America’s first banking crisis in more than a decade has regulators facing a very public reckoning: To what extent are they to blame for a rash of failures that has shaken confidence in the financial system? And how can they make things right?
The recent turmoil has been a study in bank mismanagement. For most of 2022, Silicon Valley Bank (the first lender to run into trouble) had no chief risk officer. Other executives willfully ignored glaring vulnerabilities: An extreme reliance on flighty uninsured deposits, combined with investments in long-term government bonds that declined in value as interest rates rose, effectively guaranteed steep losses if the bank were forced to sell. Despite repeated warnings from regulators starting in 2021, the bank did nothing until it was too late.
No doubt, supervisors could’ve pushed harder. If they had issued a public reprimand before SVB’s problems became a significant threat, the bank might well have survived. In many cases, regulators have been too willing to leave such issues unresolved: As of mid-2022, the 10 US banks in SVB’s size category had more than 100 warnings outstanding. Still, it would be folly to demand that officials anticipate everything that could go wrong or micromanage thousands of institutions to ensure that none failed.
What else can they do?
Regulators have already signaled some changes, aimed at addressing the weaknesses that SVB revealed. They’ll likely reimpose big-bank rules, including more frequent stress tests, on institutions (like SVB) with assets between $100 billion and $250 billion — a group that Congress freed of such burdens only five years ago. They might also reconsider how fast deposits can run in an age of smartphone apps and social media, and how even the safest long-term bonds, given their sensitivity to interest rates, should figure into liquidity and capital requirements.
Yet such tweaks won’t solve the broader problem. Banks will keep making mistakes, and the next one will almost certainly be different. What matters is that the system be prepared for whatever might happen: that banks have the necessary financial strength, and that depositors won’t overwhelm them by bolting at the slightest provocation.
