How a Trump-Era Rollback Mattered for Silicon Valley Bank’s Demise

Silicon Valley Bank’s recent collapse has brought forth critical questions about its oversight and regulation that deserve scrutiny. However, as the dust continues to settle, the role of the Federal Reserve Board’s 2018 decision to ease banking regulation by recalibrating how banks are supervised cannot be ignored. This regulatory move led to a series of events that ultimately led to the bank’s demise. The following points highlight how the Trump-era rollback played a part in Silicon Valley Bank’s collapse:

Heavy dependence on the technology industry

One of the biggest problems with Silicon Valley Bank’s business model was its dependence on the technology industry. Given that technology companies are susceptible to volatile markets, it is easy to see how any downturn in technology companies would impact the bank’s stability. While it is impossible to predict sudden market shocks, proper oversight, and regulation could have significantly mitigated this risk.

Deposits above limits that the government insures in case of a bank collapse

Another significant risk factor for Silicon Valley Bank was its unusually high share of deposits above the federally insured limit of $250,000 in the event of a bank collapse. This places the bank at risk of costly litigation in such an event, which could lead to significant losses. Without proper regulation, there was no mechanism to address and mitigate this risk factor.

A lack of risk management focus by the executive team

Another issue with Silicon Valley Bank’s oversight was that the executives paid little attention to risk management. Without a structured approach to risk management, problems with decision-making, product development, and risk-based pricing can quickly surface. The lack of attention to risk management has dramatically cost Silicon Valley Bank and emphasizes the need for continuous regulatory oversight.

A Small supervision team of generalists

Even when regulators are alerted to an issue, dealing with it becomes a challenge when there is a small team solely responsible for the oversight of the bank. In addition, banks with niche business models and complicated products require in-depth and specialized knowledge to ensure proper management. Silicon Valley Bank’s issues required immediate attention from specialists with the knowledge and skill set to provide adequate oversight.

Related Facts

• Silicon Valley Bank is a private commercial bank specializing in financing growth-oriented tech and life science companies in the United States and globally.
• Silicon Valley Bank collapsed in early 2023 after years of risk factors brewing in the background.
• The 2018 bipartisan law aimed to make regulation less onerous for small and midsize banks.
• The bank’s delayed shift to a more substantial oversight group, which would have helped mitigate risks, was caused by the Board’s recalibration of bank supervision brought on by the bipartisan law.
• The bank’s inability to address issues and risks that the small supervisory team had flagged before it moved to a larger group of specialists shows the disadvantage of supervision by professionals who lack in-depth knowledge of the specialized banking area.

Key Takeaway

The collapse of Silicon Valley Bank highlights the importance of continued robust regulatory oversight of banks. Regulatory oversight is critical to identify and address potential risks, initiate corrective action, and prevent catastrophic banking failures. The importance of regulatory oversight is further highlighted in niche banking sectors, given the specific risks they face that require specialized knowledge to mitigate effectively.

Conclusion

Silicon Valley Bank’s demise was caused by multiple factors, each of which could have been mitigated if the bank had been subject to rigorous oversight and regulation. Unfortunately, the Trump-era rollback compromised the excellent rule of the bank, allowing the accumulation of vulnerabilities, eventually leading to its downfall. This event highlights the need for regulatory oversight and proper implementation of regulations in niche or specialized banking areas to prevent similar situations.