Voice of the Industry

Regulators are more prepared for the current banking crisis

Thursday 23 March 2023 13:59 CET | Editor: Vlad Macovei | Voice of the industry

Steve Boms, Founder and President of Allon Advocacy and Executive Director of FDATA North America, shares valuable insights into the collapses of Silvergate, SVB, and Signature Bank and how US regulators prevented the crisis from spreading.


Steve Boms shares valuable insights into the collapses of Silvergate, SVB, and Signature Bank and how US regulators prevented the crisis from spreading.


To a casual observer, the events of the last several weeks in the banking sector may be eerily reminiscent of the 2008 financial crisis. Interest rate and investment risk fueled a run on deposits in Silicon Valley. A large bank in New York faltered shortly after. A giant Swiss financial institution was acquired under duress – and with the encouragement of the Swiss government – over a weekend. 

But the 2023 banking crisis doesn’t compare – at least yet – to 2008. During the 2008-2009 financial crisis, at least 165 US banks failed as contagion from the mortgage market spread across the financial system. In fact, more than 250 failed in 2010 and 2011, after the crisis had abated, but those numbers slowed in subsequent years. In fact, there were zero US bank failures in both 2021 and 2022. Of course, that streak ended earlier this month.

Three US banks have met their demise in recent weeks, including one (Silicon Valley Bank, or SVB) that was a major financial conduit to startups across a number of industries and that also is the banker of choice to popular consumer websites and services like Etsy and Roku. Notably, the failures all took place nearly simultaneously. Silvergate Bank in San Diego (USD 16 billion in assets) failed on a Wednesday. SVB (USD 209 billion in assets) went under on a Friday. And then, the following Sunday, regulators announced that Signature Bank in New York City (more than USD 118 billion in assets) had been shuttered over the weekend.

In the US banking system, depositors historically have lost access to portions of their funds that weren’t insured when their bank fails, at least temporarily, until the bank’s assets are either acquired or sold. For SVB, that meant companies like Etsy had to halt payments to the entrepreneurs who sell goods on its site, and scores of technology companies wondered whether they would be able to meet payroll obligations on March 15. Those repercussions are huge for individual businesses but could have catastrophic implications for the entire economy, too.

So why isn’t 2023 a replay of 2008? Thanks, at least in part, to the Dodd-Frank Act – the legislation enacted into law in 2010 to prevent the kind of financial crisis that we experienced in 2008 and 2009.

In the US, the Federal Deposit Insurance Corporation (FDIC) generally insures only USD 250,000 of each depositor’s assets. In addition to individual consumers, SVB’s clients were businesses, startups, and wealthy individuals. (Along with Etsy, SVB depositors included Compass Coffee, Vox Media, and Roku.) As a result, about 90% of its deposits were uninsured, and uncertainty existed as to whether customers would ever see some – or any – of those funds.

Enter Dodd-Frank and US regulators. The Sunday after SVB failed, US Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell, and FDIC Chair Martin Gruenberg announced SVB and Signature Bank deposits would be ‘fully protected’ regardless of whether they were insured. This announcement marked the first time the agencies utilised a Dodd-Frank authority that allows the agencies to designate the failure of an individual institution as ‘systemic’ and, in so doing, utilise a special fund to make depositors whole. Under Dodd-Frank, this fund will be replenished through the assessment of special fees on the remainder of the financial institution marketplace. As a result, SVB’s and Signature Bank’s customers had full access to all of their deposits the Monday morning after the banks failed. 

US regulators didn’t stop there

The Treasury Department and Federal Reserve additionally established a new programme, the Bank Term Funding Programme (BTFP), that will ‘help assure banks have the ability to meet the needs of all their depositors.’ Specifically, the BTFP allows US banks to access loans to meet deposit demands on generous terms. Instead of having to sell off their interest-rate-ravaged treasuries, banks will be allowed to use them as collateral for a loan at their original value, providing much-needed liquidity. As of the week ending March 15, the BTFP had provided nearly USD 12 billion in loans to US banks, shoring up their liquidity positions.

Of course, the forced acquisition of Credit Suisse by UBS last weekend underscores that, much like 2008, volatility in the banking system isn’t constrained to the US. Here, too, regulators have responded strongly. A number of central banks, including those of the US, the U.K, Japan, the European Union, and Switzerland announced that swap operations, which help international banks access US dollar financing, would shift from weekly offerings to daily through at least the end of April. The move was aimed at calming the markets by ensuring that dollars remain readily available throughout the global financial system amidst the current crisis. 

It’s been said, because no two financial crises are alike, it’s impossible for policymakers to foresee how to best protect consumers, small businesses, and the global economy more broadly from the next crisis. While that may be true, the lessons learned from 2008 – and the legal authorities granted to US regulators in the fallout from it – have thus far served to mitigate the impact of the current volatility in the banking sector. 

About Steve Boms

Steve Boms is the Founder and President of Allon Advocacy, LLC, a fintech and policy consulting firm based in Washington DC. Steve is also the Executive Director of the Financial Data and Technology Association of North America, which represents fintech companies and aggregation platforms. Steve has also been a contributor to the Open Banking/Open Finance Report 2022.


About Allon Advocacy

Allon Advocacy, LLC is a financial technology public policy consulting firm based in Washington DC. 

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Keywords: banks, startup, financial institutions, online banking
Categories: Banking & Fintech
Companies: Allon Advocacy, FDATA Global
Countries: United States
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Banking & Fintech

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