Who is to Blame for Modern Bank Failures? An Analysis of the 2018 Bank Regulation Change on Banks’ Balance Sheets Leading Up to the 2023 Liquidation Crisis

Abstract

This paper provides an analysis of the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) of 2018 on the balance sheets of banks up to the 2023 banking crisis when Silicon Valley Bank (SVB) and other regional banks failed. Specifically, it analyzes how the EGRRCPA rolled back the Dodd Frank Act by increasing the threshold in which banks are subject to enhanced prudential standards from $50 billion total assets to $250 billion total assets. These regulatory changes led to banks taking on more liquidity risk which impacted their resiliency to shocks that occurred due to the high-interest rate environment. Furthermore, this study contrasts the liquidity positions of failed banks with their bank peers of equivalent size in order to assess regulatory effectiveness and the underlying cause of the specific bank failures. The findings suggest that the 2018 deregulation weakened liquidity oversight and increased interest rate risk, both of which contributed to bank vulnerabilities amid rising interest rates and deposit outflows. Additionally, the study provides predictive analysis of bank failures and found that increases in capital conservation buffers are critical to prevent bank failures.