What Has Changed Since Silicon Valley Bank Collapsed? Not Much.
Two years later, no major legislation or regulation has passed, and the basic problem that caused the crisis persists.
Two years ago, the collapse of Silicon Valley Bank sounded an alarm over vulnerabilities in the banking system. And briefly, it looked like a call to action: The Federal Reserve released a 102-page critique of its own failures in oversight; Congress kicked off hearings to examine banking legislation; and columnists (including this one) outlined ideas for preventing the next crisis.
Yet all of that talking has led to very little. Regulators tightened up on supervision, at least for a while, but there haven’t been any major new laws or regulations. And the basic problem at the heart of the regional banking crisis remains: The financial system as a whole relies heavily on runnable liabilities — namely, sources of funding, such as uninsured deposits, that can be yanked away abruptly.
As long as banks are financially healthy, runnability is not a big problem. Regulators say the current risk is relatively low. Silicon Valley Bank is back in business under new ownership. “Over the past year, vulnerabilities from funding risks have declined to a level in line with historical norms,” the Fed wrote last month in its semiannual Financial Stability Report.
But runnability becomes a source of vulnerability when insolvency threatens, as happened to Silicon Valley Bank. And troubles could resurface. For example, President Trump’s tariff war might cause an economic slowdown or recession, which could result in big losses for some banks through their loan portfolios.
It doesn’t help that regulators seem to be shifting their focus away from the problems that Silicon Valley Bank brought to the surface. An interagency plan from 2023 to increase bank capital requirements starting this July 1, which bank lobbyists opposed, is being scaled back and postponed. Last month, Treasury Secretary Scott Bessent said he wanted to “help get banks back into the business of lending” by reducing how much they needed to keep in liquid assets such as Treasuries. And this past week, The Financial Times reported that regulators were preparing to announce within months a reduction in the supplementary leverage ratio, a backstop safety measure adopted in 2014.
The financial system still relies heavily on runnable liabilities
A bank run occurs when depositors and other creditors of a bank start to worry that their money is unsafe or might become unsafe, and pull it out while they still can. (See: “It’s a Wonderful Life,” 1946.) Deposit insurance is supposed to relieve that worry, but it doesn’t cover all bank liabilities. At Silicon Valley Bank, to take an extreme case, 94 percent of deposits were uninsured. Some other sources of funding that banks rely on can also be snatched back abruptly, such as short-term borrowings from other banks.
Uninsured deposits in the banking system fell 15 percent in 2023, according to Fed data used in preparing the Financial Stability Report. That’s progress, but it still leaves the system heavily reliant on the flighty form of funding.
Looking at the financial system as a whole, including nonbanks such as money market mutual funds, the Fed calculates that runnable liabilities equaled about 80 percent of gross domestic product at the end of 2024. That included commercial paper and the securitized lending known as repurchase agreements. The ratio was about the same as before Silicon Valley Bank failed, although below the level on the eve of the financial crisis of 2007-9.
Potential solutions abound, but policy is slow to follow
What’s the answer? An extreme solution to runnability, which has been floated after every crisis going back to the 1930s, would be to turn banks into glorified mutual funds, in which every dollar deposited is securely backed by a dollar of safe and highly liquid assets. Laurence Kotlikoff, a Boston University economist, argues that all kinds of financial institutions, including insurers, should be reconstituted as debt-free mutual funds, entirely financed by equity.
There’s little support in Congress for what’s called “narrow banking,” though. Instead, the risk reduction that the Fed cited last month was mostly done voluntarily by bank executives who were trying to win back the confidence of investors. That includes the slight reduction in dependence on uninsured deposits.
There are “reciprocal” networks that allow banks to swap deposits with one another to get all the money under the Federal Deposit Insurance Corporation’s $250,000 insurance threshold. Also, the Fed is slowly improving its lending procedures so banks that need emergency collateralized loans can get them quickly, through either its discount window or the newer standing repo facility.
One problem is that memories in finance are short. Banks could go back to taking big chances in a few years, because the rules that enabled that risk-taking remain in place.
“I am uneasy that there hasn’t been a formal, regulatory structure put in place to consolidate the improvements in risk management that banks undertook on their own after Silicon Valley Bank,” Daniel Tarullo, a professor at Harvard Law School, told me. He was a governor of the Fed from 2009 to 2017 and led its supervision and regulation committee.
Policymakers acted “at the speed of light” to arrest the 2023 crisis but are taking years to figure out how to avoid a recurrence, Shayna Olesiuk, the director of banking policy at Better Markets, an advocacy group, wrote in a March report.
More can be done
Even before the 2023 crisis, the biggest U.S. bank holding companies were required to have a certain amount of “high-quality liquid assets” that could be quickly turned into cash to satisfy a surge in withdrawals. One obvious option — although it would go against Bessent’s thrust — would be to require a broader spectrum of banks to keep high-quality liquid assets on hand.
Stronger capital requirements, such as those that regulators sought in 2023, could also make banks safer. Capital is assets minus liabilities. If a bank’s capital cushion shrinks because its assets lose value (as happened to Silicon Valley Bank), regulators can order the bank to raise more money by selling shares.
The worst combination is too little liquidity and too little capital. Silicon Valley Bank, Signature Bank and First Republic Bank, which failed in rapid succession in 2023, “had too little usable liquidity relative to their runnable funding” along with “too little capital given the magnitude of their interest rate risk,” two Fed staff members, Shawn Kimble and Matthew Seay, wrote last year.
Those three banks and three others that failed or nearly failed in early 2023 all had a high concentration of customers in crypto, venture capital or both fields, Steven Kelly of Yale and Jonathan Rose of the Chicago Fed wrote in a working paper in March. In contrast, New York-based Amalgamated Bank also suffered from poor solvency and high dependence on uninsured deposits but avoided a run because its customers were mainly unions and nonprofits, which were less likely to bolt, Kelly and Rose wrote. That indicates that regulators need to pay attention to banks’ customers, not just their balance sheets.
Greg Baer, the chief executive of the Bank Policy Institute, which represents the nation’s leading banks, said in 2023 that people should not seize on the failure of Silicon Valley Bank “to fit their favorite policy pegs into the unusually shaped hole that appeared in March.”
I asked Baer for his latest thinking. He said he agreed with Bessent that overly strict liquidity rules could restrict banks’ ability to lend. He argued that improved functioning of the discount window and the standing repo facility gave banks plenty of access to liquidity when they needed it. And he said the problems of Silicon Valley Bank — the levels of depositor concentration and interest rate risk — were “unique to rare.”
The rarer, the better.