Like any other trusted institutions, banks are capable of failing. Over 550 banks have collapsed since 2001, according to the Federal Deposit Insurance Corp.
Nonetheless, the recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse was a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk.
But experts say these financial disasters could have been prevented.
“Silicon Valley Bank’s failure could and should have been prevented by better regulation and supervision by the Federal Reserve,” said Aaron Klein, a senior fellow of economic studies at the Brookings Institution. “The Federal Reserve needed to be the one saying, ‘Wait a second, you have some serious interest rate risk that you need to hedge against.’ And they failed [to do that].”
Experts say the focus should be on ensuring that the rules are being enforced.
“As recently as 2019 and more recently even, there were warnings that things needed to be changed here, that they’re taking on additional interest rate risk, and that they’re going to have some potential liquidity problems in the event that interest rates begin to rise,” said William T. Chittenden, an associate professor of finance and economics at Texas State University.
The collapse of SVB also revealed the danger of deregulation. Several politicians and researchers have pointed to the rollback of Dodd-Frank regulations by the Trump administration as one of the main reasons for the bank’s failure.
“What happened in Dodd-Frank was they said that all banks over $50 billion would be subject to enhanced prudential standards,” explained Klein. “The rollback said nobody’s subject to that between $50 billion and $100 billion, and between $100 billion and $250 billion, it is optional.”
“SVB happened to fall in that category of between $50 billion and $250 billion so when they raised that, they weren’t subject to this great scrutiny,” said Chittenden.
Watch the video to find out more about why banks fail in the U.S.
