Elizabeth Warren: SVB's collapse underscores the need for 'stringent' banking 'oversight'

Elizabeth Warren: SVB's collapse underscores the need for 'stringent' banking 'oversight'
image via Creative Commons.

Ever since being elected to the U.S. Senate in 2012, Sen. Elizabeth Warren (D-Massachusetts) has been sounding the alarm about the need for "stringent" banking regulations — the type that were enacted as part of President Franklin Delano's Roosevelt's New Deal during the 1930s but were weakened during the 1990s and 2000s. The liberal senator has repeatedly said that the economic crash of 2008, the Wall Street bailouts and the Great Recession make an argument for reinvigorating the New Deal and preventing the banking sector from collapsing the U.S. economy.

The liberal senator revisits those arguments in an op-ed published by the New York Times on March 13, describing recent bank failures — including the Silicon Valley Bank (SVB) debacle — as a "direct result of leaders in Washington weakening the financial rules."

"In the aftermath of the 2008 financial crisis," Warren observes, "Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law…. Banks like SVB — which had become the 16th largest bank in the country before regulators shut it down on Friday, (March 10) — got relief from stringent requirements, basing their claim on the laughable assertion that banks like them weren't actually 'big' and therefore, didn’t need strong oversight."

READ MORE:Silicon Valley Bank becomes 'largest bank' to collapse 'since 2008' financial catastrophe: report

To understand why Warren feels so passionately about "strong oversight" for the banking sector, it helps to know some things about the United States' economic history. The Wall Street crash and bank failures of 1929 left millions of formerly middle-class Americans destitute, but the Banking Act of 1933/Glass–Steagall Act established the Federal Deposit Insurance Corporation (FDIC); 90 years later, FDIC insurance still protects savings and checking accounts as well as certificates of deposit. However, stocks and mutual funds are not FDIC-protected.

On Sunday night, March 12, the Biden Administration assured SVB customers that they would have access to all of their money the next morning. This is quite a contrast to 1929, when millions of American bank customers lost everything.

Like progressive Sen. Bernie Sanders (I-Vermont), Warren has often been a scathing critic of Wall Street lobbyists. But while Sanders identifies as a "democratic socialist," Warren considers herself a "capitalist to my bones." Not unlike FDR 90 years ago, Warren views herself not as an enemy of capitalism, but as someone who is fighting to prevent it from self-destructing. And she sees SVB's problems as a glaring example of capitalism playing economic Russian roulette.

"SVB suffered from a toxic mix of risky management and weak supervision," Warren explains. "For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits. This meant that weakness in a single sector of the economy could threaten the bank's stability."

READ MORE:Silicon Valley Bank's collapse triggers concern over potential 'bloodbath' and risk to broader markets

Read Sen. Elizabeth Warren’s full op-ed at this link (subscription required).

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