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The economic environment’s abrupt departure from zero-interest rates in the past year might mean that a collapse in the risk-filled banking sector was always likely, but almost nobody was expecting this, not even the regulators. Since the famously terrifying bank runs that ushered in the Great Depression of the 1930s, the Federal Deposit Insurance Corporation has guaranteed deposits up to a certain threshold, but that got thrown out the window on March 12 night when the Federal Reserve, Treasury, and FDIC jointly announced a “systemic risk exception” that they also insisted wasn’t a bailout. Now all the depositors on Silicon Valley Bank’s roughly $220 billion balance sheet will be made whole, even though around 95% of them weren’t insured by the FDIC on March 10. Clearly something has to change, and Jason Furman, the Harvard economist who once advised President Barack Obama, has a three-point plan. Still, he insists “no one should feel good about what happened here.”

SVB became the second-largest bank failure in U.S. history after the largest-ever bank run, and while it insisted it was solvent right up to the very end, it just wasn’t prepared for the surge in withdrawals. The bank had reinvested many of its assets into risky long-term bonds that lost value as the Fed hiked interest rates, meaning that as the tech sector freaked out about the solvency of its favorite bank, it didn’t have the cash on hand to pay them.

But with debates still raging over who and what was responsible for the crisis and if the government should step in to fix it, some things are becoming clear: Small and regional banks like SVB may not be as different from Wall Street behemoths as they’d like us to think, and banking regulation was revealed to be no match for a skittish group of tech executives.

“Regulators probably needed to do what they did to prevent potentially chaotic damage across the economy,” Jason Furman, a Harvard economist who held senior positions in two economic councils advising the president during the Obama administration, wrote in a tweet on March 12.

Furman was referring to regulators’ decisions to step in and seize the assets of SVB and crypto-focused Signature Bank on March 12, but added that the need for them to do so came down to a series of decisions and rulings that were likely “wrong” and allowed the banking spiral to occur. He outlined a three-point plan of next steps to stop it from happening again, largely focused on expanding regulators’ reach to keep all banks—even the small and regional ones who only years ago declared themselves innocuous to the financial system—in check.

Getting regulators up to speed

The last time banks had to deal with big regulatory oversight changes was after the 2008 financial crisis, when many institutions were hit by bank runs similar to the one that decimated SVB last week. The Obama administration pushed through the Dodd-Frank Act in 2010, which significantly increased accountability and transparency requirements for financial institutions, regulatory adjustments that would increase banks’ preparedness for sudden surges in withdrawals and discourage excessive risk-taking.

Dodd-Frank was supposed to keep all banks prepared for a crisis through regular stress tests and detailed plans for winding down operations in an orderly way in the event of bankruptcy. But the law has weakened over time, after intense lobbying from bank executives including SVB CEO Greg Becker successfully reduced the act’s requirements for small and regional banks in 2018.

“SVB, like our midsized bank peers, does not present systemic risks,” Becker said in a 2015 testimony to the Senate Banking Committee. “Because SVB’s business model and risk profile does not pose systemic risk, imposing the numerous Dodd-Frank Act requirements that were designed for the largest bank holding companies would place an outsized burden on us, with minimal corresponding regulatory benefit.” Notably, when the Fed, FDIC, and Treasury intervened last weekend, they cited a “systemic risk exception” to their normal operating process.

Furman outlined his three-point idea to understand what caused SVB’s failure and how to prevent future ones. The first step investigators need to take is to “find out what went wrong with regulation,” and how such a large systemic risk could have developed overnight. Secondly, existing regulation needs to be strengthened, Furman wrote, and expanded to cover smaller banks in addition to Wall Street giants. “I always thought small and midsized banks got off too easy,” he said.

The demand to strengthen regulatory foundations for banks of all sizes was echoed on March 13 by Democratic Sen. Elizabeth Warren, who wrote in a New York Times op-ed that had Congress and former President Donald Trump not rolled back Dodd-Frank, “SVB and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks” and may have been better prepared for last week’s flurry of withdrawals.

When smaller banks were lobbying for more lenient oversight in 2016, Furman insisted that the Obama-era changes were not as big a stumbling block as the banks were making them out to be.

“There’s no evidence at all that Dodd-Frank has had a negative impact on this sector,” he told the?Wall Street Journal?at the time, referring to the growth of small banks since the law was enacted as evidence. “In all those respects, this sector has been really successful in the last six years, and so it’s hard to say Dodd-Frank caused a problem.”

Furman’s third point had less to do with regulation and more with what banks themselves could do to guard against a bank run. “Increase deposit insurance—and make everyone pay for it in advance,” he wrote. (The market seems to agree that this change is coming, as many regional lenders, especially West Coast–based ones, saw record drops in share value when the market opened on March 13. In other words, investors see less profitable regional lending ahead.)

A larger deposit insurance fund to ensure clients’ funds are safe may have softened the blow in SVB’s case. Regulators confirmed on March 10 that all deposits under the FDIC’s $250,000 insurable limit would be available by March 13, but as much as 89% of SVB’s $175 billion in deposits is uninsured, according to 2022 regulatory filings, since the bank’s clientele is largely made up of a relatively small number of tech companies with big balance sheets. Regulators pledged on March 12 that all depositors—even uninsured ones—would have access to their funds, although it required extraordinary government measures.

But raising deposit insurance funds was another potential protection for consumers that SVB lobbied against in the past. The bank was one of several to oppose the FDIC’s proposal last year to increase how much banks pay into their deposit funds, The Lever reported on March 12, citing federal records. SVB and other banks reportedly insisted their risk of failure was low, and paying more into deposit funds would hurt their bottom line.

Furman and stricter Obama-era banking regulations may be forgiven for feeling vindicated over the recent turn of events, although the economist insisted in his tweet that the crisis stemming from SVB’s collapse could still have serious ramifications for the economy.

“This was not the system working. The system failed and it was jury-rigged to keep it going. Need a better system,” he wrote.