Silicon Valley Bank said it was too small to need regulation. Now it’s ‘too big to fail’ | Rebecca Burns and Julia Rock

Silicon Valley Bank was supposedly the type of institution that would never need a government bailout - right until its backers spent three days on social media demanding one, and then promptly receiving it, after the bank's spectacular collapse last week.

Eight years ago, when the bank's CEO, Greg Becker, personally pressed Congress to exempt SVB from post-2008 financial reform rules, he cited its "low risk profile" and role supporting "job-creating companies in the innovation economy". Those companies include crypto outfits and venture capital firms typically opposed to the kind of government intervention they benefited from on Sunday, when regulators moved to guarantee SVB customers immediate access to their largely uninsured deposits.

Fifteen years after the global financial crisis, the logic of "too big to fail" still prevails. The financial hardship of student debtors and underwater homeowners is a private problem - but losses sustained by titans of tech and finance are a matter of urgent public interest. Moral hazard for thee, but not for me.

What's more, SVB's meteoric rise and fall serves as a reminder that many of the guardrails erected after the last crisis have since been dismantled - at the behest of banks like SVB, and with the help of lawmakers from both parties beholden to entrenched finance and tech lobbies.

Before becoming the second-largest bank to fail in US history, SVB had transformed itself into a formidable influence machine - both in northern California, where it became the go-to lender for startups, and on Capitol Hill, where it spent close to a million dollars in a five-year period lobbying for the deregulatory policies that ultimately created the conditions for its downfall.

"There are many ways to describe us," SVB boasts on its website. "'Bank' is just one."

Indeed, SVB's management appears to have neglected the basics of actual banking - the bank had no chief risk officer for most of last year, and failed to hedge its bets on interest rates, which ultimately played a key role in the bank's downfall. In the meantime, the bank's deposits ballooned from less than $50bn in 2019 to nearly $200bn in 2021.

From the moment that Congress passed banking reforms through the 2010 Dodd-Frank law, SVB lobbied to defang the same rules that would probably have allowed regulators to spot trouble sooner. On many occasions, lawmakers and regulators from both parties bowed to the bank's demands.

One of SVB's first targets was a key Dodd-Frank reform aimed at preventing federally insured banks from using deposits for risky investments. In 2012, SVB petitioned the Obama administration to exempt venture capital from the so-called Volcker Rule, which prevented banks from investing in or sponsoring private equity or hedge funds.

​​"Venture investments are not the type of high-risk, 'casino-like' activities Congress designed the Volcker Rule to eliminate," the bank argued to regulators. "Venture capital investments fund the high-growth startup companies that will drive innovation, create jobs, promote our economic growth, and help the United States compete in the global marketplace."

After the Obama administration finalized the Volcker Rule in 2014 without a venture capital carveout, SVB sought its own exemption that would allow it to maintain direct investments in venture capital funds, in addition to providing traditional banking services for roughly half of all venture-backed companies.

One such firm was Ribbit Capital, a key investor in the collapsed cryptocurrency exchange FTX, which lauded SVB's tech-friendly ethos in a 2015 New York Times profile. "You can go to a big bank, but you have to teach them how you are doing your investment," Ribbit's founder told the Times. At SBV, "these guys breathe, eat and drink this Kool-Aid every day."

In the transition between the Obama and Trump administrations, SVB got what it wanted: a string of deregulation, based on the idea that the bank posed no threat to the financial system.

In 2015, Becker, the CEO, submitted testimony to Congress arguing that SVB, "like our mid-size peers, does not present systemic risks" - and therefore should not be subject to the more stringent regulations, stress tests and capital requirements required at the time for banks with $50bn or more in assets.

Two years later, SVB was one of just a handful of banks to receive a five-year exemption from the Volcker Rule, allowing it to maintain its investments in high-risk venture capital funds.

The deregulatory drumbeat grew louder in Congress, and in 2018 lawmakers passed legislation increasing to $250bn the threshold at which banks receive enhanced supervision - again, based on the argument that smaller banks would never prove "too big to fail".

The Federal Reserve chairman, Jerome Powell, supported the deregulatory push. Under Powell, a former private equity executive, the Fed in 2019 implemented a so-called "tailoring rule", further exempting mid-size banks from liquidity requirements and stress tests.

Even then, the banks' lobbying groups continued to push a blanket exemption to the Volcker Rule for venture capital funds, which Powell advocated for and banking regulators granted in 2020.

Then, in 2021, SVB won the Federal Reserve's signoff on its $900m acquisition of Boston Private Bank and Trust, on the grounds that the post-merger bank would not "pose significant risk to the financial system in the event of financial distress".

"SVB Group's management has the experience and resources to ensure that the combined organization would operate in a safe and sound manner," Federal Reserve officials wrote.

Since the financial crisis, SVB has reported spending more than $2m on federal lobbying efforts, while the bank's political action committee and executives have made nearly $650,000 in campaign contributions, the bulk to Democrats.

Among the highlights of this influence campaign was a 2016 fundraiser for the Democratic senator Mark Warner of Virginia, hosted by Greg Becker in his Menlo Park home. A few months later, Warner and three other Democratic senators wrote to regulators arguing for weaker capital rules on regional banks.

In the wake of SVB's collapse, Republicans have not renounced their votes for deregulation - nor have most of the Democrats who joined them, even as Biden is promising a crackdown.

Warner took to ABC's This Week on Sunday to defend his vote; Senator Jeanne Shaheen, the Democrat from New Hampshire, told NBC on Tuesday that "all the regulation in the world isn't going to fix bad management practices". Senator Jon Tester, the Democrat from Montana and a co-sponsor of the 2018 deregulatory law, even held a fundraiser in Silicon Valley the day after the SVB bailout was announced.

Unless they reverse course, the Silicon Valley Bank bailout could prove politically disastrous for Democrats, who just oversaw the rescue of coastal elites in a moment of ongoing economic pain for everyone else.

The good news is that there are straightforward steps that Democrats can take to start fixing things.

For example: Senator Elizabeth Warren's legislation to repeal Trump-era financial deregulation.

Democrats can also revisit the areas where Dodd-Frank fell short, including stronger minimum capital requirements, and consider longstanding proposals to disincentivize risky behavior by banks by reforming bankers' pay. And they should demand that Powell recuse himself from the Federal Reserve investigation of recent bank failures and take a hard look at whether his disastrous record merits outright dismissal under the Federal Reserve Act, which allows the president to fire a central bank chair "for cause".

And yet even now - amid the wreckage of deregulation - these and other measures to better regulate the banks may still be nonstarters among both the Republicans and corporate Democrats who voted for the regulatory rollbacks and have so far shown little sign of repentance.

The words of the Illinois Democratic senator Dick Durbin still ring true, 14 years after the financial crisis.

"The banks - hard to believe in a time when we're facing a banking crisis that many of the banks created - are still the most powerful lobby on Capitol Hill," he said back in 2009. "And they frankly own the place."

If that remains true today, the possibility of change looks grim.