Elizabeth Warren scoffs at the idea that banks like SVB can be trusted to do their own stress testing: 'I taught school for many, many years. And I did not let my students do their own testing'

• Elizabeth Warren doesn't have much faith in the idea that banks could effectively run their own "stress tests."
• A stress test evaluates whether a bank can handle tight economic conditions.

Senator Elizabeth Warren is continuing her showdown with the banking industry.

She's had ample cause over the last week: Regulators shut down Silicon Valley Bank on Friday in what has become the second-largest bank failure in US history. It's the largest since the 2008 financial crisis, and even though it doesn't indicate a repeat of the Great Recession, the federal government is bailing out SVB's customers, who are primarily businesses and people involved in the private equity and venture capital industries.

With rising interest rates being a main stressor that led to SBV's demise, the Massachusetts senator told CNBC on Tuesday that banks cannot be trusted to do their own "stress testing." These tests check whether or not banks have enough funding to absorb a loss during "stressful" conditions, according to the Federal Reserve. To pass stress testing, a bank needs to withstand such conditions while also having enough funds to lend to households and businesses and meeting obligations to creditors.

"Those are much smaller than the bigger banks," CNBC host Sara Eisen said to Warren, referring to banks like SVB. "We've had a number of those CEOs on the shows in the last few days" such as Charles Schwab, she said, who "do their own stress testing."

Warren laughed at that.

"I'm sorry, I taught school for many, many years. And I did not let my students do their own testing. The testing that is meaningful is the test that comes from the outside. The whole point of stress testing is for someone on the outside of the bank to say, 'what could go wrong here?' and make sure the bank can withstand the problems like a sudden increase in interest rates."

If a bank fails a stress test, it needs to seek the funding to withstand tight economic conditions, typically through decreasing the dividends and share buybacks that shareholders get, the Brookings Institution wrote in 2019.

Warren wrote in a Monday opinion piece for The New York Times that the SVB shutdown happened due to President Donald Trump's 2018 rollback of provisions within the 2010 Dodd Frank Act, which loosened the rules banks had to follow. It meant that Silicon Valley Bank was no longer a "systematically important financial institution" and not subjected to the regulations of larger banks.

What happened to SVB, Warren wrote, is "the direct result of leaders in Washington weakening the financial rules." Warren's critique was echoed by Democratic senators like Sen. Bernie Sanders, who also pointed to Trump's deregulation bill.

Warren has been a consistent critic of the circumstances that led up to the SVB failure, such as Trump's rollback of Dodd Frank. But she's also slammed the regulators for their actions following the shut down, denouncing regulators for stepping in to "fully" protect depositors following the SVB failure while leaving "millions of student loan borrowers in limbo."

And she warned that protecting those depositors would encourage other bank CEOs to repeat SVB's mistakes.

"If these execs walk away with millions of dollars for running their banks into the ground and gambling with the survival of small businesses and nonprofits, it'll be a big neon sign encouraging other bank CEOs to run the same risks," she said on Twitter on Wednesday.