Financial Regulators Turned Out to Be Fighting the Last War
In 2015, Greg Becker, the chief executive of Silicon Valley Bank, submitted testimony to the Senate Banking Committee arguing that the Dodd-Frank financial regulation rules should be loosened for banks like his. If they weren’t, Becker warned, Silicon Valley Bank “likely will need to divert significant resources from providing financing to job-creating companies in the innovation economy to complying with enhanced prudential standards and other requirements.” If only!
But Becker’s testimony is an interesting read for reasons other than grim irony. It is an argument about what makes a bank “systemically important” — the term of art for a financial institution that cannot be allowed to fail. It is an argument that persuaded the Trump administration, alongside nearly every congressional Republican and no small number 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 yet to be defined, let alone operationalized, in anything approaching a satisfactory way.” Lawmakers had tried, in Dodd-Frank, to define it in terms of assets: $50 billion or above, and you posed a systemic risk.
Becker, and top executives at many other midsize banks, argued that this cutoff was too low and too simplistic. You could not be a systemic risk, in their telling, unless you were a large bank attempting exotic financial engineering. “S.V.B., like our midsize bank peers, does not present 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 derivatives transactions or dealing, offer complicated structured products or participate in other activities of the sort that contributed to the financial crisis.”
Put more simply, the idea here was that we know what a systemically risky bank looks like: It looks like the banks, and assorted other financial institutions, that caused the 2008 crash. This is a classic case of fighting the last war. But it is pervasive.
