Who is to Blame for the Silicon Valley Bank Debacle? Examining the Complex Role of Bank Management and Regulators
On March 14th and 17th, 2021, Silicon Valley Bank collapsed and caused a massive financial crisis, prompting the federal government to step in with a bailout. But the question remains: whose fault was it? Was it the bank's management, regulators, or a combination of both?
Primary responsibility for the debacle lies with the bank's management, as bankers are always tempted to take risks. But the role of regulators cannot be overlooked either. Regulators have awesome powers to go into a bank, examine its operations and demand changes, but they rarely do.
The Trump administration's penchant for installing regulators who are opposed to regulation certainly played a role in the collapse. Donald Trump appointed Randal Quarles as the first-ever vice chair of banking supervision at the Federal Reserve, and Quarles saw it as his mission to relax the post-financial-crisis regime. Quarles supported the 2018 law to roll back stress tests, something that Becker himself had called for.
This crisis raises the issue of how strange it is that the Federal Reserve regulates banks at all. In the years leading up to the 2008-09 financial crisis, an alphabet soup of regulators ostensibly shared responsibility for banking oversight. Financial institutions and institutions compared each other to find the most lenient terms. Policy makers and legislators knew this and toyed with changing the architecture of banking-and-securities regulation, but ultimately, their only action was to close down the least of them, the OTS, and keep the rest.
The causes of regulatory malfunction go beyond the measures taken by the Trump administration. Regulators often hesitate to intervene, as this can cause unease among people, as well as require them to exercise their authority. Ultimately, it is up to the Biden administration to make sure that this kind of financial crisis does not happen again.
0. “So Where Were SVB’s Regulators?” The Atlantic, 17 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/silicon-valley-signature-bank-collapse-regulator-culture/673423/
1. “Silicon Valley Bank's Distress Wasn't Reflected in Credit Ratings” The Wall Street Journal, 17 Mar. 2023, https://www.wsj.com/articles/silicon-valley-banks-distress-wasnt-reflected-in-credit-ratings-93cd9dff