Could Banking Failure be Due to Policy Failure?

The recent banking turmoil in the American economy has brought attention to a long-standing issue: outdated policies that were supposedly fixed by reforms.

The Dodd-Frank Act of 2010, which followed the crash and subsequent recession of 2010, was created to protect taxpayers and the federal bank. However, the Bank Term Funding Program, a United States Treasury-backed effort that accepts a bank's impaired assets as a sort of collateral, has impelled various experts to feel like we're repeating the past. While the Biden Administration is firm that taxpayers won't be bailing failed banks such as the notorious Silicon Valley Bank (SVB) and Signature Bank, support for uninsured investors is still emerging in the form of private equity. Sadly, it doesn't fix the underlying problem that banks in America don't adequately protect against risk, as they see themselves as invincible.

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“To my mind, the best way to think about banking history in America, and the structure of our banking laws, is that banks exercise delegated powers, to expand the money supply, as essentially franchises of the federal government,” Morgan Ricks, law professor at Vanderbilt University and former U.S. Treasury employee, told The New Yorker.

Regulatory policies that kept institutions like SVB from failing, particularly those outlined in the Dodd-Frank Act, were loosened for medium-sized banks in 2018. Annual stress tests were no longer required, meaning that many gaps or weak spots for these institutions were swept under the rug. Currently, those with money in now-defunct banks are facing the consequences of this exploitation.

As for how this can be prevented in the future, it's hard to say. Ricks recommends that banks ensure 100% of their customer deposits rather than adhering to a Federal Deposit Insurance Corporation (FDIC) limit that allows for potential government bailouts. They can charge for services accordingly, but their revenue stream should remain steady. Rather than consistently relying on the government as a last-ditch effort at risk management, regional banks should keep equity capital levels up and always stress test to ensure continued safety.