An old adage is that history will repeat itself. In other words, all of this has happened before, and it will all happen again. Another banking crisis is upon us following the familiar cycle of financial deregulation. The failures of Silvergate, Silicon Valley, and Signature Banks provide an opportunity to learn and to act.
 
From the early 1980s through the 1990s, Presidents and Congress worked together on “financial services modernization.” Loosened restraints led to the savings and loan crisis, speculative subprime mortgage lending, and a myriad of other abuses that caused the financial system be severely tested after Lehman Brothers collapsed. The Dodd-Frank Act was borne out of these dominoes falling to prevent a repeat of those abuses. A more recent President and Congress relaxed Dodd-Frank standards. One of the leading advocates (and beneficiaries) of the loosened standards was Silicon Valley Bank (“SVB”). SVB’s executives reportedly assured members of Congress that SVB had other robust risk management measures. As we have learned in the past couple of weeks, SVB did not have adequate risk management for most of last year. Elected officials, regardless of party affiliation, enjoy a “free vote” on these matters.
 
True reformers now claim that only a structural change to the way Congress acts on financial regulation will prevent future losses and suggest that the budget process rules provide a guide. For over 40 years, the Congressional Budget Act has required the Congressional Budget Office to estimate the likely effects of major fiscal legislation. While this requirement has not halted deficit-increasing legislation, it has derailed some legislation and forced proponents of legislation to offset for new spending or tax cuts. More impressively, it resulted in major legislation, such as the Affordable Care Act and the 2022 Inflation Reduction Act, to pay for costs but also include major deficit reduction.
 
Financial regulatory legislation has more impact on the country’s finances than the vast majority of explicitly fiscal legislation. Poorly developed standards full of loopholes can lead to financial institutions taking on excessive risks that lead to significant losses and larger systemic problems. The recent bank failures show the major public expenditures for deposit insurance as well as subsidies to stabilize other financial institutions.
 
Reformers and commentators wisely are citing the need for a CBO type review of financial regulatory legislation. They express hope for breaking out of this latest crisis to install reforms durable enough to have a chance to survive the money-induced amnesia that will inevitably follow…and lead to the next crisis.