Financial Regulators Are Focused on the Wrong Thing
In 2015, the CEO of Silicon Valley Bank, Greg Becker, argued that the Dodd-Frank financial regulations should be loosened for banks like his, or they would be forced to spend resources on regulatory compliance instead of providing financing to job-creating companies in the innovation economy. But upon reading Becker’s testimony, one can see it offers more than grim irony. It presents an argument about what makes a bank “systemically important”, or a financial institution that cannot be allowed to fail. Becker, like many other midsize banks, claimed the cutoff was too low and too simplistic. He argued that you couldn’t be a systemic risk unless you were a large bank attempting exotic financial engineering.
This is a classic case of fighting the last war. In other words, regulators are focused on preventing a repeat of the 2008 financial crisis instead of anticipating and preventing the next crisis. Morgan Ricks, a financial regulation expert, argues that the issue lies in how regulators define systemic risk, which “has yet to be defined, let alone operationalized, in anything approaching a satisfactory way.” Instead of defining systemic risk solely in terms of assets, lawmakers need to take a more nuanced approach to better identify true systemic risks, rather than using a one-size-fits-all approach based solely on a bank’s size.
