Is Sinema to blame for the failure of Silicon Valley Bank?

There are huge flaws in Gallego's attempted indictment.

Ruben Gallego tried to exploit the failure of the Silicon Valley Bank against Kyrsten Sinema, a likely U.S. Senate opponent.

Standing in front of the company’s Tempe office, he contrasted their votes on whether to increase the threshold for Dodd-Frank’s heightened regulatory scrutiny of systemically important financial institutions from $50 billion in assets to $250 billion. Sinema voted in favor; Gallego voted against.

In so doing, in Gallego’s account, Sinema was siding with Wall Street, while he was protecting Arizonans against Wall Street.

There are a few huge flaws in Gallego’s attempted indictment.

In the first place, it wasn’t the big Wall Street banks that asked for the threshold to be increased. The request came from community and regional banks so they could better compete against the big Wall Street firms. 

Compliance with the increased regulatory scrutiny was expensive, and local banks were less able to absorb the cost and compete for customers. The too-big-to-fail banks were getting even bigger. 

We aren’t really big enough to be a threat to the stability of the overall financial system, went the pitch from the community and regional banks. So there’s no reason to put us at a competitive disadvantage by subjecting us to the regulatory oversight designed for the truly big guys. 

That doesn’t mean that community and regional banks underneath the threshold aren’t subject to regulatory requirements and oversight. They are. Just not the heightened Dodd-Frank regimen.

In the second place, it is highly unlikely that the outcome would have been different if SVB had been subjected to the heightened Dodd-Frank regimen. SVB wasn’t parking depositor dollars in exotic, illiquid investments. It was buying easily marketable Treasury bonds and insured mortgage-backed securities. Regulators consider them supersafe and prudent in calculating the adequacy of bank capital. There was nothing about what SVB was doing that would have raised a red flag under Dodd-Frank that was missed under standard bank regulation and oversight.

After the balance between deposits and withdrawals moved against SVB and it needed to liquidate those supersafe and prudent securities, it had to sell them at a discount due to rising interest rates. In retrospect, SVB should have hedged against such a prospect. But unrealized losses in such securities are widespread in financial institutions and, prior to SVB’s failure, regulators hadn’t required compensatory actions.  

Finally, except for those who worked for SVB, the ordinary Arizonans Gallego purports to be protecting haven’t been damaged by its failure. SVB ran back-office operations in its Tempe location. It didn’t have a customer branch here.

SVB catered to the tech business crowd, not ordinary Jacks and Jills wanting a demand checking account. And the balances of Jacks and Jills were already guaranteed by the federal government up to $250,000. Nothing happened to Jacks and Jills because SVB wasn’t subject to Dodd-Frank’s heightened scrutiny.

In fact, the only thing in this whole episode that actually fits Gallego’s narrative of siding with the rich and well-connected against ordinary Jacks and Jills was the decision for the FDIC to guarantee all SVB deposits, well above the established $250,000 limit. That was a bailout for SVB’s tech customers, who otherwise would have likely received a 10-15% loss on their deposits. The funds to make them whole will come from deposit insurance premiums banks pass on to all customers, including Jack and Jill. 

In other words, Jacks and Jills will help pay to make the tech companies, with accounts in the millions, whole. And guess what? Gallego said he supported the FDIC guaranteeing all SVB deposits. As did Sinema.

Whether the threshold for Dodd-Frank’s heightened scrutiny was $50 billion or $250 billion wasn’t a material factor in SVB’s failure. Runaway inflation was.

Runaway inflation is primarily due to incontinent monetary policy. But excessive federal spending and debt have contributed, for which both Gallego and Sinema are complicit. 

Reach Robb at robtrobb@gmail.com.