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- In prepared remarks, Treasury Secretary Janet Yellen said the SVB situation is very different from 2008.
- In 2008, a global financial crisis was precipitated by subprime assets, which is not the case today.
- Some Democrats are pointing fingers at weakened regulation legislation from 2018.
After the abrupt closure and failure of Silicon Valley Bank, along with Signature Bank, some worried about history repeating itself. But Treasury Secretary Janet Yellen doesn't think that 2023 is a 2008 redux.
"While we don't yet have all the details about the collapse of the two banks, we do know that the recent developments are very different than those of the Global Financial Crisis," Yellen said in prepared remarks for the American Bankers Association's summit.
In 2008, "many financial institutions came under stress due to their holdings of subprime assets," Yellen said. "We do not see that situation in the banking system today."
One key driver of the Great Recession was mortgage lenders' willingness to lend to potential homebuyers, even those who might not necessarily be financially equipped to pay off those homes. That meant they lent out what's called subprime mortgages to wannabe homebuyers with lower credit, helping set off rapidly rising home prices and a housing bubble — and setting up the new homeowners to not be able to make their mortgage payments. After the bubble burst, the banks who had invested in those subprime loans also took a battering, and some even shuttered.
Yellen said that's not what's happening right now.
"Our financial system is also significantly stronger than it was 15 years ago," she said. "This is in large part due to post-crisis reforms that provided stronger capital standards, among other important improvements."
Dean Baker, a senior economist at the Center for Economic and Policy Research who predicted the 2008 housing bubble crash, told Insider that "this is not a 2008, 2009 story at all."
"To this day I always argue with people, the problem was the housing bubble. The financial crisis made it worse, no doubt about it," Baker added. "But the real problem was that the housing market was driving the economy — a housing bubble, and it collapsed, and there was no easy replacement for that. It's not that story at all. "
Despite Yellen's confidence that the banking system is resilient, some Democratic lawmakers aren't convinced. In 2018, former President Donald Trump signed into law legislation that rolled back provisions in the 2010 Dodd-Frank Act, which was intended to protect consumers from abusive financial practices in the aftermath of the 2008 recession.
The 2018 rollbacks eliminated stress tests for small and mid-sized banks like SVB, raising the threshold for regulation from $50 billion to $250 billion — meaning those smaller banks were not evaluated for how well they could respond to factors like increased interest rates.
Massachusetts Sen. Elizabeth Warren blamed the Trump-era legislation for the SVB collapse, and Vermont Sen. Bernie Sanders said the bank's shutdown was a "direct result" of the rollbacks.
"Let's be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed," Sanders said in a statement.
Warren, alongside Rep. Katie Porter, also introduced legislation last week to reverse the 2018 law, and Biden called on Congress to hold bank executives accountable for failures by expanding the FDIC's authority to "claw back" compensation from those executives.
Still, regulators like the Federal Reserve and Treasury Department are under intense scrutiny following the SVB debacle, especially as the Fed is expected to announce another interest rate hike on Wednesday. Yellen reassured bankers on Tuesday that "the situation is stabilizing, and the US banking system remains sound."
"A safe and sound banking system is integral to the health of the American economy," she said. "We are squarely focused on doing our job. And you should rest assured that we will remain vigilant."