The three Federal banking agencies – the Federal Reserve, FDIC, and Comptroller of the Currency – issued for public comment yesterday a proposal to require US banks/holding companies with assets of $100 billion and over to meet new capital requirements, known as Basel III. I have been a consistent supporter of strong capital requirements for US banks since my years as Chairman of the FDIC, appointed by Presidents Carter and Reagan.
In principle, I support strong capital and prudently managed banks. It will take time to digest the complex (nearly 1,100 pages) Notice of Proposed Rulemaking and understand the full extent of its consequences. It is apparent that the regulators have proposed the new rules in response to the recent failures of Silicon Valley Bank and First Republic Bank (both in California) and Signature Bank (in NYC). In those three instances, the banks failed due to negligent practices and the failure of their state and Federal regulators to take timely enforcement actions.
Moreover, the regulators resolved the failures by making whole all depositors of the banking institutions, including billions of dollars in deposits well over the $250,000-dollar deposit insurance limit. I recognize that the regulators were acting in good faith in the middle of a genuine financial crisis. That said, the regulators have been acting in an ad-hoc manner, albeit in good faith, for over six decades (including during the period when I was Chairman of the FDIC). This unending practice of bailouts of large banks and large depositors must end––now.
I urge Congress and the regulators to develop a plan to reform the deposit insurance system to end bailing out the largest depositors when banks fail. I also urge Congress to give serious consideration to restructuring the bank regulatory system at the Federal level to vastly streamline and improve bank regulation. I believe these changes are urgently needed and should come before or concurrently with the kind of changes being proposed today.
I spoke with Bloomberg Market’s “The Close” on this subject: