Accounting & Finance

Two ways better banking regulations can prevent the next bank collapse

  • 5 min Read
  • July 21, 2023

Author

Escalon

Table of Contents

In the wake of three bank collapses, Signature Bank, crypto-focused Silvergate, and the high-profile implosion of Silicon Valley Bank, many business owners are wondering — where were the fail-safe banking regulations when we needed them? Aren’t the banking regulations put into place following the 2008 banking collapse meant to prevent struggles and stumbles like these?

In this article, we’ll look at two banking regulations designed to stop banks from overleveraging themselves and taking on too much risk — and why these fail-safes missed the mark in 2023. 

Schedule a call today

Banking regulation #1: the Dodd-Frank Act 


The Dodd-Frank Wall Street Reform and Consumer Protection Act is a comprehensive set of regulations that apply to both banks and public companies. The act, which was approved in 2010, increases the level of corporate governance these organizations are subjected to, limits how much their executive team can earn, and sets stricter rules for credit rating agencies. 

In the banking sector specifically, Dodd-Frank created a 10-member Financial Stability Oversight Council and the Consumer Financial Protection Bureau. These independent groups were formed to help identify significant financial risks, guide the market and respond to banking threats quickly while minimizing depositor panic. 

Unfortunately, in the case of Silicon Valley Bank in particular, the Dodd-Frank act, and resulting oversight councils, failed to recognize (or respond to) the growing crisis before depositors were put at increased risk. 

For banking regulators, the signs were clear. 


Long before SVB’s collapse, regulators understood that rising federal interest rates could put a strain on banks. And as SVB’s liabilities increased month after month, the regulators who oversaw the bank failed to warn the government or depositors. 

According to some reports, it was SVB’s own poor management and mishandling of risk that triggered the bank’s insolvency. The right regulations were in place, but SVB failed to follow them carefully. An example of the deep level of mismanagement is how the bank struggled to pull together the basic data potential bank buyers were looking for as SVB prepared for purchase. No banking regulations can compensate for disorganized data — one sign of a company growing faster than it’s prepared to.  

Talk to us about how Escalon’s essential business services can help your firm deal with challenges.


Data aside, some argue that better oversight through every interest rate hike could have prevented the bank from becoming so overleveraged. SVB, like all banks of this size, was required to submit periodic reports to bank supervisors. As interest rates increased, supervisors should have been closely watching for early signs of distress, like the ballooning growth of uninsured deposits and the declining value of the bank’s investments in mortgage-backed securities. 

Banking regulation #2: FDIC-backed deposits


In 2010, as part of the Emergency Economic Stabilization Act, the FDIC raised the level of insured bank deposits from $100,000 to $250,000. While the vast majority of individual bank account holders won’t hit the upper limit of the new cap, millions of small businesses hit — and exceed it — many times over. 

This low limit on backed deposits causes bank customers with more than $250,000 in their accounts to immediately withdraw their deposits the moment they sense market turbulence. And that bank run scenario is exactly what happened at SVB and banks like it. Even banks unaffected by SVB’s insolvency saw depositors pull out millions in cash, fearful their bank would be next.  

Now, some lawmakers and regulators are calling for a higher limit — or no cap at all — to prevent future bank runs. 

While the FDIC technically only backs deposits up to $250,000, no one has lost their deposits.


The FDIC regulation states that the government can step in to cover both FDIC-insured and uninsured deposits by invoking the “systemic risk exception”. If allowing a group of large depositors to lose their cash would trigger a systemic risk, these bigger deposits can be backed at the government’s discretion. And since the 1980s, that exception has been leveraged in every collapse. 

If this unspoken best practice becomes explicit, bank customers (and especially small businesses) would have the peace of mind that comes from knowing no matter what happens to their bank, their deposits are safe. By raising or removing the FDIC cap, we may see the end — or a significant decline — in bank run situations. 

Are the post-2008 crisis banking regulations working?


According to Peter Conti-Brown, professor of financial regulation at the Wharton School of Business, the collapse of three banks earlier in 2023 suggests that the regulations put into place serve a valuable function, but may be underenforced. 

SVB was one mid-sized bank with a comparatively small list of customers. While many of these customers were influential tech companies, the full collapse of a bank this size shouldn’t have had the global impact it did. If our banking sector is truly sturdy, resilient and insulated from crises, the stumble of one shouldn’t take down others with it. Conti-Brown suggests the fallout triggered by SVB’s collapse could be either an overreaction or exposes just how fragile the banking system is in times of volatility.

Want more? Escalon has helped over 5,000 companies across a range of industries to optimize routine business functions, like taxes, accounting, insurance HR and payroll, and operate more efficiently. Talk to an expert today.

Schedule a call today

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

People Management & HR

Streamlining HR Processes, Best Practices for Small Business Owners 

Human Resources (HR) might feel like an afterthought for many small business owners juggling day-to-day demands, yet it has a...

Read More
People Management & HR

Streamlining HR Processes, Best Practices for Small Business Owners

Human Resources (HR) might feel like an afterthought for many small business owners juggling day-to-day demands, yet it has a...

Read More
People Management & HR

Leveraging AI for Efficient People Operations

Artificial intelligence (AI) isn’t just for tech giants anymore—it’s increasingly accessible to small and mid-sized businesses seeking a competitive edge...

Read More
Accounting & Finance

How to Set Up Payroll, A Guide for Small Business Owners 

Setting up a payroll system is an essential step that helps small business owners pay their employees accurately and on...

Read More
Accounting & Finance

Financial Planning for the Future, Setting Long-Term Business Goals

While small businesses must handle day-to-day tasks—like managing payroll or closing monthly books—long-term planning is the compass that keeps them...

Read More
People Management & HR

Benefits Administration, What Small Business Need to Know

Benefits administration can be a game-changer for small businesses aiming to attract and retain top talent. While salaries remain an...

Read More
Accounting & Finance

AAP vs. Cash Accounting: Which Method Is Best for Your Growing Business? 

Choosing the right accounting method can significantly impact how you track financial performance, manage taxes, and plan growth. Two common...

Read More
Accounting & Finance

Beyond Bootstrapping: Advanced Cash Flow Management for Scaling Companies 

Bootstrapping—financing growth through internal cash flow—is a hallmark of many successful startups. But as businesses mature past their initial stage,...

Read More
Technology & Security

Building a Scalable Tech Stack: How to Choose the Right Tools for Growth 

In today’s business landscape, technology is more than a convenience—it’s a strategic asset that can supercharge growth. But as you...

Read More