When Silicon Valley and Signature banks failed in early March 2023, government regulators rushed in to guarantee deposits and protect bank customers. Under current banking regulations, though, there was no obligation for the government to step in.

Now, both Democratic and Republican politicians are making pronouncements about whether bipartisan-backed deregulation in 2018 led to the banks’ collapse and whether the banking industry needs more government intervention.

Sen. Elizabeth Warren of Massachusetts and U.S. Rep. Katie Porter of California, both Democrats, introduced a bill on March 15, 2023, to restore stiff banking regulations that they maintain would have prevented the practices that led to the recent bank collapses. But some Republicans, including U.S. Rep. Andy Barr of Kentucky, say lax government policy that included overspending – which Barr says, fueled inflation, as well as long-term low interest rates – not deregulation, was behind the banks’ failures.

In dispute are requirements in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that were rolled back in 2018. Dodd-Frank put in place financial regulatory changes in response to the 2008 global financial meltdown. The legislation included among its requirements one that banks with US$50 billion in assets be subject to strict standards. Some lawmakers, including Porter and Warren, say those requirements should have remained intact.

But the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 loosened the standards, raising the asset threshold to $250 billion, meaning fewer banks were under strict controls.

The Conversation asked Gerard W. Comizio, a law professor, former Wall Street attorney and former senior Treasury Department official, to explain some of the problems that spurred Silicon Valley Bank, Signature Bank and another bank to fail.

Significant withdrawals at all three banks caused cash crises that could not be addressed by selling assets, such as bank notes and bonds. In the case of all three banks, sales of their assets would have triggered significant additional losses, since their portfolios were worth less than they paid for them and interest rates were rising.

While some aspects of each failure were different, there were common elements, and a certain level of Murphy’s law – the idea that if something can go wrong, it will. In the case of these banks, everything went wrong.

In the last three months of 2022, Silvergate had a record $1 billion loss, due to heavy lending to troubled and failed crypto trading exchanges. And its interest rate-sensitive securities portfolio became kindling for the current crisis.

During 2022, Silvergate’s deposit base grew dramatically, almost doubling its assets to $210 billion. But the bank did not have either the administrative capacity or market demand to lend out all of the money, as banks normally do. So, it invested the excess deposits in Treasury bonds and mortgage investment products.

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