BankThink Sometimes Banks Fail. A System Where They Can't Would be Worse.

(American Banker) - After every banking crisis, policymakers in Washington flood the halls of Congress and the airwaves with thoughts and ideas, dissecting the crisis with an urgent call to fix the current problems. Invariably, the proposed solution usually calls for more regulation, paired with a discussion about the role and size of deposit insurance. 

Today's "solutions" in response to headline-grabbing bank failures are once again centered around the "nationalization" of the U.S. banking system. This includes discussions of government guarantees on all deposit accounts, no matter the amount, and the expansion of the "too big to fail" regime to regional banks. If anyone wants to know what universal guarantee of all deposits looks like, look no further than the two government-sponsored enterprises Fannie Mae and Freddie Mac, which are now in their 14th year of government conservatorship, and the Savings & Loan crisis in the 80's that cost U.S. taxpayers some $160 billion. What could possibly go wrong when a bank management team decides to onboard undue risk but does not have to worry about deposits leaving the bank?

A sound banking system is essential to a free market economy. Failure is part of the free enterprise system, as well as rewards for understanding and accepting risk in the marketplace. The safety and soundness of the U.S. banking system is key to this country's macro economy and business in general. There are policymakers in Washington who think we should regulate the "risk" out of the U.S. banking system. If that were to happen, we would not, in fact, have a functioning banking system. The business of banking is managing risk; those who are good at it are successful, those who are bad at it often fail.

By  Don Powell and Tim Long
May 25, 2023


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