Reviews | Silicon Valley Bank Collapse Makes Everyone Terrible

Financial regulators turned out to be waging the last war

In 2015, Greg Becker, the CEO of Silicon Valley Bank, testified before the Senate Banking Committee arguing that Dodd-Frank financial regulatory rules should be relaxed for banks like his. If they weren’t, Becker warned, Silicon Valley Bank “will likely have to divert significant resources from funding job-creating companies in the innovation economy to comply with heightened prudential standards and ‘other requirements’. If only!

But Becker’s testimony is interesting reading for reasons other than grim irony. It’s an argument about what makes a bank “systemically important” – the art term for a financial institution that cannot be allowed to fail. It’s an argument that has won over the Trump administration, along with nearly every congressional Republican and a slew of congressional Democrats.

In his book “The Money Problem,” Morgan Ricks, a financial regulation expert at Vanderbilt Law School, writes that the problem here runs deep. Systemic risk, he says, “has not yet been satisfactorily defined, let alone operationalized.” Lawmakers had tried, in Dodd-Frank, to define it in terms of assets: $50 billion or more, and you posed systemic risk.

Becker and senior executives at many other midsize banks have argued that this threshold is too low and too simplistic. You couldn’t be a systemic risk, they say, unless you were a major bank attempting exotic financial engineering. “SVB, like our mid-sized bank counterparts, does not pose systemic risks,” Becker said. “We do not engage in market making, securities underwriting or other global investment banking activities. We also do not engage in complex derivative transactions or transactions, offer complicated structured products, or engage in other activities of the type that contributed to the financial crisis.

More simply, the idea here was that we know what a systemic risk bank looks like: it looks like the banks, and various other financial institutions, that caused the crash of 2008. This is a classic case of the last war . But it’s ubiquitous.