WASHINGTON — The warning signs were all there. Silicon Valley Bank was expanding at a breakneck pace and pursuing wildly risky investments in the bond market. The vast majority of its deposits were uninsured by the federal government, leaving its customers exposed to a crisis.
None of this was a secret. Yet bank supervisors at the Federal Reserve Bank of San Francisco and the state of California did nothing as the bank rolled over the cliff.
“Their duty is to make sure that the bank is being run in a safe and sound manner and is not a threat,’’ said Dennis Kelleher, president of Better Markets, a nonprofit that advocates tougher financial regulations. “The great mystery here is why the supervision was AWOL at Silicon Valley Bank.’’
A pedestrian passes by a Silicon Valley Bank Private branch Tuesday in San Francisco.
The search for causes and culprits — and solutions — is refocusing attention on a 2018 federal law that rolled back tough bank regulations put in place after the 2008-2009 financial crisis and, perhaps even more, on the way regulators wrote the rules that put that law in place.
The Silicon Valley Bank collapse — the second-biggest bank failure in U.S. history — is also raising difficult questions about whether the FDIC needs to offer more protection for deposits.
On March 10, regulators shuttered and seized the bank, based in Santa Clara, California. For months it had made a losing bet that interest rates would stay low. They rose instead — as the Federal Reserve repeatedly raised its benchmark rate to fight inflation — and the bank’s bond portfolio plunged in value. As its troubles became public, worried depositors started to withdraw their money in an old-fashioned bank run.
And over the weekend the federal government, determined to restore public confidence in the banking system, decided to protect all the bank’s deposits, even those that exceeded the FDIC’s $250,000 limit.
The demise of Silicon Valley Bank and of New York-based Signature Bank two days later has revived bad memories of the financial crisis that plunged the United States into the Great Recession of 2007-2009.
In the wake of that cataclysm, set off by reckless lending in the U.S. housing market, Congress passed the so-called Dodd-Frank law in 2010, tightening financial regulation. Dodd-Frank focused especially on “systemically important’’ institutions with assets of $50 billion or more — so big and interconnected with other banks that their collapse could bring the whole system down.
Those institutions had to maintain a bigger capital buffer against losses, keep more cash or other liquid assets on hand to handle a bank run, undergo annual “stress tests’’ from the Federal Reserve and write a “living will’’ to arrange for their affairs to be settled in an orderly manner if they fail.
But as the crisis faded into the past, and more and more banks grumbled about the burden of complying with the new rules, Congress decided to provide relief from the Dodd-Frank legislation. Among other things, it ditched the $50 billion asset threshold for the most stringent oversight, pushing it up to $250 billion. Many large lenders, including Silicon Valley Bank, were thereby freed from the tightest regulatory scrutiny.
Democratic Sen. Elizabeth Warren of Massachusetts, a leading critic of the banking industry, denounced the bill at the time, saying it would encourage banks to take more risk.
The law gave Federal Reserve officials the authority to reimpose tougher regulations on banks with assets between $100 billion and $250 billion if they felt it necessary.
But they chose not to be tough on those banks. For example, they required a stress test only every two years, not annually. So Silicon Valley Bank didn’t have to undergo a stress test in 2022 and wasn’t due for one until later this year.
Todd Phillips, a fellow at the left-leaning Roosevelt Institute and a former FDIC lawyer, said Congress’ deregulatory push during the Trump years created a “vibe shift.”
“It basically gave regulators permission to take their eyes off″ lenders like Silicon Valley Bank, he said. ”The regulators ran with that.’’
Warren and other lawmakers on Tuesday introduced legislation to undo the 2018 law and restore the tougher Dodd-Frank regulations.
But Kelleher at Better Markets said that U.S. bank regulators “don’t have to wait for a divided Congress to act in the best interests of the American public.’’
They could rewrite 20 bank-friendly rules the Fed and other bank agencies put in place during the Trump years. For example, for banks with $100 billion or more in assets, Phillips wrote in a report Wednesday, regulators should reinstate annual stress tests and raise capital requirements, among other things.
“When we roll back regulations so that bank executives can use these banks to boost their profits, to boost their own salaries, to get big bonuses, they are doing it by taking on more risk,’’ Warren told reporters Wednesday. “Banking should be boring. And we have a chance here in Congress to make banking more boring again.’’
The sudden collapse of Silicon Valley Bank has also turned attention to federal deposit insurance.
The FDIC only covers up to $250,000. But Silicon Valley Bank, the go-to institution for tech entrepreneurs, held cash for many startups: 94% of its deposits — including money that companies need to meet their payrolls — were above the $250,000 threshold and vulnerable to losses when the bank failed.
The idea that so many depositors would lose their savings threatened to shake public faith in the banking system. So the Biden administration announced Sunday night that the FDIC would cover 100% of deposits at Silicon Valley Bank, and also at Signature Bank
Now some are calling for a permanent increase in the deposit insurance limit.
“I hope now going forward they’re not going to treat this increase in the guaranteed deposits as just a one-shot response … but make it ongoing,’’ said Barney Frank, former chair of the House Financial Services Committee and director of failed Signature Bank. He also suggested an increase for businesses so they can meet payrolls.
How cashless spending has grown since 2015
How cashless spending has grown since 2015
Updated
Digital payment trends that had been steadily developing for a decade or more kicked into high gear when the COVID-19 pandemic accelerated the widespread adoption of cashless payments.
In March 2020, consumers pulled back discretionary spending across the board. Instead of live events and travel, for instance, Americans widely opted instead to spend money on groceries, home goods and digital entertainment. The mismatch of demand and supply caused the first of several pandemic-induced shock waves through global supply chains as retailers scrambled to keep up with the surge in online shopping for everything from living room furniture to hand sanitizer.
In 2020, Americans using cashless payments sent and received more than $7 trillion in credit and debit card payments and $62 trillion through automated clearing house transfers. ACH transfers, which include electronic cash transfer services like paycheck direct deposits, Zelle, and Venmo, had the highest rate of adoption among cashless payment types over the year.
Experian examined data from the Federal Reserve’s Payments Study to see how cashless spending changed in 2020 and how spending habits evolved in the years leading up to the pandemic. The data is broken down into the number of transactions in multiple spending categories for cashless spending in-person and remotely, as well as spending on e-commerce versus spending over the phone or by mail. It does not break out data on so-called “buy now, pay later” installment plans that have risen in popularity in recent years.
In 2020, stay-at-home guidelines and social distancing recommendations kept many Americans away from stores. While the way people shopped may have changed—many headed online—the way they purchased was almost the same. Credit and debit cards accounted for 3 in 4 purchases, a rate that was relatively unchanged from the prior year.
Fewer people used paper checks in 2020, a continuation of a yearslong trend that may have been accelerated further by social-distancing efforts. Sending and receiving money through ACH services like direct deposits, Venmo, or Paypal was the only form of payment that saw significant growth among consumers, reaching nearly 1 in 5 payments made—the most popular form of cashless payment after credit cards.
In 2020, ACH also saw an increase in usage as it was used by the government to transfer economic impact payments, or stimulus payments, to American consumers after the onset of COVID-19 pandemic.
Share of cashless transactions by type in 2020
Updated
In 2020, stay-at-home guidelines and social distancing recommendations kept many Americans away from stores. While the way people shopped may have changed—many headed online—the way they purchased was almost the same. Credit and debit cards accounted for 3 in 4 purchases, a rate that was relatively unchanged from the prior year.
Fewer people used paper checks in 2020, a continuation of a yearslong trend that may have been accelerated further by social-distancing efforts. Sending and receiving money through ACH services like direct deposits, Venmo, or Paypal was the only form of payment that saw significant growth among consumers, reaching nearly 1 in 5 payments made—the most popular form of cashless payment after credit cards.
In 2020, ACH also saw an increase in usage as it was used by the government to transfer economic impact payments, or stimulus payments, to American consumers after the onset of COVID-19 pandemic.
Card use among consumers continues to climb
Updated
Even as spending on credit cards saw slower growth in 2020, Americans spent the previous five years using their debit and credit cards for more and more purchases. As card payments increased over this period, interest rates on credit cards remained relatively low compared to historic levels. For most of the 2010s, the average bank-issued credit card carried a rate of around 13%, according to the Federal Reserve. That interest rate climbed to an average of 15% in the first quarter (Q1) of 2020 and has climbed even higher since: above 18% in August 2022.
Total card payments dip slightly in 2020
Updated
Consumers swiped their debit and credit cards at fewer registers in 2020 as the pandemic kept shoppers away from brick-and-mortar stores. Overall card spending dropped by nearly $3 billion compared with 2019. However, much of that jolt to in-person spending on credit cards was offset by Americans’ use of credit cards for online and other remote purchases.
Card spending varies by how consumers pay
Updated
In 2020, consumers tended to spend more when purchasing something over the phone or through the mail—which the Federal Reserve tracks as a single category. The average in-person purchase with a credit card in 2020 was $40, enough to snag a basket of items at the grocery store. Consumers spent more than that on average when paying through an e-commerce website, recurring autopay bills or payment installments, or some other remote shopping experience not specifically tracked by the Fed.
In-person shopping in which a consumer swipes a card or hands it to a cashier is considered “contact.” Contactless purchases are also counted as in-person sales, but refer to transactions when consumers use the tap-to-pay technology on their card or smartphone.
Cash isn’t always king
Updated
Long before the pandemic caused consumers to think twice about handling cash and checks, these types of transactions were already on the decline. Paper check usage has been dropping steadily since at least 2000. Meanwhile, ATM withdrawals, which provide a clue to how often consumers are using cash, have more or less stagnated according to the Federal Reserve.
Global data suggests that cashless payments have been gaining a foothold around the world. The World Bank, which has tracked financial inclusion since 2011, found that digital payment activity has grown steadily over the past few years. Adults that sent or received digital payments in developing economies increased from 35% in 2014 to 57% in 2021. As of 2021, 2 in 3 adults globally received or sent money digitally.
More than 1 in 3 adults in those countries used digital payments for the first time because of the pandemic, according to the World Bank 2021 Global Findex. Nongovernmental organizations, including the Bill & Melinda Gates Foundation, have long said that giving people access to digital banking and cashless payment options helps them use more financial services that can build wealth and economic stability.
This story originally appeared on Experian and was produced and distributed in partnership with Stacker Studio.
