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Dodd-Frank wasn't gutted, and it wasn't even touched much

The Economic Growth Act amended how the Fed can regulate the companies that own commercial banks, not how it can regulate the commercial banks themselves. There’s a huge difference.

In March 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was the topic of an opinion piece in the New York Times. (the Economic Growth Act). The article said that the plan "would change or get rid of parts of the Dodd-Frank Act."

In March 2023, the Times published an opinion piece by Senator Elizabeth Warren (D-MA) about the failure of Silicon Valley Bank. In it, Warren talks about the Economic Growth Act and says that the failure of Silicon Valley Bank was "the direct result of financial rules being weakened by leaders in Washington."

Even though they were written five years apart, both pieces of writing about the Economic Growth Act are way off.

First of all, the Economic Growth Act changed the Dodd-Frank Act, but it didn't get rid of any of its titles or sections. More importantly, the Economic Growth Act changed the "enhanced supervision and prudential standards for certain bank holding companies" set by the Federal Reserve. (Emphasis added.) That is, the Economic Growth Act changed how the Fed can regulate the companies that own commercial banks, but not how it can regulate commercial banks themselves.

It is very different. Several big companies are talking about buying SVB banking Group, the holding company that owned Silicon Valley Bank and other banking companies. Even though the FDIC now runs Silicon Valley Bank, SVB Financial Group is a different company.

Even the 2018 Times article overstated how much the Economic Growth Act "rolled back" rules on bank holding companies.

The biggest change to regulations that the Economic Growth Act made was to the so-called systemically important financial institution (SIFI) standards. These were the rules that Dodd-Frank put in place to keep a closer eye on bank holding companies with more than $50 billion in assets. (See Title IV.) But when you look closely, even these changes aren't that big.

On the surface, the bill raised the size limit for enhanced control. Now, only bank holding companies with total assets of more than $250 billion will have to follow stricter rules. But the bill only changed the bar from $50 billion to $250 billion in a technical sense. It also gave the Fed permission to "apply any prudential standard to any bank holding company or bank holding companies" with total assets of at least $100 billion.

In other words, bank holding companies with at least $100 billion, not $250 billion, were still subject to the Fed's enhanced supervision if, when, and how the Fed chose. The bill also gave the Fed the power to "tailor or differentiate among companies on an individual basis or by category, taking into account their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Board of Governors thinks are appropriate."

So, the bill gave the Fed a lot of room for choice. It was used by the Fed.

Republicans Set To Unveil Plan To Replace Dodd-Frank Act | The Title  Resource Network
The Fed made a number of new rules, but the most important ones for this talk are the new Prudential Standards for Large Bank Holding Companies and the Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements. In short, these new rules set up a set of groups for judging capital and liquidity ratios based on the size (total assets) of the bank holding company. (This Davis Polk & Wardwell paper has a handy 612-page summary.)

Under the new rules, the Fed basically raises the standards for the following four types of bank holding companies:

    The U.S. GSIBs are the biggest organizations in the country. (global systemically important banks).
    More than $700 billion in assets (but not a G-SIB).
    Between $250 billion and $700 billion worth of assets.
    Between $100 billion and $250 billion in assets as a whole.

Under the new rules, the Fed has different requirements for each type of company, but it can still choose to have different requirements for each institution. (For details, check out this handy summary from Deloitte.)

In the end, companies in each category are expected to meet different minimum capital and liquidity ratios and to meet different reporting requirements.

Putting aside the question of whether any of these rules actually make the banking sector safer and more stable, we can use SVB Financial Group's yearly reports to track their capital and liquidity measures from 2015 to 2022, which are the years when they crossed several regulatory thresholds. If we can believe the financial statements, which, if we can't, is a much bigger problem, it is very hard to say that the new rules hurt SVB Financial Group's commercial bank. (If you keep searching for "leverage ratio," you'll find a conversation and then a table with ratios for each annual report.)

Let's focus on the new $100 billion limit to keep things simple.

The $100 billion mark was finally crossed by SVB Financial Group in 2020. Because of this, the company was put in category IV in 2021. Even though the company had to meet new standards, it continued to have too much money. This has been the case since at least 2015. For example, its minimum leverage and tier 1 risk-based capital ratios were 4% and 8.5%, respectively. But SVB Financial Group said that its debt ratio was 7.93% and that its tier 1 capital ratio was 16.8%.

These numbers were much higher than what was needed and were also higher than in previous years. If you're curious, SVB Bank had similar ratios, which were well above the minimum needed.

The 2022 financials for SVB Financial Group show similar ratios, but the leverage ratio is a little bit higher at 8.11 percent and the tier 1 capital ratio is a little bit lower at 15.4 percent. (Silicon Valley Bank also reported similar ratios, both higher than in 2021, and both well above the minimum required.)

It is hard to compare the company's needs now to what they would have been if the Economic Growth Act hadn't changed Dodd-Frank. But SVB Financial Group did reach $50 billion in 2017, before these changes were made. And the financial records show that, just like in 2022, the company had a lot of money, with ratios that were about twice as high as what was needed. (At least one analysis suggests even the higher liquidity coverage ratio standards would have made no difference in preventing the Silicon Valley Bank failure.)

So, SVB Financial Group and the commercial bank it was a part of had capital ratios that were close to twice as high as what was needed, even after it crossed the $100 billion mark. Given that the 2018 changes to Dodd-Frank were made at the level of holding companies and that what regulators have done to improve requirements after Dodd-Frank amounts to higher capital and liquidity ratios, it is a bit of a stretch to say that the Economic Growth Act caused Silicon Valley Bank to fail.

Michael Barr, who is the Fed's vice chair for supervision, is the person that Congress should listen to the most. In regards to how the Federal Reserve supervised Silicon Valley Bank, he said, "We need to be humble and do a careful and thorough review of how we supervised and regulated this firm and what we should learn from this experience."

People are putting too much faith in federal rules and federal regulators if they think there will be no bank failures. This event should force us to face the fact that more rules don't always make things safer.

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