Exploiting Fallout from SVB & First Republic Will Choke Off Capital for Small Businesses
The shockwaves triggered by the collapse of Silicon Valley Bank (SVB) and the more recent failure of First Republic Bank are rippling through the U.S. economy. Rising interest rates were already making it more difficult for small businesses to access capital for investment and operational needs. The rapid spike in rates has contributed to a 13 percent decrease in small business applicants being approved for at least some of the loans, lines of credit, and cash advances for which they applied. Now, the threat of intrusive regulation in response to internal negligence at the two banks, which regulators ignored even though they had the tools and authority to take action, could make matters worse.
Not surprisingly, according to our new Small Business Checkup Survey conducted by Technometrica, 60 percent of small business owners report that rising interest rates are having a negative impact on their business and 44 percent say that a “credit crunch” is doing the same. Misguided regulatory punishment aimed at small to mid-size banks would only serve to exacerbate small business woes, and in turn harm the broader economy.
President Biden and his allies, like Massachusetts Senator Elizabeth Warren (D-Mass.), are pointing blame for the latest bank failures on former President Donald Trump. The current Administration wants the American people to believe its inflation-inducing policies have nothing to do with current economic pressures, or the distortions that inflation is causing, like interest rate hikes that have led to financial pain and harm. But small business owners have a different view - 70 percent believe the Biden Administration is responsible for current inflationary conditions, according to the Small Business Checkup Survey.
A White House fact sheet specifically blames the bank failures on a bipartisan 2018 law (S. 2155) that tailored banking rules originally included in the Dodd-Frank Act. The reforms prevented one-size-fits-all regulation from stifling and harming regional and community banks - the very banks entrepreneurs mostly count on to meet their lending and financial-services needs. The misrepresentation of the practical changes enacted through S. 2155 are being exploited to impose inappropriate banking regulations on medium-sized banks. These baseless banking regulations would result in even less capital for small, local businesses.
The failures of SVB and First Republic had nothing to do with a law that right-sized banking regulation. The Federal Reserve’s easy money foray (and subsequent rapid-fire interest rate hikes) along with President Biden’s massive government spending created the conditions for the collapse of these institutions. Both institutions were flush with cash from their depositors and purchased long-term government bonds and mortgage-backed securities. As the Federal Reserve rapidly increased interest rates in 2022, management at these banks failed to efficiently ladder maturity dates and suffered from severe interest rate and duration risk on its long-term bonds and securities. Depositors got wind of the mismatched balance sheets, and a good chunk of them were uninsured deposits, which led to a classic bank run.
There is no evidence that the collapse of SVB or First Republic would have been prevented had the regulations that currently apply to the biggest banks been imposed; in the case of SVB, customers withdrew $42 billion in a single day. There is no regulation, capital requirement, or stress test that could have prepared any bank to withstand a shockwave of this magnitude.
The bipartisan law that tailored Dodd-Frank was reasonable reform. Even Barney Frank, the namesake of Dodd-Frank, acknowledges this fact. The law aimed to properly scale the most burdensome regulations that prevented small and medium-sized banks from lending to their communities. Specifically, S. 2155 raised the threshold for what qualifies as a “systemically important financial institution” from $50 billion to $250 billion and eased overly prescriptive rules and requirements for community and regional banks so that these institutions weren’t held to the same strict standards as large banks.
The truth is that bank regulators fell asleep at the wheel. The failures of SVB and First Republic were a problem of supervision, not regulation. Federal and state regulators had all the tools at their disposal to properly supervise these institutions but failed to take appropriate action. The San Francisco Federal Reserve Bank oversaw SVB, which was the most prominent bank under their supervision. SVB's CEO held a position on the San Francisco Fed's Board of Directors until the day of the bank's collapse. SVB's rapid asset growth, coupled with the bank's significant interest rate risk, should have been enough for the Fed to act and increase its scrutiny.
Biden Administration spending policies and regulators at the Federal Reserve should be the parties held accountable. Our banking system is one of the most regulated industries in the world, and piling on new regulations and compliance costs on regional banks would have a negative downstream impact on small businesses. Regional banks are big lenders to small businesses. Let’s keep it that way and fix the root causes of the SVB and First Republic failures rather than squeezing capital further as the nation possibly heads into a recession.
Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.
