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Elizabeth Warren Knows Exactly Why Silicon Valley Banks Fail and Who Will Pay


The waters are still far from calm after federal regulators seized over $300 billion in deposits and assets from Silicon Valley Bankthe technology and VC sector’s lender of choice, in the second-biggest bank bust in US history on Friday, and then the third-biggest one, based in New York signature bank on Sunday. But pointing the finger at what causes banks Falling like lightning already started. Traders and customers are to blame weak and poor managerment at the executive level of SVB, among other things, lack of risk director in the last eight months. Cryptocurrency Supporters Say the centralized financial system is at fault. Venture capitalists mostly blame each other amplifying panic on social media that became a record $42 billion bankroll. But for Democratic Senator Elizabeth Warren, legislative changes that bank executives have lobbied for years (including SVB’s own CEO Greg Becker) have This means that the banking crisis is both predictable and overdue, and the writing on the wall has a lot of pain ahead.

It is not yet clear what the spillover effect of SVB’s failure on the banking industry will be. The Biden administration has committed that even customers with uninsured deposits at SVB will be made for the whole and those banks, not taxpayerswill bear the brunt of the crisis, but tensions remain on the brink as customers United States And around the world worried that other banks might fall into a spiral like SVB. As with SVB, regulators have promised Signature depositors will also be paid in full, under a similar “systemic risk exception”. When markets opened for trading on Monday, regional banks on the West Coast were crushed, with dozens of them suspend trading amid record declines.

The storms in the banking industry aren’t going to ease anytime soon, but with the blame game in full swing, Warren points to her long-standing grievance as the main culprit behind the crisis: Banks drive higher short-term profits despite creating more financial risk, and anti-regulatory lobbying efforts to circumvent regulatory safeguards may have prevented the crisis from happening. go out.

Warren wrote in an op-ed second edition in New York Times.

SVB’s demise was shades of other banks run occurred during the 2008 financial crisis—and the role of government intervention in mitigating it—set the stage for far-reaching regulatory reform to prevent future banking system failure. In 2010, the government issued Dodd-Frank Actone of the most important pieces of legislation regulating financial activity since the Great Recession, aimed at increasing accountability and transparency in the U.S. banking sector and discouraging risky lending practices.

Dodd-Frank is designed to sent to history an era of “too big to fail” in which certain financial institutions are so integral to the economy that governments are forced to step in and rescue them. But the nature of SVB’s collapse and the extent to which the economy could be affected because of it once again raised the specter of a bank is “too big to fail.” So Warren asserts that you can blame the dramatic decline in government regulatory power over banks since 2018 after bank executives, including the CEO of SVB, Greg BeckerSuccessfully lobbied to reduce the reach of Dodd-Frank.

“In 2018, the big banks won. With backing from both sides, President Donald Trump signed legislation withdrawing substantial portions of Dodd-Frank,” Warren wrote. “If Congress and the Federal Reserve do not withdraw their tighter oversight, SVB and Signature will be subject to stronger capital and liquidity requirements to withstand financial shocks.”

Undermining regulatory power over banks

Attempts to prevent federal regulators from having more say in the financial industry good start before Dodd-Frank is even issuedbut the lobbyists finally succeeded in 2018, when former President Donald Trump signed the law to reduce the size of the power provided by the statute. The bill received bipartisan approval in Congress, but management support from There are only 17 Democrats in the Senatewith members of the party’s radical wing vehemently opposed.

Warren has been one of the strongest opponents of the changes, which retains strict federal oversight of large banks but largely exempts small and regional banks from reporting requirements. which the industry has criticized as too complicated and time consuming. Warren Debate At the time, “small banks” were practically anything but, and lifting restrictions would increase the likelihood of another crisis.

“These rules have kept us safe for almost a decade,” she said. “Washington is about to make it easier for banks to take risks, to make it easier for our voters to take risks, to put American families at risk more easily, just for the CEOs of banks to take risks. this bank gets a new corporate jet and an extra floor for their new corporate headquarters.”

Becker of SVB debate about looser regulations during a hearing before the National Assembly in 2015. After the deregulation bill, SVB’s deposits increased from about 50 billion USD in 2020 to more than 170 billion USD at the time of foreclosure, also benefited from a low-interest-rate environment that favored risky lending. Warren wrote in his editorial that the bank was not sufficiently prepared for the higher interest rate environment that has become a reality over the past year.

“SVB has suffered from a toxic combination of poor risk management and oversight,” she wrote, adding that the bank “obviously failed to hedge the obvious risk that interest rates increase. This business model has been great for SVB’s short-term profits, which have grown by nearly 40% in the past three years‌—but now we know its cost.”

Still, with tighter regulations for small and regional banks, Warren added, regular mandatory stress tests could help SVB better prepare for bank withdrawals. She also repeated her ongoing criticism of the Federal Reserve’s actions under the guidance of Jerome Powell, saying that prioritizing loose monetary policies and low interest rates for the most part His tenure has left “financial institutions at risk.”

Warren recommends that the government and the banking industry work together to strengthen confidence in the industry by discouraging excessive risk-taking and increasing regulatory oversight, while making it clear to financial institutions that the burden of failure and risk is on them, and that the government task of intervening on “too big to fail” banks is indeed a thing of the past.

“These threats should never have been allowed to materialize. We must act to prevent them from happening again,” she wrote.

This story was originally featured on Fortune.com

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