Two years later, no major legislation or regulation has passed, and the basic problem that caused the crisis persists.
Two years ago, the collapse of Silicon Valley Bank sounded an alarm over vulnerabilities in the banking system. And briefly, it looked like a call to action: The Federal Reserve released a 102-page critique of its own failures in oversight; Congress kicked off hearings to examine banking legislation; and columnists (including this one) outlined ideas for preventing the next crisis.
Yet all of that talking has led to very little. Regulators tightened up on supervision, at least for a while, but there haven’t been any major new laws or regulations. And the basic problem at the heart of the regional banking crisis remains: The financial system as a whole relies heavily on runnable liabilities — namely, sources of funding, such as uninsured deposits, that can be yanked away abruptly.
As long as banks are financially healthy, runnability is not a big problem. Regulators say the current risk is relatively low. Silicon Valley Bank is back in business under new ownership. “Over the past year, vulnerabilities from funding risks have declined to a level in line with historical norms,” the Fed wrote last month in its semiannual Financial Stability Report.
But runnability becomes a source of vulnerability when insolvency threatens, as happened to Silicon Valley Bank. And troubles could resurface. For example, President Trump’s tariff war might cause an economic slowdown or recession, which could result in big losses for some banks through their loan portfolios.
It doesn’t help that regulators seem to be shifting their focus away from the problems that Silicon Valley Bank brought to the surface. An interagency plan from 2023 to increase bank capital requirements starting this July 1, which bank lobbyists opposed, is being scaled back and postponed. Last month, Treasury Secretary Scott Bessent said he wanted to “help get banks back into the business of lending” by reducing how much they needed to keep in liquid assets such as Treasuries. And this past week, The Financial Times reported that regulators were preparing to announce within months a reduction in the supplementary leverage ratio, a backstop safety measure adopted in 2014.
The financial system still relies heavily on runnable liabilities
A bank run occurs when depositors and other creditors of a bank start to worry that their money is unsafe or might become unsafe, and pull it out while they still can. (See: “It’s a Wonderful Life,” 1946.) Deposit insurance is supposed to relieve that worry, but it doesn’t cover all bank liabilities. At Silicon Valley Bank, to take an extreme case, 94 percent of deposits were uninsured. Some other sources of funding that banks rely on can also be snatched back abruptly, such as short-term borrowings from other banks.