But the bond purchases became a problem as the Federal Reserve began to raise interest rates to address inflation. As Business Insider reported, a two-year U.S. Treasury note that offered nearly triple the amount of Silicon Valley Bank’s portfolio of long-term bonds – which generated income at an average of just 1.6% – was much more attractive.

Bond prices plunged, creating billions of dollars in paper losses for Silicon Valley Bank, popularly known as SVB.

To shore up its cash assets, in the face of increasing customer withdrawals, SVB sold $21 billion in bonds at a $1.8 billion loss.

Section 165 of the Dodd-Frank Act adopted so-called “enhanced prudential regulation” rules for all banking organizations with more than $50 billion in assets, designating them as “systemically important financial institutions,” popularly known by the term “too big to fail.” These standards were designed to be more stringent than those applied to smaller banks. Lawmakers believed the larger institutions posed far greater risk to the financial stability of the U.S.

These stricter rules required, among other things, that the banks deemed too big to fail periodically update for the Federal Reserve and the Federal Deposit Insurance Corp. a comprehensive resolution plan. Dubbed the Living Will, that plan details a company’s plans for a “rapid and orderly” dissolution of the bank in the event it is failing or has already failed. In addition, these too-big-to-fail banks had a requirement to periodically assess their risk under a variety of market conditions, including rises in interest rates and risk hedging strategies. The rules also said designated banks had significantly higher capital requirements.

No longer required to adhere to those key provisions of the Dodd-Frank Act, the failed banks did not. Arguably, the provisions could have saved them.

Industry leaders, among them Greg Becker, CEO of Silicon Valley Bank, lobbied Congress in 2015 to roll back some of the Dodd-Frank Act provisions.

Arguing that the $50 billion threshold needed to be raised, Becker said the restrictions on midsize banks under the Dodd-Frank Act were too burdensome and inhibited banks’ ability to “provide the banking services our clients need.”

In 2018, Congress, in a bipartisan vote, with the support of then-President Donald Trump’s administration, all of the federal banking agencies and the banking industry, passed the Economic Growth, Regulatory Relief and Consumer Protection Act. It amended the Dodd-Frank Act to substantially reduce the number of banks subject to the more stringent regulation by raising the threshold at which banks posed potential systemic risk, from $50 billion up to $250 billion.

On July 6, 2018, all of the banking agencies issued a statement confirming the elimination of these requirements.

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