Financial Crises Are a Feature, Not a Bug, of the US System

It’s a year since the failures of Silicon Valley Bank and Signature Bank – and the renewed cries of “never again.” Almost instantly began inquiries to work out who to blame, as well as hurried efforts to tighten banking rules, raise capital demands and enact laws to make executives pay.

Within months, the Federal Reserve issued a highly technical proposal for rule changes that runs to nearly 1,100 pages. Some updates were due but SVB’s collapse inspired a much heavier rewrite. The Senate Banking Committee has come up with the Recoup Act, to make executives accountable for bank failures and to pay back more of their rewards.

These restart familiar battles, which are pitched as specific economic tradeoffs. Curb bank profits with higher capital demands and they’ll have to cut lending to ordinary people and companies. Give unelected bureaucrats excessive powers to claw back pay and to kick executives out of their jobs, then talented people will work elsewhere.

The truth is neither of these efforts will fundamentally fix banking, or starve the economy of credit. They are mere tweaks to deeper, long-term political and social bargains that last for decades, or more. A country’s banking system is forged in the balance between the powers of interest groups to demand access to credit, the ability of bankers to lobby for their own protections and profits, and the borrowing needs of governments themselves, among other things.

For example, the first great modern bargain was made through the development of the Bank of England in the late 17th and 18th centuries. In return for lending to the state to fund Britain’s wars, the then-privately owned bank was given strong protections from competitors in literally printing money and given strong protections in other commercial activities.

In the US, leaders of the early republic tried a similar thing several times but were undone by the need of individual states to finance themselves and the tensions between local and national government, according to a seminal comparative history of bank regulation by Charles Calomiris and Stephen Haber1. To cut their long and fascinating story absurdly short, those conditions produced an explosion of small unit banks that ran limited local monopolies and formed an enduring political alliance with farmers. That dynamic helped shape American banking for more than 150 years.