The writer is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow at the Center for Financial Stability
Preventing “systemic risk” was repeatedly used as a rationale for bailing out Wall Street during the 2008 financial crisis. The 2010 Dodd-Frank Act was supposed to have fixed all of that by strengthening regulation and banning government bailouts. Yet, banking regulators have now decided that the failure of two midsized banks, Silicon Valley Bank and Signature, pose systemic risk, requiring the Federal Deposit Insurance Corporation to pay off their uninsured depositors.
At combined assets of $300bn, these two banks represent a minuscule part of the US’s $23tn banking system. Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits? If it is as safe and resilient as we’ve been constantly assured by the government, then the regulators’ move sets dangerous expectations for future bailouts.