Introduction to Yale Journal on Regulation Symposium on Financial Regulation
PDF DownloadThere are about 4600 FDIC insured banks in the United States as of June 2023.[1] Sometimes deposit insurance prevents bank failures and sometimes it does not. There were four very small bank failures in 2020.[2] There were no bank failures in 2021 or 2022.[3] In 2023, after more than two years without a bank failure (called “the longest stretch without a failure in more than 15 years”[4]), five banks failed,[5] but three of these, First Republic Bank, Signature Bank and Silicon Valley Bank, were mid-sized financial institutions, with billions of dollars in assets. And Silicon Valley Bank was the second largest bank failure in the nation’s history.[6] Moreover, 2023 was notable because Silicon Valley Bank and Signature Bank were, respectively, the second and fourth largest U.S. bank failures in history, measured by total assets.[7] So, not surprisingly, we are once more focusing our attention on banking regulation.
Still, U.S. banks appear to be pretty safe, at least from a historical perspective. Between 1930 and 1933, more than 9,000 banks failed.[8] Between 1980 and 1995, more than 2,900 banks and thrifts, with assets of more than $2.2 trillion, failed.[9] What is notable about the 2023 bank failures is how embarrassing they were for regulators. It appeared as if nothing had been learned from our vast prior experience with bank instability.
Silicon Valley Bank failed because it was unable to manage its balance sheet. The Bank had a mismatch between the long-term bonds on its balance sheet and its short-term liabilities, which came in the form of demand deposits, 93% of which were uninsured.[10] That failure alone cost the FDIC $16.1 billion.[11]
Signature Bank, which marketed itself to the cryptocurrency industry, also had significant uninsured deposits, and, like Silicon Valley Bank, experienced “a surge of panicked withdrawals” as concerns emerged about the slump in digital currencies.[12] 90% of Signature Bank’s deposits were uninsured as of the end of 2022.[13] The failure cost the FDIC approximately $2.5 billion.[14] Like Silicon Valley Bank and Signature Bank, First Republic also was funded disproportionately by uninsured deposits, and when its uninsured depositors, who accounted for 68% of its total deposits, exited the bank, failure soon followed.[15] This failure cost the Deposit Insurance Fund (DIF) an estimated $15.6 billion.[16]
It turns out that what protects banks from suffering from debilitating bank runs is deposit insurance, and developing plausible strategies for preventing bank failures for banks with significant uninsured deposits has eluded bank regulators forever. It also appears clear that the only meaningful strategy for keeping banks safe is to construct a market-based regulatory system that provides strong private incentives, carrots and sticks, to bank shareholders and managers. When the FDIC deposit insurance fund loses money, as they did in the three recent bank failures described above, shareholders and managers should incur meaningful costs, as they did in the past.[17] Put simply, deposit insurance should be viewed as a supplement to market-based mechanisms for disciplining excessive risk-taking, rather than as a substitute for such mechanisms.
Rather amazingly, no matter how often traditional, non-incentive-based regulation fails to function as intended, the reaction to bank failures in academic circles is to call for still more of the same.
The important contributions by Kathryn Judge, Saule Omarova, Edward Janger, Adam Levitin, Raúl Carrillo, and Hilary Allen to this Symposium further our understanding of the regulatory environment of banks. Interestingly, however, none of these authors offers any hope that the regulatory failures that led to the bank failures of 2023 can be easily fixed, or that it is at all likely that there will be significant changes in the way that bank regulation is approached in the future.
[1]. Statistics at a Glance, FDIC (June 30, 2023), https://www.fdic.gov/analysis/quarterly-banking-profile/statistics-at-a-glance/2023jun/industry.pdf [https://perma.cc/GA3A-QVG7].
[2]. The banks that failed were Almena State Bank, Almena, KS, First City Bank of Florida, Fort Walton Beach, FL, The First State Bank, Barboursville, WV, and Ericson State Bank, Ericson, NE. None of these banks had assets of more than $200 million and none had deposits of more than $150 million. Bank Failures: 2020 in Brief, FDIC, https://www.fdic.gov/bank/historical/bank/bfb2020.html [https://perma.cc/SDJ5-ENYG].
[3]. Bank Failures: 2021 in Brief, FDIC, https://www.fdic.gov/bank/historical/bank/bfb2021.html [https://perma.cc/3Y4N-N8M8]; Bank Failures: 2022 in Brief, FDIC, https://www.fdic.gov/bank/historical/bank/bfb2022.html[https://perma.cc/9RX4-BZYT].
[4]. Kevin Wack, Dramatic Collapses Made 2023 the Biggest Year Ever for Bank Failures, Am. Banker (Dec. 13, 2023), https://www.americanbanker.com/list/dramatic-collapses-made-2023-the-biggest-year-ever-for-bank-failures [https://perma.cc/HE3F-V7Y9].
[5]. The banks that failed were Citizens Bank, Sac City, IA, Heartland Tri-State Bank, Elkhart, KS, First Republic Bank, San Francisco, CA, Signature Bank, New York, NY, and, of course, Silicon Valley Bank, Santa Clara, CA. Bank Failures: 2023 in Brief, FDIC, https://www.fdic.gov/bank/historical/bank/bfb2023.html [https://perma.cc/K8DC-PGL5].
[6]. Drew DeSilver, Most U.S. Bank Failures Have Come in a Few Big Waves, Pew Rsch. Ctr. (Apr. 11, 2023), https://www.pewresearch.org/short-reads/2023/04/11/most-u-s-bank-failures-have-come-in-a-few-big-waves [https://perma.cc/37HQ-U4B7].
[10].Tamar Gubins & Christopher Pippett, The Extraordinary Silicon Valley Bank Collapse: What We Know, Fox Rothschild (Mar. 10, 2023), https://www.foxrothschild.com/publications/the-extraordinary-silicon-valley-bank-collapse-what-we-know [https://perma.cc/YD6Z-9FG7].
[12].Max Abelson, ‘Old-School’ Signature Bank Collapsed After Its Big Crypto Leap, Bloomberg (Mar. 14, 2023), https://www.bloomberg.com/news/articles/2023-03-14/why-did-signature-bank-fail-inside-the-old-school-new-york-bank [https://perma.cc/EU3R-QA8].
[13].Press Release, FDIC, FDIC’s Supervision of Signature Bank (Apr. 28, 2023), https://www.fdic.gov/news/press-releases/2023/pr23033a.pdf [https://perma.cc/XVU7-EGKP].
[15].Karl Evers-Hillstrom, Bidding for First Republic Lasts Into the Night: A Guide to the Latest Banking Crisis, The Hill (Apr. 30, 2023, 11:02 PM ET), https://thehill.com/business/3911002-what-to-know-about-first-republic-bank [https://perma.cc/UFG8-GZK2].
[16].FDIC, Insured Institution Performance, 17 FDIC Q. 1, 31 (2023). https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2023jun/qbp.pdf [https://perma.cc/85TA-NBSK].
[17].Jonathan R. Macey & Geoffrey P. Miller, Double Liability of Bank Shareholders: History and Implications, 27 Wake Forest L. Rev. 31 (1992) (providing a historical analysis of the regime of double liability for bank shareholders that existed in the U.S. between the Civil War and the Great Depression, pursuant to which shareholders would be required to make additional capital contributions to satisfy depositors’ claims against failed banks).
