I am pleased we were able to deal with First Republic’s failure without using the FDIC’s emergency powers. It is a grave and unfortunate event when the FDIC uses these emergency powers. Any decision to use the FDIC’s emergency powers should be approached skeptically, taking into account the unique facts and circumstances of the time, and with careful attention to the implications for the future.
The March 12 rescue of SVB and Signature’s uninsured depositors was an admission that 15 years of reform efforts have not been a success. Many of the Dodd–Frank Act regulations were prescriptive, burdensome, and expensive. Yet still a failed bank’s investors do not always bear the consequences of the bank’s poor risk management. And yet still the banking system is not resilient to failures of bank supervision.
More work remains to be done. We should avoid the temptation to pile on yet more prescriptive regulation or otherwise push responsible risk taking out of the banking system. Instead, we should acknowledge that bank failures are inevitable in a dynamic and innovative financial system. We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses.