Reviews | Silicon Valley Bank has sparked a crisis that demands smart solutions
The events of the past week have proven that supervision, regulation or both of smaller banks need to be improved. Clearly, the risk management functions, on-site supervision and qualifications and role of boards of directors need to be assessed. The $250,000 limit on deposit insurance should be increased, possibly dramatically, to at least $2 million or up to $5 million or even $10 million. This step reflects the reality that depositors cannot be expected to monitor the financial condition of banks as if they were sophisticated investors.
But we have to be realistic. Small banks cannot afford anything close to what big banks have to do, because the latter are able to spread the costs over their huge global operations, including large deposit bases. Calls for increased capital and liquidity, appealing in their simplicity, inevitably follow bank failures, but Silicon Valley Bank had plenty of both. If we impose big bank regulation on small banks, small banks would be forced out of business, in many cases falling into the hands of big banks.
It is clear that regulation based on size is necessary if we want to have a diversified banking system. We are concerned that this need is being ignored.
Excessive regulation is not the only threat to small banks. With relatively high interest rates, banks not only face the market risk that helped bring down Silicon Valley Bank; they also face fierce competition for deposits, especially from short-term US Treasuries. For anyone living in a high-tax state, the after-tax yield from a Treasury security is likely to be higher than a bank deposit. Treasury securities issuance for January and February is already up 13.4% from those months in 2022, or $3.4 trillion. Since deposits are a critical source of funding for bank lending, if businesses and consumers switch from bank deposits to Treasury securities in search of greater security and higher yields, banks will not be able to lend as much. This will hurt significant parts of our economy.
Whatever action the government takes in the wake of the Silicon Valley Bank collapse, it must preserve the role of our diverse system, recognizing this truth: there are no ratios or tests that can replace the need for risk management and regulatory oversight. Additionally, regulators must always be prepared to intervene in the event of panic selling or other destabilizing behavior. That’s why we’ve had banking supervisors and FDIC insurance for 90 years.
Adopting new, tailored regulations that make small banks safer and help protect all voters makes sense, but they must be designed in a way that does not lead to increased banking concentration or a reduction in available credit. Either outcome would hurt economic growth and consumer welfare.
Jay Clayton served as Chairman of the Securities and Exchange Commission from 2017 to 2020. Gary D. Cohn served as Director of the National Economic Council from 2017 to 2018.
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