Unfortunately, but not surprisingly, the banking industry has opposed the banking agencies’ efforts to respond to the regional panic and improve the regulations that apply to large banks. Having benefited from explicit and implicit protection from the government, Wall Street now wants the public to forget that the regional banking crisis ever happened. But we can’t forget what happened to our financial system and what could have happened to our economy a year ago.
The stability of the U.S. banking system is undergirded by the public’s belief that banks don’t take egregious risks and that regulators hold them accountable. When that trust breaks down because of the precipitous collapses of large regional banks or private-sector opposition to strong reform, our entire financial sector suffers the consequences. If we are not clear-eyed about why these large banks failed and how we got there, then we remain exposed to future panics.
Despite what some industry executives have claimed, the possibility of a regional banking panic was not some freak accident. It was foreseeable. Depositors not covered by federal deposit insurance withdrew their money from SVB out of concern about its solvency, particularly the risk that paper losses on the bank’s securities holdings exceeded its shareholder equity. SVB and the other banks had grown too fast, failed to properly manage the risks from rising interest rates, and taken too many large deposits from the technology and cryptocurrency industries. The depositors’ behavior was rational, given the concerns about the banks’ risk management. Collectively, this loss of confidence created the conditions for a classic bank run, admittedly one that occurred at an unprecedented speed.
However, the failures were also the result of the Donald Trump administration’s weakening of regulations for large banks like the ones that failed. This deregulatory approach was based on a false belief that the failures of banks like these would not have systemic impacts. Last February, I debated a former Trump administration regulator who argued that the failure of large regional banks like SVB, Signature, or First Republic posed little risk to financial stability. Less than a month later, this view was proven to be spectacularly misguided.
Under President Biden, the banking agencies have sought to shake off the regulatory complacency that contributed to the failures of SVB, Signature, and First Republic. The administration has moved ahead with a policy agenda that would reform the banking system to ensure we don’t repeat the SVB episode, including reversing Trump-era deregulation, increasing banks’ capital requirements, and making them easier to liquidate. These reforms would complement longstanding proposals to rein in banks’ exorbitant pay packages, slow the pace of banking industry consolidation, and protect consumers from unfair and deceptive “junk” fees.” But Wall Street is lobbying against these commonsense rules that protect consumers and taxpayers from a repeat of last March.
Wall Street executives and their allies always find convenient excuses for not making the economy more equitable, and secure. In good times, regulated industries will insist there’s no need for more regulations. When the economic cycle turns, they say the financial system is too fragile to withstand rules intended to avoid future downturns and protect our most vulnerable communities. However, as the history of banking crises has repeatedly taught us, strong regulations and consumer protections are vital to ensuring the financial system is a stable foundation for our economy.
The banking system operates on trust; if risks are allowed to develop unchecked over time, that trust can disappear instantly. That is why we can’t let Wall Street, its Congressional allies, and the courts block the necessary reforms that will make the banking system work for the rest of us.