In March 2018, The New York Times ran an op‐ed about the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Economic Growth Act). The piece claimed the bill “would roll back or eliminate parts of the Dodd‐Frank Act.”
Fast forward to March 2023, when the Times ran an op‐ed by Senator Elizabeth Warren (D‑MA) about the Silicon Valley Bank failure. In it, Warren points to the Economic Growth Act and argues the demise of Silicon Valley Bank was “the direct result of leaders in Washington weakening the financial rules.”
Though separated by five years, both opinion pieces widely miss the mark on the Economic Growth Act.
First, while the Economic Growth Act did amend the Dodd‐Frank Act, it didn’t eliminate a single title or section of Dodd‐Frank. More importantly, the Economic Growth Act amended the Federal Reserve’s “enhanced supervision and prudential standards for certain bank holding companies.” (Emphasis added.) That is, the Economic Growth Act amended how the Fed can regulate the companies that own commercial banks, not how it can regulate the commercial banks themselves.
There’s a huge difference. Right now, several large firms are in talks to buy SVB Financial Group, the holding company that owned several financial companies, including Silicon Valley Bank. Although Silicon Valley Bank is now under control of the FDIC, SVB Financial Group is a separate entity.
That said, even the 2018 Times piece exaggerated how much the Economic Growth Act “rolled back” the regulations on bank holding companies.
The biggest regulatory relief in the Economic Growth Act was what it did to the so‐called systemically important financial institution (SIFI) standards, the enhanced supervision that Dodd‐Frank imposed on bank holding companies with assets of more than $50 billion. (See Title IV.) On close inspection, though, even these changes weren’t so big.
Superficially, the bill raised the size threshold for enhanced supervision, so heightened regulations would apply only to bank holding companies with total assets of more than $250 billion. But the bill only technically changed the threshold from $50 billion to $250 billion because it also authorized the Fed to “apply any prudential standard to any bank holding company or bank holding companies” with total assets of at least $100 billion.
In other words, bank holding companies with at least $100 billion—not $250 billion—were still subject to the Fed’s enhanced supervision if, how, and when the Fed decided. The bill also authorized the Fed to “tailor or differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including financial activities of their subsidiaries), size, and any other risk‐related factors that the Board of Governors deems appropriate.”
So, the bill left the Fed with a great deal of discretion. And the Fed used it.
The Fed implemented a number of new rulemakings, the most relevant (for this discussion) being the new Prudential Standards for Large Bank Holding Companies, and the Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements. The short version is that these new rules established a set of categories for evaluating capital and liquidity ratios, each based largely on the size (total assets) of the bank holding company. (For a handy 61‐page summary, see this Davis Polk & Wardwell document.)
Essentially, under the new rules, the Fed applies enhanced standards to the following four categories of bank holding companies:
- The very largest institutions, the U.S. G‑SIBs (global systemically important banks).
- Total assets more than $700 billion (but not a G‑SIB).
- Total assets between $250 billion and $700 billion.
- Total assets between $100 billion and $250 billion.
Under the new rules, the Fed applies different standards based on which category the company falls in, but it maintains the discretion to apply different standards to each institution. (For details, check out this handy summary from Deloitte.)
Ultimately, firms falling into the respective categories are responsible for different reporting requirements and for meeting different minimum capital and liquidity ratios.
Setting aside whether any of these regulations actually make the banking sector safer and more stable, we can use SVB Financial Group’s annual reports to track their capital and liquidity measures from 2015 through 2022, the years when they crossed several regulatory thresholds. If the financial statements are to be trusted—and if they’re not, we have a much bigger problem—it is exceedingly difficult to argue that the new rules weakened SVB Financial Group’s commercial bank. (For each annual report, a continued search on “leverage ratio” brings up a discussion and eventually a table with reported ratios.)
For brevity, let’s focus on the new $100 billion threshold.
During 2020, SVB Financial Group finally crossed the $100 billion threshold. As a result, the firm was labeled a category IV firm in 2021. Yet, despite facing new requirements, the firm continued to be overcapitalized, a trend it maintained since at least 2015. Just for example, its required leverage and tier 1 risk‐based capital ratios were 4 percent and 8.5 percent, respectively. However, SVB Financial Group reported a leverage ratio of 7.93 percent and a tier 1 capital ratio of 16.08 percent.
These figures were well above the required ratios and higher than in previous years. For anyone wondering, SVB Bank reported similar ratios, well above the minimum required.
The 2022 financials show similar ratios for SVB Financial Group, with a slightly higher leverage ratio of 8.11 percent and a slightly lower tier 1 capital ratio of 15.4 percent. (Silicon Valley Bank also reported similar ratios, both higher than in 2021, and both well above the minimum required.)
It is very difficult to make a pure comparison to what the company’s requirements would have been had the Economic Growth Act not amended Dodd‐Frank. However, SVB Financial Group did cross the $50 billion threshold in 2017, prior to these amendments. And the financial statements show—much like in 2022—a company that was extremely well capitalized, with ratios roughly twice as high as the requirements. (At least one analysis suggests even the higher liquidity coverage ratio standards would have made no difference in preventing the Silicon Valley Bank failure.)
So, SVB Financial Group (and the commercial bank itself) had capital ratios approaching twice the minimum required, even after if crossed the $100 billion threshold. Given that the 2018 amendments to Dodd‐Frank were at the holding company level, and that what regulators have done to implement enhanced requirements after Dodd‐Frank effectively amounts to higher capital and liquidity ratios, it is quite a reach to connect Silicon Valley Bank’s failure to the Economic Growth Act.
If anything, members of Congress should listen closely to Michael Barr, the Fed’s vice chair for supervision. With regard to the Federal Reserve’s supervision of Silicon Valley Bank, he announced “We need to have humility and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience.”
The truth is that if people expect to see zero bank failures, they are expecting much too much of federal regulations and federal regulators. This incident should be used to finally face the fact that increased regulation does not guarantee safety.
This article was originally featured at the Cato Institute and is republished with permission.
