Before Silicon Valley Bank went down, it was the 16th-biggest US bank and had more than $200 billion in assets. Yet it didn’t have the same level of regulatory scrutiny as JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), or Wells Fargo (WFC).

Why? Because lawmakers and regulators decided to loosen requirements for regional banks at the end of last decade. Congress and the Trump administration approved some changes in 2018 with a bipartisan bill that re-defined which banks were deemed "systemically important" to $250 billion in assets instead of $50 billion. The Federal Reserve, FDIC and OCC refined those rules in 2019.

The changes released certain regional banks from some of the strictest requirements imposed in the aftermath of the 2008 financial crisis, a downturn that pushed the banking system to the brink. The revised regulatory framework left Silicon Valley Bank and other mid-size peers in a new air pocket of the banking universe: too small to be deemed "systemically important" but now, as we've learned, big enough to bring the system to the brink again.

One key revision was the Fed’s decision to exempt banks with $100-$250 billion in assets from maintaining a standardized "liquidity coverage ratio" as long as they kept their short-term wholesale funding levels below a certain amount. The ratio is designed to show whether a lender has enough high-quality liquid assets to survive a crisis. A lack of liquidity turned out to be a major problem for Silicon Valley Bank as deposits left the bank and the value of its assets declined as interest rates rose.

Fed Chair Jerome Powell spoke in favor of the refinements during 2019, but not all regulators were happy with them at the time. They "weaken core safeguards against the vulnerabilities that caused so much damage in the crisis," then-Fed governor Lael Brainard said in an October 10, 2019 letter released by the Fed.

Days later, FDIC board member Martin Gruenberg highlighted regional banks as "an underappreciated risk" in an October 16, 2019 speech. He expressed concern about another change, noting that bank holding companies between $100-$250 billion in assets no longer had to supply resolution plans showing how they could be wound down in the event of a failure.

"These measures are unwarranted and misguided," he said, according to a transcript of his remarks published by the FDIC. "They only increase the challenges posed by the resolution of these institutions and the potential for disorderly failure, and disregard the lessons of the financial crisis."

The changes were part of a long, national debate following the 2008 crisis about which banks should be regulated more aggressively and how. A big question: Which banks are big enough to be "systemically important"? Or, put another way: Which banks are "too big to fail"?

JPMorgan, Bank of America, Citigroup and Wells Fargo clearly belonged in that group because they were so much bigger than the rest of the industry; each institution has more than $1.5 trillion in assets, and JPMorgan has more than $3 trillion. Goldman Sachs (GS), Morgan Stanley (MS), State Street (STT) and BNY Mellon (BK) were other obvious choices.

But what about the scores of smaller regional banks spread throughout the country? Congress and President Obama provided the first definition: $50 billion in assets. Any bank of that size or bigger would be considered "systemically important," as a result of a 2010 law known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, and thus subject to the strictest scrutiny. That included annual Fed stress tests designed to see if banks could survive adverse economic circumstances, among other regulatory requirements.

Eight years later, a new threshold emerged: $250 billion. That resulted from a 2018 law known as the Economic Growth, Regulatory Relief, and Consumer Protection Act that was signed by President Trump. Banks below that asset size, which would have included Silicon Valley Bank, would be exempted from the Fed’s annual stress tests.

Silicon Valley Bank and other regional banks had lobbied for such a change. In fact, Silicon Valley Bank’s CEO Greg Becker told a Senate committee in 2015 that if the $50 billion threshold was not raised his company would be "subject to the array of regulatory requirements designed for the largest, most complex banks." He also said that his business model and risk profile didn't "pose systemic risk."

The 2018 law, however, wasn’t the final word on regional banks. The legislation gave the Fed the power to make decisions about banks with assets of $100 billion, and decide whether those institutions should be held to standards that applied to bigger banks. Silicon Valley wasn’t yet that big; it had $56 billion in assets as of June 30, 2018.

What the Fed decided to do in consultation with the FDIC and OCC was to group banks in five categories according to the risk they posed, using a variety of measures. When the new framework was announced in October 2019, Powell said in a release that "our rules keep the toughest requirements on the largest and most complex firms" and "maintain the fundamental strength and resiliency that has been built into our financial system over the past decade."

Banks between $100 billion and $250 billion would be required to undergo supervisory stress tests every two years. But if they had less than $50 billion in average weighted short-term wholesale funding, they would not be required to maintain a standardized "liquidity coverage ratio," which measures how much high-quality assets a bank has to raise cash when funding disappears during challenging economic circumstances. They did need to continue internal liquidity stress testing that was specific to each institution.

At the time those rules were released, Silicon Valley Bank was in the $50-100 billion asset category, a group that didn’t have stress test requirements or standardized liquidity coverage ratio rules. It joined the $100 billion club in the fourth quarter of 2020.

In a recent federal filing before its collapse, the bank acknowledged it was not part of the Fed’s standardized liquidity coverage ratio requirements. If that were to change "as a result of further growth," the Fed "would require us to maintain high-quality liquid assets in accordance with specific quantitative requirements and increase the use of long-term debt as a funding source."

Senator Elizabeth Warren challenged Powell about the liquidity adjustments during a 2021 hearing. "So, let me just ask, do you regret slashing liquidity requirements designed to protect markets from crashing like they did in 2008?" Powell said: "I don’t see that there has been any evidence that that was a bad idea, but it’s one that could certainly be looked at again."

Fed officials on Sunday were unwilling to say whether any liquidity or stress test requirements could change for smaller banks in the aftermath of Silicon Valley Bank’s failure, saying they would be focused on drawing appropriate lessons learned in the days, weeks and months to come. On Monday, the Fed said Vice Chair for Supervision Michael Barr will lead a review of the supervision and regulation of Silicon Valley Bank. The review will be publicly released by May 1.

Ben Werschkul contributed to this report.

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