Congressman discusses why Silicon Valley Bank failed

Congressman Ro Khanna led efforts to ensure depositors of Silicon Valley Bank could withdraw their funds following the largest collapse of a U.S. financial institution since the 2008 mortgage meltdown.

The Federal Deposit Insurance Corporation (FDIC) took control of Silicon Valley Bank last week after uncertainty about its solvency led to a run on the bank, as customers withdrew funds faster than the bank could keep up. Days later, after pressure from Khanna and other lawmakers, the Federal Reserve Board said it would protect all depositors at Silicon Valley Bank, and New York- based Signature Bank, which was shut down Sunday, making sure customers would have access to all their funds beyond the $250,000 insured by the FDIC. The uncertainty had dozens of depositors lining up at the bank Monday morning to pull their money.

Khanna answered questions from San José Spotlight on the fallout from Silicon Valley Bank’s collapse and what follows. His responses have been edited for clarity and length.

SAN JOSÉ SPOTLIGHT: What can be done to prevent bank runs like this in the future and to ensure solvency for regional banks? How could SVB’s failure have been prevented?

KHANNA: One of the most infuriating parts of this situation is that it could have all been prevented had Republicans not given big banks a handout in 2018 by repealing critical oversight tools that Democrats fought to enact after the 2008 financial crisis. By caving to Wall Street’s lobbying, Republicans chose to intentionally remove the protections that kept everyday Americans and small businesses safe. Their decision allowed big banks to reap profits from risky bets, while expecting taxpayers to cover any losses.

Midsize banks like SVB have avoided stress tests as well as liquidity and capital requirements that could have stopped this crisis from happening in the first place. The way to ensure banks, including regional banks, stay solvent is by making sure they don’t place irresponsible bets in the first place, and to increase transparency so regulators could get them back on track if they were exposed to unreasonable levels of risk. That’s what Dodd Frank was meant for and that’s why we need to bring it back in all its force and integrate new lessons from the last decade.

SAN JOSÉ SPOTLIGHT: You hosted a Zoom call last Friday night with more than 500 tech leaders and officials to better understand the crisis and how it’s affecting thousands of businesses. What did you learn from that call? What are you hearing from tech and business leaders now, and how is that shaping your response?

KHANNA: I heard from tech leaders, business owners, employees and nonprofits in my district who were concerned about their deposits being insured, paying their employees and what would happen to their companies. I assured them that I was pushing for the Treasury and the FDIC to insure deposits above $250,000 without using taxpayer funds.

I was glad to see the Treasury announce this step that will not only help small business owners and startups in my district—it will help nonprofits with loans at banks bought by SVB like Sunnyvale Community Services that is providing food aid and homelessness assistance.

SAN JOSÉ SPOTLIGHT: You said during Face the Nation that you believe U.S. banking is secure and there’s no systemic risk. What is your office doing to ensure consumers aren’t pulling funds from other regional banks in the aftermath of this failure?

KHANNA: I continue to believe that the U.S. banking system is secure and that (last) weekend’s conversations with the FDIC, Treasury and the White House led to action that will reign in contagion risk. The FDIC’s announcement to ensure access to all funds for depositors at SVB and Signature Bank and to provide depository institutions with more liquidity options to manage the recent turmoil are helping to assure markets and everyday folks.

SAN JOSÉ SPOTLIGHT: Many critics say this is another bailout for millionaires and billionaires, similar to the 2008 financial crisis. How do you respond to that?

KHANNA: This is not a bailout. I have and will continue to do all I can to make sure there is no bailout for SVB millionaire and billionaire investors, executives or customers. FDIC’s decision to cover all deposits will not cost taxpayers one cent. Instead, deposits will come from SVB’s own assets and fees paid by banks. The $3.6 million in stocks that the SVB CEO sold right before the collapse should also be clawed back and go to depositors.

SAN JOSÉ SPOTLIGHT: How did you convince U.S. Treasury Secretary Janet Yellen to shift from saying early Sunday there will be no bailout for SVB to saying depositors would be protected and have access to their funds by Monday?

KHANNA: Sunday morning, we had no answers. All we had were vague statements about helping depositors and acting in a timely manner from the Department of Treasury. I went on Face the Nation and outlined the case for paying all depositors in full and ensuring they have access to their accounts by Monday morning. I also pointed to the collapse of the Bank of New England in 1991 when the Treasury and FDIC worked together to insure everyone in full. They did it because they didn’t want a regional run on the banks.

During the briefings held over the weekend, I stood firm with my California delegation colleagues that this crisis needed to be handled by Monday. I’m glad that the Treasury and FDIC listened and moved quickly to tackle these issues.

SAN JOSÉ SPOTLIGHT: What else are you doing to help businesses and individuals who banked with SVB?

KHANNA: My district office is in contact with businesses and individuals who are calling and writing in with concerns about SVB. Any issues that arise, we’re ready to step up and try to help within our capacity. Insuring the deposits in full should help reassure my constituents that their funds will be protected.

SAN JOSÉ SPOTLIGHT: How should SVB executives such as CEO Greg Becker, who sold stocks immediately before the bank’s collapse, be held responsible?

KHANNA: Of course, without more information right now, we can’t assume someone’s motives given that it could be a scheduled sale planned months before. Whatever his motives, the $3.6 million in funds should be clawed back and given to the depositors. I will continue watching developments with this closely. If there are facts showing that the timing of this sale was intentional, the government could sue.

SAN JOSÉ SPOTLIGHT: Anything else you want readers to know about SVB’s demise and what’s next?

KHANNA: Since 2008, we’ve known that stronger regulations were needed. I will continue working to repeal the 2018 Trump policies that weakened policies that allowed for SVB to collapse.