Congress Knew Trump-Era Bill Would Put Banks at Risk, They Pushed It Through Anyway

Last week, the collapse of Silicon Valley Bank sparked concerns of a potential financial crisis akin to the 2008 recession. In 2018, a bipartisan law was passed by Congress, which President Donald Trump signed, that relaxed regulations on mid-sized financial institutions such as Silicon Valley Bank. The banking industry and Trump secured a vital bipartisan success with the backing of 33 House Democrats and 17 Democratic senators.

The Bill That Started It All

The piece of legislation that was enacted scaled back elements of the Dodd-Frank Act, a law implemented in the aftermath of the 2008 financial crisis. The regulations imposed tougher standards on banks with assets over $50 billion to avoid future governmental bailouts like the one that occurred in 2008. The bill increased the threshold for stricter oversight to banks with $250 billion in assets but still allowed regulators to scrutinize those with more than $100 billion.

Advocates of the modification contended that it would be advantageous to rural and community banks that lend primarily to small businesses (although it also favored larger banks). However, a few Senate Democrats who supported the bill and were up for reelection lost their seats later that year.

The bill was supposed to remove rules that were meant to make banks more resilient against unanticipated shocks, like the deposit run that led to the failure of Silicon Valley Bank last week.

Risk Warning

The Congressional Budget Office informed lawmakers that the bill would only marginally increase the risk of a regional financial institution's collapse. Still, this could expose the government to substantial expenses. The CBO also noted that the legislation excluded some bank assets from tighter oversight, which would heighten the possibility of a large financial institution with $100 billion to $250 billion in assets going bankrupt.

Silicon Valley Bank reported that it had $212 billion in assets at the end of 2022, putting it in this category of risk.

Called It

Some lawmakers, like Sen. Elizabeth Warren, went so far as to publicly rebuke Democratic colleagues who supported the bill. Warren, who had predicted the consequences of the bill, wrote in a recent op-ed that the bank failures could have been prevented if strong banking regulations had remained in place.

Todd Phillips, a former attorney at the Federal Deposit Insurance Corp., the bank regulator that seized Silicon Valley Bank’s assets, commented that it is uncertain how the 2018 law may have played a role in the bank's downfall.

Phillips noted that the 2018 legislation appeared to allow bank regulators to ease oversight on some regional banks, which may have contributed to the collapse of Silicon Valley Bank. Senator Mark Warner, who helped author the 2018 bank deregulation legislation, defended his work.

Warner asserted that the legislation provided the necessary regulatory relief for mid-sized banks. He suggested that Silicon Valley Bank's failure was caused by mismanagement, high interest rates, and an “unprecedented” run on deposits. Despite Warner's defense of the bill, many lawmakers remain concerned that the legislation could lead to another financial crisis.

This article was produced and syndicated by Wealth of Geeks.