In 2018, Congress passed bipartisan legislation signed into law by President Donald Trump weakening regulations on mid-sized financial institutions like Silicon Valley Bank, whose collapse last week set off fears of another 2008-like financial crisis.
The measure was supported by 33 House Democrats and 17 Democratic senators, delivering Trump and the banking industry a key bipartisan victory.
But lawmakers had been explicitly told that the bill increased the risk of a financial crisis because it relaxed rules designed to strengthen banks in case of an unexpected shock — like the run on deposits last week that resulted in Silicon Valley Bank’s failure.
The Congressional Budget Office, in its estimate of how much the legislation might cost the government, said the bill would slightly increase the risk that a mid-sized regional institution would fail, potentially exposing the government to much higher costs.
The legislation would exclude some bank assets from stricter regulation, the CBO explained to lawmakers, so passing it “would thus increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.” Silicon Valley Bank said it had $212 billion in assets at the close of 2022.
The 2018 legislation rolled back parts of the Dodd-Frank Act, which Congress passed in the wake of the 2008 financial crisis, imposing stiffer regulations on banks with more than $50 billion in assets. The rules were designed to prevent the government from having to do another massive bank bailout like the one lawmakers approved in 2008.
The 2018 bill raised the threshold for stricter regulation, from banks with $50 billion in assets to $250 billion in assets, but allowed regulators to maintain heightened scrutiny of banks with more than $100 billion.
Proponents of the change argued that it would benefit rural and community banks, which primarily lend to main street businesses (it also benefitted larger banks). A handful of vulnerable Senate Democrats who backed the bill ended up losing their reelection bids later that year anyway.
Critics warned at the time that Congress would be inviting another banking crisis if it passed. Some, like Sen. Elizabeth Warren (D-Mass.), even took the extraordinary step of calling out Democratic colleagues who supported the measure.
“I wish I’d been wrong,” Warren wrote in an op-ed published by The New York Times on Monday. “These bank failures were entirely avoidable if Congress and the Fed had done their jobs and kept strong banking regulations in place since 2018.”
Todd Phillips, a former attorney with the Federal Deposit Insurance Corp. — the bank regulator that seized Silicon Valley Bank’s assets over the weekend — said it’s still unclear how the 2018 law may have contributed to the bank’s demise.
“In my mind, however, there was just such a clear vibe shift in 2018 that gave bank regulators permission to take their eyes off of some of these regional banks,” Phillips told HuffPost.
Sen. Mark Warner (D-Va.), who helped author the 2018 bank deregulation legislation, defended his work during an interview over the weekend.
“I do think these mid-sized banks needed some regulatory relief,” Warner said when asked on ABC’s “This Week” if he regretted voting for the 2018 rollback. “I think it put in place an appropriate level of regulation on midsized banks.”
Warner, a wealthy former venture capitalist and senior member of the Senate Banking Committee, suggested that a mix of mismanagement, high interest rates, and an “unprecedented” run on deposits contributed to Silicon Valley Bank’s downfall.
Warren, however, argued in her op-ed that the kind of mismanagement that took down Silicon Valley Bank wouldn’t have been possible with tougher federal supervision. She called for repealing the 2018 law and reimposing Dodd-Frank capital requirements.
Warren’s fierce criticism of the proposal in 2018 prompted some major intraparty feuding. Red-state Democrats like Sen. Heidi Heitkamp (N.D.) hoped the bill would boost their reelection prospects; in Heitkamp’s case, it wasn’t enough.
It wasn’t just the Congressional Budget Office that warned lawmakers about bank deregulation. Former Federal Reserve Chair Paul Volcker said that while it might have been wise to reconsider Dodd-Frank’s $50 billion threshold for tougher prudential standards, $250 billion was too high.
“It would have the effect of substantially reducing the regulation of 25 of the 38 largest banks to which these standards now apply,” Volcker wrote in a 2018 letter to Sen. Sherrod Brown (D-Ohio), the top Democrat on the Senate Banking Committee and an opponent of the legislation.
Other prominent banking experts, including Federal Reserve Board Chair Jerome Powell, supported the legislation, arguing regulators like the Fed had made the financial system much safer than it was in 2008. But critics of the legislation were not hard to find.
“Without any compelling public policy rationale — other than the deceptive guise of aiding regional and community banks — this bill now seeks to undo key bulwarks of public protection designed to avert future crises,” wrote Phil Angelides, the chair of the Financial Crisis Inquiry Commission, which produced an authoritative report on the causes of the 2008 financial crisis.
Former Rep. Barney Frank (D-Mass.), co-author of the post-crisis banking regulation that bears his name, said he didn’t think the rollback caused the recent bank failures. But he has also said he thought the $250 billion threshold was too high.
Frank serves on the board of Signature Bank in New York, which regulators took over to avoid another failure over the weekend.
Biden’s administration on Sunday announced emergency steps to prevent more instability in the banking sector. The Treasury Department, Federal Reserve and FDIC said that all Silicon Valley Bank clients will be protected and able to recover their money, even though federal deposit insurance is only supposed to cover a depositor’s first $250,000. The vast majority of Silicon Valley Bank’s deposits were over the threshold, meaning they were uninsured and are now getting bailed out.
Regulators said that their bank takeovers would prevent a broader financial crisis and that fees on banks, not taxpayers, would cover the cost.
“Americans can rest assured that the banking system is safe,” Biden said in a speech at the White House on Monday. “Your deposits will be there when you need them.”