Elizabeth Warren knows exactly why Silicon Valley Bank failed—and who should pay

It remains unclear what the ripple effects of SVB’s failure will be for the banking industry. The Biden administration has pledged that even customers with uninsured deposits at SVB will be made whole and that banks, not taxpayers, will bear the burden of fixing the crisis, but tensions are still on a knife’s edge as clients in the U.S. and around the world worry that other banks may spiral like SVB. As with SVB, regulators promised Signature depositors will be made whole as well, under a similar “systemic risk exception.” When markets opened for trading on Monday, regional banks on the West Coast got crushed, with dozens of them halting trading amid record drops.

The banking industry’s stormy winds aren’t set to subside anytime soon, but with the blame game already in full swing, Warren pointed to a long-standing grievance of hers as the primary perpetrator behind the crisis: Banks pushing for higher short-term profits despite creating more financial risk, and anti-regulation lobbying efforts to tear down legislative protections that may have prevented the crisis from happening.

“These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren wrote in an op-ed published Monday in the New York Times.

SVB’s collapse has shades of other bank runs that happened during the 2008 financial crash. That crisis—and the role government intervention played in mitigating it—set the stage for sweeping regulatory reforms to prevent future systemic bank failures. In 2010, the government enacted the Dodd-Frank Act, one of the most significant pieces of legislation regulating financial activity since the Great Depression, to increase accountability and transparency in the U.S. banking sector and discourage risky lending practices.

Dodd-Frank was designed to consign to history the “too big to fail” era in which certain financial institutions were so integral to the economy that the government was obliged to step in and rescue them. But the nature of SVB’s collapse and the extent to which the economy might suffer because of it has once again raised the specter of a bank being “too big to fail.” For that, Warren insists you can blame a significant drawdown in the government’s regulatory power over banks since 2018 after bank executives, including SVB’s own CEO, Greg Becker, successfully lobbied to reduce the scope of Dodd-Frank.

“In 2018, the big banks won. With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank,” Warren wrote. “Had Congress and the Federal Reserve not rolled back the stricter oversight, SVB and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”

Weakening regulatory power over banks

Efforts to block federal regulators from having more say over the financial industry started well before Dodd-Frank was even enacted, but lobbyists finally got their way in 2018, when former President Donald Trump signed a law to scale back the act’s regulatory power. The bill received bipartisan approval in Congress, but managed support from only 17 Democrats in the Senate, with members of the party’s progressive wing staunchly opposed.

Warren was among the most vocal opponents to the changes, which kept strict federal oversight powers for large banks but largely exempted small and regional banks from reporting requirements the industry had criticized as being too complex and time-consuming. Warren argued at the time that “small banks” were in reality anything but, and rolling back restrictions would increase the odds of another crisis.

“These rules have kept us safe for almost a decade,” she said. “Washington is about to make it easier for the banks to run up risk, make it easier to put our constituents at risk, make it easier to put American families in danger, just so the CEOs of these banks can get a new corporate jet and add another floor to their new corporate headquarters.”

SVB’s Becker argued for looser regulations while testifying to Congress in 2015. In the wake of the deregulation bill, SVB’s deposits grew from around $50 billion in 2020 to over $170 billion by the time of seizure, also benefiting from a low-interest-rate environment that favored risky lending. Warren wrote in her op-ed that the bank failed to adequately prepare for the higher-rate environment that became reality over the past year.

“SVB suffered from a toxic mix of risky management and weak supervision,” she wrote, adding that it “apparently failed to hedge against the obvious risk of rising interest rates. This business model was great for SVB’s short-term profits, which shot up by nearly 40% over the last three years‌—but now we know its cost.”

Warren added that had stricter regulations for small and regional banks remained in place, regular required stress tests could have better prepared SVB for a bank run. She also repeated her constant criticism of the Federal Reserve’s actions under Jerome Powell’s guidance, saying a prioritization of loose monetary policies and low interest rates for much of his term let “financial institutions load up on risk.”

Warren recommended the government and the banking sector work together to instill faith in the industry by discouraging excessive risk-taking and increasing regulatory oversight, and make clear to financial institutions that the burden of failure and risks sit squarely on their shoulders, and that the government’s mandate to step in for banks that are “too big to fail” really is in the past.

“These threats never should have been allowed to materialize. We must act to prevent them from occurring again,” she wrote.