Financial regulators appear to be fighting the latest war
Presented in 2015 by Greg Becker, CEO of Silicon Valley Bank testimony to the Senate Banking Committee, arguing that Dodd-Frank financial regulation rules should be relaxed for banks like his. If not, Becker warned, Silicon Valley Bank “will likely have to divert significant resources from providing financing to companies creating jobs in the innovation economy to complying 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”—a term for a financial institution that cannot afford to fail. It’s an argument that has convinced the Trump administration, along with nearly every Republican in Congress and quite a few Democrats in Congress.
In his book “Money problem“, Morgan Ricks, an expert on financial regulation at Vanderbilt Law School, writes that the problem here runs deep. Systemic risk, he says, “has yet to be defined, let alone operationalized, in any way that comes close to being satisfactory. In Dodd-Frank, lawmakers tried to define it in terms of assets: $50 billion or more and you posed a systemic risk.
Becker and top executives at many other mid-sized banks argued that the limit was too low and too simplistic. In their narrative, you cannot be a systemic risk unless you are a large bank attempting exotic financial engineering. “SVB, like our mid-sized banks, does not pose systemic risks,” Becker said. “We do not engage in market making, underwriting or other global investment banking activities. We also do not engage in complex derivative transactions or trading, offer complicated structured products, or engage in other activities that contributed to the financial crisis.”
More simply, the idea here was that we know what a systemically risky bank looks like: It looks like banks and various other financial institutions failed in 2008. This is a classic case of fighting the last war. But it is ubiquitous.
