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America’s Financial Regulatory System Is Still Broken

When a bank fails in the United States, questions about who is to blame are often directed at many different regulatory agencies, because the system is complex and hard for outsiders to understand. In the wake of the collapse of Silicon Valley Bank, the case for an overhaul could not be stronger.

EDINBURGH – When a bank fails, attention inevitably turns to its regulators. Who was asleep at the wheel? Who failed to spot the warning signs? The failure of Silicon Valley Bank (SVB) is no exception.

In the United States, these questions are often directed at many different agencies, since the system is complex and hard for outsiders to understand. So, the conclusion is often an inverted form of John F. Kennedy’s famous observation after the Bay of Pigs fiasco, to the effect that “success has many fathers, but failure is an orphan.” American bank failures often have several fathers – all disclaiming paternity.

Congress will get its teeth into the SVB collapse before too long, and we will learn more. In the meantime, a few facts are clear. SVB was exempted by the Trump-era Regulatory Relief Act from enhanced supervision. This means that it did not have to submit to stress tests, for example, which should have exposed its vulnerability to a sharp rise in interest rates. The United Kingdom’s stress test includes a five-point rise in interest rates, which would have revealed – and perhaps prevented – SVB’s maturity mismatch. Moreover, a five-year exemption from the Volcker rule, which prohibits proprietary trading by banks, allowed SVB to invest in venture capital funds. As its website proudly proclaimed: “There are many ways to describe us. Bank is just one.”

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