Two years have passed since the dramatic collapse of Silicon Valley Bank (SVB), an event that sent shockwaves through the financial sector and raised alarms about the vulnerabilities lurking within our banking system. Initially, it seemed like a turning point; the Federal Reserve promptly released a scathing 102-page critique of its own oversight failures, while Congress began holding hearings to scrutinize banking legislation. Financial pundits, including many seasoned columnists, took the opportunity to propose measures aimed at averting a similar crisis in the future.
However, as the dust settled, it became clear that the anticipated reforms have largely failed to materialize. Although regulators tightened oversight temporarily, the hard truth remains: no significant new laws or regulations have emerged to address the fundamental issues plaguing regional banks. At the core of the crisis lies a persistent problem—our financial system’s heavy reliance on runnable liabilities. These liabilities, particularly uninsured deposits, can vanish in an instant, leaving banks vulnerable at the most inopportune moments.
In a stable environment, this “runability” might not pose a significant threat. Indeed, current risk assessments suggest that the overall health of the banking system is relatively stable. The Fed reported last month that vulnerabilities stemming from funding risks have returned to levels consistent with historical norms. Silicon Valley Bank, under new ownership, has resumed operations, providing a semblance of normalcy.
Yet, this stability is precarious. The specter of insolvency looms large, particularly in light of potential economic headwinds. For instance, the fallout from trade wars—such as those initiated during the Trump administration—could trigger an economic slowdown or recession, which in turn could lead to significant losses in bank loan portfolios. This is a crucial consideration, as the interconnectedness of the banking system means that the failure of one bank can have ripple effects across the entire sector.
Compounding these vulnerabilities is a troubling trend among regulators. Recent plans to bolster bank capital requirements, which were set to take effect on July 1, have been scaled back following pushback from bank lobbyists. Treasury Secretary Scott Bessent has expressed a desire to encourage banks to re-engage in lending, advocating for reduced liquidity requirements that would allow banks to keep fewer assets in liquid forms, such as government bonds. Moreover, reports indicate that regulators may soon announce a reduction in the supplementary leverage ratio—a crucial safeguard implemented in 2014 to ensure that banks maintain enough capital to absorb losses.
To understand the implications of a bank run, consider the classic film *It’s a Wonderful Life*. In it, depositors panic, fearing the safety of their funds, and rush to withdraw their money. Deposit insurance is designed to alleviate these concerns, but it only covers a fraction of bank liabilities. In the case of SVB, a staggering 94 percent of deposits were uninsured. This reality underscores a broader issue: many banks depend on funding sources that can be abruptly withdrawn, such as short-term loans from other financial institutions.
The underlying vulnerabilities in our banking system demand urgent attention. While the Federal Reserve and other regulatory bodies have acknowledged the risks, their current trajectory suggests a troubling complacency. Without meaningful legislative action and a renewed focus on the systemic issues highlighted by the SVB collapse, we may find ourselves unprepared for the next crisis—one that could be lurking just around the corner.
As we navigate this complex landscape, it’s essential for stakeholders, from policymakers to everyday consumers, to remain vigilant. By understanding the intricate web of liabilities and the potential for economic disruptions, we can advocate for a stronger, more resilient banking system that protects not just the institutions but also the individuals who depend on them. The lessons learned from SVB must not be relegated to history; they should serve as a catalyst for meaningful reform that prioritizes stability and accountability in our financial systems.
