(MENAFN) Recent events, including the forced sale of Credit Suisse and the failure of regional lender Silicon Valley Bank (SVB), are rekindling concerns about the risk of financial institutions defined as too big to fail. During the 2008 financial crisis, so-called too-big-to-fail banks were deemed too large and too intertwined with the U.S. economy for the government to allow them to collapse despite their role in causing the subprime loan crash. Yet 15 years later, the largest banks have only grown larger, and the weakening of post-crisis regulations has raised concerns about the safety of the U.S. banking system.
While the 2008 financial crisis involved complex financial instruments, such as mortgage-backed securities, credit default swaps, and derivatives, the recent banking turmoil is due to a number of other problems. Credit Suisse, one of 30 banks around the world designated by regulators as "globally significant," was hamstrung by a $5.5 billion loss on its dealings with private investment firm Archegos in 2021 and a spying scandal. When its biggest investor, Saudi National Bank, declined to put up more money, investors and depositors headed for the exits, paving the way for UBS' takeover of the bank on Sunday.
The failure of regional lender Silicon Valley Bank (SVB) is also raising concerns about the risk of too-big-to-fail banks. While SVB is not one of the largest banks in the U.S., its failure highlights the potential ripple effects of a bank's collapse on the broader financial system. Although the failure of SVB is not expected to have a significant impact on the U.S. economy, it underscores the need for strong regulations to prevent too-big-to-fail banks from collapsing.
The nation's largest banks, including JPMorgan Chase and Bank of America, have only grown larger since the 2008 financial crisis. JPMorgan Chase now has $2.6 billion in assets, a 16% increase from 2008, while Bank of America's assets have jumped 69% to $3.1 trillion. Meanwhile, lawmakers in 2018 weakened the post-crisis regulations enacted in what came to be known as Dodd-Frank, a sweeping law passed in 2010 aimed at ensuring the safety of the U.S. banking system.
Critics argue that the too-big-to-fail banks remain incredibly risky and are bigger and more concentrated than before. The recent events involving Credit Suisse and SVB highlight the need for strong regulations to prevent the collapse of financial institutions that are deemed too big to fail. While the recent banking turmoil is not expected to have a significant impact on the U.S. economy, it serves as a warning to policymakers and regulators that the risks posed by too-big-to-fail banks have not gone away. As such, it is crucial that lawmakers take action to strengthen regulations and ensure the safety of the U.S. banking system.
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