DFAST is another part of Dodd-Frank, and one part that
might have helped catch this issue, I agree - although, I do wonder what potential Federal Reserve interest rates they would have plugged into the calculations…
The 2021
Report https://www.federalreserve.gov/publications/files/2021-dfast... took the baseline scenario to 1.9% in 2024 for 10yr Treasury returns, while the adverse scenario went to 1.5%. Likewise for the previous year: in 2020, baseline took it to 2.7% in 2023 while the adverse scenario went to 2.2%. The 2022 Test variables are quoted at https://www.federalreserve.gov/publications/2022-Stress-Test... saying year 2025 would see 2-1/2 and 1-1/2, for baseline and adverse respectively. For comparison, the actual rate now is close to 4%. So, honestly, I’m not sure if DFAST would have caught it, since this is a full percentage point and a half above the highest values they used in the last three tests. 2019 had 3.6% in baseline for 2022, so maybe it would have, though.
But ignore that, let’s assume DFAST would have clearly highlighted this. If it did, it would be cautioning “you have the potential for significant unrealized losses, make sure you maintain a good position so you can carry those securities to maturity” - which SVB was doing right up until its dwindling liquidity was in reach of a big bank run. The stress test is simply not designed to detect all potential periods where a sudden bank run of significant scale might kill a bank - fundamentally, it’s a capital stress test, not a liquidity stress test.
At best I think we can say DFAST, in some years but not in others, could plausibly have given a moderate to strong indication that more of SVB’s assets would be tied up than usual. From that, you could certainly take a hint and look at liquidity.
But then you have to have enough paranoia to model “The Fed lights a rocket under the interest rate just like they said they wouldn’t” and “our depositors, who all walk around with their burn rates practically tattooed on their foreheads, decide to do a bank run” at the same time to see this coming. And then you have to tell other people this is coming, and grit your teeth listening to them quote the Fed’s forecast that interest rates will stay low. Ultimately they would calculate the cost of your proposal and ask you why they ought to give up that much potential profit to hedge against the chance of these two unlikely events happening together - “that’s like seeing a pair of black swans mating”, they would say to you.
Again, I want to stress I’m not saying Dodd-Frank caused this, I’m not saying Dodd-Frank exemptions for SVB were a good thing, etc. I’m saying that this collapse was mostly out of scope of Dodd-Frank, the parts that were in scope were affected in both directions, and all of this in service of the original point: the article bringing up their exemption lobbying is just airing dirty laundry, not elucidating the cause of the downfall.