Karen Petrou: What the FRB and FDIC Left Out: Why They Still Can’t Shutter Regional Banks Without a Bailout

2023-05-03T15:38:36-04:00May 1st, 2023|The Vault|

Although the Fed’s “unflinching” self-assessment of SVB’s inglorious demise and the FDIC’s still more exculpatory analysis of SBNY talk much of supervisory gaffes, neither addresses a critical unanswered question:  why were both agencies so ill-prepared for such large resolutions?  That they were is still more grievous when it comes to First Republic, where the agencies are flat-footed even though they’ve had over a month of warnings that FRC might not make it.  As the Fed says, a banking system without failure is a financial system without intermediation.  It and the FDIC clearly know that failures are inevitable, but still turn to one or another form of the taxpayer bailouts U.S. policy-makers swore after 2008 would never again disfigure the nation’s financial system.  The agencies did not answer the urgent question of why even mid-sized bank resolutions are still systemic or lead to still more concentrated market power, but we must and then hold them as accountable for this failure as for all the others mentioned or not in each of their reports.

Are regional banks truly systemic or is it just that the FDIC doesn’t know what to do with them?  Mass regional-bank failures are clearly problematic, but would these be likely if the FDIC knew how to resolve mid-sized banks when supervisors spot problems or, failing that as seems sadly likely, if a regional bank comes unglued?  The FDIC is clearly ill-prepared to handle them even when the bank is the principal subsidiary of a non-complex BHC as is …