Yesterday, I attempted to unravel the intricate web of factors behind last spring's disastrous bank failures. We saw how technological manipulation exploited regulatory gaps, sparking panic and triggering collapse. But knowledge of the facts and circumstances, however accurate, is only a partial antidote to future problems. Today, we move beyond the post-mortem and into proactive defense, taking up the tools to build a financial future more resilient against tomorrow's tremors.
Many have long argued that increasing deposit insurance limits would stem panicked deposit runs. Once raised, the limits would be in constant effect, unencumbered by the obstacles or delays required by consultations or meetings. Furthermore, deposit insurance coverage and payoffs following a crisis have not, to this point, cost the government money or added to the deficit.
Instead of focusing on FDIC limit increases now, it makes sense to focus — at least as a Band-Aid — on establishing a more fluid, flexible, effective and destigmatized Federal Reserve discount window system. This approach can be accomplished through regulatory (as opposed to legislative) action, and thus allows for meaningful protection now. If not quite as effective as increasing deposit insurance, it could mark a big step forward in stabilizing the system. It is worth emphasizing that more flexible approaches to the fluid utilization of the window taken in the past should not be rolled back, nor should the window get smaller for banks once they are in trouble. On the contrary, the bias should be to open the window wider.
Meanwhile, the recent fixation on the notion that bank runs and other banking system problems are solved by "too big to fail" institutions could well prove problematic. It is worth remembering that virtually all of these institutions survived the crisis of 2007 because of their reliance on the Troubled Asset Relief Program, not because the institutions themselves were less risky. It is worth noting that the collapse of numerous smaller banks and community development financial institutions in the Great Recession was not because they were more risky, but because they were deemed less essential, less systemic and accordingly in many cases, did not get even a penny from TARP. This uneven approach to which institutions did and did not get TARP, at least initially, and the failures that came from it, created significant gaps in our financial landscape and our ability to support lower-income and smaller segments of the economy. It is worth also noting that it was the community banks, not our largest banks, that disproportionately helped small business when the Paycheck Protection Program was their one lifeline during the COVID crisis.
Charging a nonsufficient funds fee on a debit, ATM or peer-to-peer payment that gets declined immediately would be considered "abusive" under a proposed rule from the Consumer Financial Protection Bureau.
Additionally, banks and regulators should place a greater emphasis on tail risk as a major part of their own enterprise risk systems. Oddly, this is too often overlooked by regulators — except in the formalistic one-size-fits-all stress test system that has its benefits, but that can be too uniform to cover all emerging risks. To wit, stress tests did not foresee the problems that emerged in the spring of 2023. It is worth emphasizing that, in a renewed focus on tail risk, any concern should be analyzed particularly closely with regard to new products and services.
Congress also needs to enact legislation to require that nonbanks be treated like banks from a supervisory perspective. Our financial system maintains two separate regulatory systems for two groups of entities providing essentially the same products and services — one is highly regulated, and the other is barely regulated at all. This is highly destabilizing. It is particularly unacceptable when the entities are roughly of equivalent size because the dichotomy spurs banks to go further out on the risk curve. That, then, has set up the entire financial system for what may be a serious nonbank financial institution failure, with knock-on effects. In the short run, it is draining needed talent out of the banking system.
Finally, we need to support our bank regulators' use of judgment and balance — often they are quite good at this, and a material help to the banking system. The high level of professionalism and wisdom of our best bank regulators is often overlooked. In this regard, through training, we ought to help them improve their own risk assessments of banking organizations when applying a wider range of existing examination methods. These methods must evolve. This has historically been one of the great strengths of our bank regulatory system.
