As I’ve previously said, one lesson of the events of March 2023 is that, despite 15 years of reform efforts, we still have a system that privatizes gains while socializing losses.
Even if our decision to invoke the “systemic risk exception” was the lesser of two evils,1 we should be honest that SVB and Signature were bailouts.2 We should acknowledge that those bailouts have not only fostered moral hazard but also undermined public confidence in the basic fairness of our banking system.
To avoid future bailouts, we need to accept that bank failures are inevitable in a dynamic economy. We should then plan for those bank failures by focusing on strong capital requirements and an effective framework for resolving large failed banks as our best hope for eventually ending this practiced habit we’ve developed of privatizing gains while socializing losses.
And so I am happy to support today’s finalization of the Title I resolution planning guidance for triennial full filers. This guidance is an important step toward an effective resolution framework.
Of course this guidance is not sufficient in itself. No system is adequate if we ourselves do not have the courage and conviction to pull the trigger and resolve a large failed bank without a bailout. This guidance, once implemented, should help instill that courage and conviction.
- 1
As discussed in my statement on the proposed special assessment, my vote in favor of the “systemic risk exception” was intended to exempt the resolution of SVB and Signature from the least-cost-resolution requirement so as to facilitate sales of the failed banks that hopefully would mitigate a wide range of serious adverse effects on economic conditions and financial stability that could have arisen out of winding down SVB and Signature in the normal course through a series of asset sales and deposit payouts.
- 2
I understand of course that the shareholders of SVB and Signature were wiped out. I understand also that the banking industry absorbed the cost of making SVB and Signature’s uninsured depositors whole. Some argue there was no bailout. But private parties—namely the uninsured depositors—that were otherwise on the hook to absorb SVB and Signatures’ losses did not take those losses thanks to extraordinary action by the FDIC; instead, thanks to that extraordinary action, those losses were borne by others. That’s a bailout.