Silicon Valley Bank Collapse: A Year Later, Little Changed in Regulatory Landscape

Two years after Silicon Valley Bank collapsed in March 2023, the banking sector remains mired in uncertainty. While regulatory actions were taken in the wake of the crisis, the core challenges that contributed to the collapse persist, and the system’s resilience is under scrutiny.

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Regulatory Responses and the Status Quo
In the immediate aftermath of the collapse, regulators and policymakers launched efforts to address systemic vulnerabilities. The Federal Reserve released a 102-page report critiquing its oversight failures, while Congress initiated hearings to explore banking legislation. Columnists, including this piece, called for reforms to prevent future crises. However, these initiatives have largely stalled.

Regulators have tightened supervision for a time, but no major new laws or regulations have emerged. The financial system’s reliance on “runnable liabilities”

such as uninsured deposits

remains a critical risk. While Silicon Valley Bank is now operational under new ownership, its history of vulnerabilities has not been fully resolved.

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The Core Problem Remains: Runnability and Funding Risks
The crisis exposed a fundamental flaw: banks depend on sources of funding, like uninsured deposits, that can be abruptly withdrawn during a bank run. This risk is particularly acute when insolvency threatens, as seen with Silicon Valley Bank.

Regulators argue that current risks are low, but the system’s fragility persists. For example, the Federal Reserve noted in its recent report that runnability levels have declined to historical norms, yet the potential for sudden liquidity shocks remains. The system’s reliance on runnables means that even a small economic downturn could trigger widespread stress.

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Regulatory Shifts and Their Implications
Recent efforts to address the crisis have faced pushback. An interagency plan to increase bank capital requirements, which bank lobbyists opposed, is being scaled back. Meanwhile, Treasury Secretary Scott Bessent emphasized reducing liquidity needs, such as Treasuries, to help banks return to lending.

Additionally, regulators are preparing to reduce the supplementary leverage ratio, a safety measure adopted in 2014. These changes, though intended to stabilize the system, have sparked debate about their effectiveness. Critics argue that regulatory adjustments may not address the underlying risks, and the focus is shifting away from the root causes of the crisis.

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Key Takeaways
1. Regulatory Progress Is Limited: While regulators tightened supervision, no major new laws or regulations have been enacted to address the systemic risks.
2. Runnability Remains a Threat: Banks’ reliance on uninsured deposits and short-term funding sources leaves them vulnerable to sudden liquidity crises.
3. Regulatory Priorities Shift: Efforts to stabilize the system are increasingly focused on liquidity and capital requirements, with debates over their impact on lending and risk management.
4. Economic Uncertainty Loops in: Events like President Trump’s tariff war could trigger economic slowdowns, exacerbating risks for banks with heavy loan portfolios.

The Silicon Valley Bank collapse underscores the need for vigilance in addressing systemic vulnerabilities. While regulatory actions have provided temporary relief, the financial system’s reliance on runnables and the absence of comprehensive reforms mean the crisis is far from over.

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Conclusion: The banking sector remains in a state of cautious recalibration. Without significant legislative or regulatory breakthroughs, the risks of runnability and liquidity shocks will continue to loom. Stakeholders must prioritize long-term reforms to ensure the system’s resilience in the face of evolving economic and financial challenges.

Source: New York Times Business