Breaking Down Broken Banks: The Case for a New Regulatory and Supervisory Framework

Authors

Federico Curbelo

Document Type

Note

Abstract

(Excerpt)

Bank failures are systemic breakdowns in regulatory and supervisory frameworks that threaten the financial bedrock of the United States economy and can potentially cause panic and contagion to the broader banking sector. Although banks function as standalone institutions, when one bank fails, it often takes down others with it. Silicon Valley Bank (“SVB”) was one such bank whose failure temporarily destabilized a whole sector and prompted important questions about the effectiveness of the current financial regulation and supervision scheme.

This Note argues that the current regulatory and supervisory categorization scheme that the Federal Reserve uses to keep banks in check is outdated and an alternative classification method to the asset-based framework is needed. The crash of SVB will be used as a case study to show the need to update the current regulatory and supervisory framework. Part I of this Note gives a general overview of bank regulation and legislation, explores the world of bank regulators and supervisors, and describes why Silicon Valley Bank failed. Part II of this Note first argues that the current regulatory scheme used to categorize banks is not working and then explains why it needs to be updated. Part III of this Note proposes the adoption of a new framework, the Asset Plus Model (“Asset Plus”), explains how it would work, and analyzes the potential consequences associated with not updating the current framework.