In the past few days, two large American banks have failed. Everyone in the financial world is now holding their collective breath, hoping that this will be the full extent of the damage and that we won't see more banks shutter their doors as well. The bank failures (even if they stop at two) will have other widespread economic consequences as well. This all might just convince the Federal Reserve not to hike interest rates another half a percent when they meet next week (which was anticipated by many) and instead leave them where they are for now. Rising interest rates played a role in the failure of Silicon Valley Bank, the first to fail. There will likely be political fallout as well, as Congress holds hearings and investigates and possibly even passes some changes to the banking laws. This would be appropriate, since the real reason these banks failed is that they were allowed to run too much risk.

After the financial crisis which hit the American economy like a bombshell in 2008, banking regulations were toughened up considerably, under the new rules of the Dodd-Frank Act. Banks weren't allowed to run with so much risk that they could collapse. But a lot of those safety rails were rolled back in 2018, in a law that Donald Trump signed. The irony of the entire situation is that banks have very recently been lobbying for looser regulation of their industry -- vowing all the while that the system as it stood was perfectly safe. As Politico reported:

Three days before Silicon Valley Bank's failure, big bank lobbyists and executives were triumphant. They had convinced key GOP lawmakers to publicly warn Federal Reserve Chair Jerome Powell against tightening regulations on the industry.

Now, the months-long campaign is in jeopardy.

The world's attention is focused on whether the U.S. banking system is safe. And bank lobbyists believe the Fed may now be encouraged to press ahead with tougher rules that it was just beginning to discuss before the meltdown. Sen. Elizabeth Warren (D-Mass.) warned mere hours after Silicon Valley Bank's collapse that "regulators must not buckle to pressure" in response to the bank lobbying barrage that had been underway.

The banks were lobbying to put political pressure on the Fed not to make any changes for a specific reason:

The rules that the big bank lobby was focused on before S.V.B.'s failure dealt with the capital funding buffers that lenders are required to maintain so they can absorb losses during downturns and spare taxpayers from having to bail them out.

The Fed and other bank regulators hiked capital requirements in the wake of the 2008 crash. In the last few months, a top official appointed by President Joe Biden -- Fed Vice Chair for Supervision Michael Barr -- kicked off a "holistic review" of capital rules that were put in place over the last decade and suggested lenders should be subject to higher requirements.

Barr's review rattled large banks. And so their main trade groups -- the Bank Policy Institute, which counts S.V.B. as a member, the Financial Services Forum and the Securities Industry and Financial Markets Association -- mounted a campaign to argue that hiking capital requirements would be a drag on the economy. They churned out explainers challenging Barr's assumptions, and executives made direct pleas to lawmakers who handle oversight of the Fed and other regulators.

. . .

The lobbying bore fruit last week when Powell testified before the House and Senate. Over his two days of testimony, a parade of lawmakers -- mostly Republican -- warned him about raising capital requirements and urged him to rein in Barr.

. . .

Then on Friday, regulators rushed to rescue S.V.B., and lobbyists began panicking that their push on capital might be in trouble. Critics immediately connected the dots.

Because it is so easy to connect the dots here. Especially if you add in a pertinent fact that Politico conveniently glided over without even a mention: the Dodd-Frank Act which was enacted after the 2008 financial crisis had been replaced by much looser laws and regulations, back in 2018. Senator Elizabeth Warren forcefully pointed this out in an opinion piece in today's New York Times [emphasis has been added]:

No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules.

In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.

Greg Becker, the chief executive of Silicon Valley Bank, was one of the many high-powered executives who lobbied Congress to weaken the law. In 2018, the big banks won. With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank. Regulators, including the Federal Reserve chair Jerome Powell, then made a bad situation worse, letting financial institutions load up on risk.

Banks like S.V.B. -- which had become the 16th largest bank in the country before regulators shut it down on Friday -- got relief from stringent requirements, basing their claim on the laughable assertion that banks like them weren't actually "big" and therefore didn't need strong oversight.

That's kind of a major thing to leave out, as you can see. The Politico article doesn't mention it anywhere, even though it is a very big dot that needs connecting in order to understand the current mess.

Warren points this all out in greater detail, naming both banks which have now failed. She then ends on what absolutely should happen next -- a bout of re-regulation to get us back to the safer ground we were all on before the 2018 deregulation was passed:

Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature [Bank] would have been subject to stronger liquidity and capital requirements to withstand financial shocks. They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses. But because those requirements were repealed, when an old-fashioned bank run hit S.V.B., the bank couldn't withstand the pressure -- and Signature's collapse was close behind.

. . .

These threats never should have been allowed to materialize. We must act to prevent them from occurring again.

First, Congress, the White House and banking regulators should reverse the dangerous bank deregulation of the Trump era. Repealing the 2018 legislation that weakened the rules for banks like S.V.B. must be an immediate priority for Congress. Similarly, Mr. Powell's disastrous "tailoring" of these rules has put our economy at risk, and it needs to end -- now.

Bank regulators must also take a careful look under the hood at our financial institutions to see where other dangers may be lurking. Elected officials, including the Senate Republicans who, just days before S.V.B.'s collapse, pressed Mr. Powell to stave off higher capital standards, must now demand stronger -- not weaker -- oversight.

This isn't strictly a partisan issue. While Republicans bear far more of the blame for the current lax situation, please note that both articles admit that there's more than enough blame to spread around. From Politico: "...a parade of lawmakers -- mostly Republican..." and from Warren: "With support from both parties, President Donald Trump signed a law...." Some Democrats are just as susceptible to the bank lobby's money as Republicans are, in other words.

But now could be one of those magical times when standing with powerful lobbyists is seen as so dangerous politically that enough members of both parties could actually be spurred to act. The danger obviously exists, and the solution's pretty obvious as well: go back to Dodd-Frank. As with the recent rail disaster in Ohio, there could be one shining moment when one industry's disregard for the safety of Americans in general becomes so politically odious that Congress might actually be seized by a momentary fit of bipartisanship. Or productivity, to put it another way.

There's no guarantee, though. These moments can be awfully fleeting -- and Congress normally moves glacially slowly. The more money that lobbies for inaction, the more enticing it is to just do nothing and hope the public forgets all about the problem. So we'll have to see if Senator Warren's eminently reasonable call to action is actually answered in any meaningful way or not. Because when deregulation goes spectacularly wrong, the time has indeed come for healthy bout of re-regulation.

-- Chris Weigant

Follow Chris on Twitter: @ChrisWeigant