By Andrew Moran
In the immediate fallout of the collapse of Silicon Valley Bank (SVB) and Signature Bank, President Joe Biden and several Democrats blamed former president Donald Trump’s deregulatory efforts in 2018.
During Biden’s prepared address from the White House on Monday, he asserted that the previous administration rolled back several banking requirements aimed to prevent a financial crisis comparable to what occurred in 2008.
“During the Obama–Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank, including the Dodd-Frank Law, to make sure the crisis we saw in 2008 would not happen again,” Biden said. “Unfortunately, the last administration rolled back some of these requirements.”
Writing in a New York Times op-ed on Monday, Sen. Elizabeth Warren (D-Mass.) urged the White House and banking regulators to “reverse the dangerous bank deregulation of the Trump era,” adding that repealing the 2018 bill “must be an immediate priority for Congress.
“Had Congress and the Federal Reserve not rolled back the stricter oversight, SVB. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks,” Warren wrote.
According to Sen. Bernie Sanders (I-Vt.), the SVB failure was caused by deregulation, citing a Congressional Budget Office (CBO) warning that the legislative pursuit would bolster the odds of a large bank with assets between $100 billion and $250 billion failing.
Did Trump Cause the Crisis?
In 2018, Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, effectively curtailing some components of the 2010 Dodd-Frank bill. The legislative pursuit aimed to ease restrictions on small- and medium-sized banks. By raising the threshold of being considered too critical to the financial system to fail from $50 billion to $250 billion, these banks would not be forced to go through stress tests.
It received the support of 33 House and 17 Senate Democrats, but many opponents warned that it would lead to heightened liability for taxpayers if the financial system came under pressure.
But Thomas Hogan, the former chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs, does not think these are legitimate criticisms.
“In fact, I would say the opposite that it’s almost certainly true that the banks are more regulated, and that makes it more difficult for them to work,” he told The Epoch Times.
He cited his study that was published in the Journal of Regulatory Economics, explaining that the landmark Dodd-Frank bill bolstered average annual payments by exorbitant amounts that made it costlier for banks to function and “therefore more likely to fail” since they took on more risk.
A key reason for the current problem is the mark-to-market regulations that identify the so-called fair value of a fluctuating asset or liability based on the current market price.
“If banks are planning to hold these securities, then they’re really not actually in any danger of failing,” Hogan said. “But the regulation makes them look like they are at risk, which is what originally caused these threats.”
According to Laurence Kotlikoff, an author and professor of economics at Boston University, the Dodd-Frank stress tests “are a bad joke.”
“SVB surely passed its latest stress test. But large, uninsured depositors don’t care that its bank has a, say, 10 percent capital ratio (which is ridiculously low, but somehow viewed as roughly adequate),” he recently wrote. “They will realize, after today, that banks that pass the Dodd-Frank stress test can instantly collapse.”
In addition, the challenges facing risky banks are the result of the rising-rate climate, experts say. Silicon Valley Bank had engaged in venture capital investments. The bank had tried to offset these risks by investing in low-risk assets, like long-term bonds. However, as the Federal Reserve raised interest rates to fight inflation, the tightening measures also eroded the value of bonds.
In October 2022, Treasury Secretary Janet Yellen expressed concerns about a “loss of adequate liquidity” in the financial system.
Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, stated that government banking regulations facilitated these companies to purchase long-term Treasurys and mortgage-backed securities.
“The government blames #SVB’s failure on management’s foolish decision to load up on long-term U.S. Treasurys and MBS [mortgage-backed securities]. But government banking regulations encouraged those purchases with favorable accounting terms; no haircuts or mark-to-market, despite high interest rate risk,” he tweeted on Monday. “All the #banks that were dumb enough to buy long-term Treasurys and MBS when yields were at all-time record lows have now been bailed out by the #Fed. What about pension funds, insurance companies, and private investors who made the same mistake. Why don’t they get bailed out?”
The shrinking money supply has also weighed on the banking system, says Steve Hanke, the professor of applied economics at John Hopkins University and senior fellow at the Independent Institute.
“As I predicted, the Fed’s contraction of the money supply has created a banking bloodbath,” he tweeted.
Data from the Federal Reserve revealed that the M2 money supply contracted for the second consecutive month in January, falling nearly 1.73 percent. In December, it fell for the first time on record by more than 1 percent. But it has been on a steady decline since reaching a peak in February 2021.