How the US government can prevent more bank failures

Like any other trusted institution, banks are capable of failing. more 550 Banks have collapsed since 2001, according to the Federal Deposit Insurance Corporation.

However, the recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse was a grim reminder of how quickly a trusted institution can fail, putting billions of dollars at risk.

But experts say these financial disasters could have been avoided.

“The Silicon Valley bank failure could and should have been prevented through better regulation and oversight by the Federal Reserve,” said Aaron Klein, senior fellow for economic studies at the Brookings Institution. “The Fed should have been the one to say, ‘Wait a second, you have some serious interest rate risk that you need to hedge.’ And they failed. [to do that]. “

Experts say the focus should be on ensuring that the rules are enforced.

“As recently as 2019 and even more recently, there have been warnings that things need to change here, that they’re taking additional interest rate risks, that they’re going to run into some potential liquidity issues if interest rates go down,” said William T. Chittenden, associate professor of finance. and Economics at Texas State University.”

The collapse of SVB also revealed the danger of deregulation. several Policy And researchers They point to the Trump administration’s reversal of the Dodd-Frank regulations as one of the main reasons for the bank’s failure.

“What happened at Dodd-Frank is they said all the $50 billion-plus banks are going to be subject to enhanced prudential standards,” Klein explained. “The retraction said nobody is subject to that between $50 billion and $100 billion, and between $100 billion and $250 billion, it’s optional.”

“SVB just happened to fall into that $50 billion to $250 billion category, so when they raised that, they weren’t subject to that much scrutiny,” Chittenden said.

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