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May 9, 2023

Ten Actions Necessary to Prevent Large Bank Failures, Strengthen the Financial System, and Protect Main Street Families

Below is the Introduction to the Fact Sheet, read the full Fact Sheet here

The failures of First Republic Bank, Silicon Valley Bank (SVB), Signature Bank, and the ongoing banking crisis are going to directly impact and hurt Main Street families, workers, small businesses, community banks, and the entire economy.  That’s because it is already causing banks to reduce their lending resulting in less credit available to individuals and businesses of all sizes.  Some have estimated that this will reduce the country’s gross domestic product (GDP) by at least half a percentage point or likely more than $132 billion (which will be on top of the economic slowdown precipitated by the Fed’s historic rate increases and quantitative tightening).

This didn’t have to happen.  The crisis was predictable and the causes are not a mystery: since 2017, the financial industry has been significantly deregulated and under-supervised, as captured by a 2018 headline: “Banks Get Kinder, Gentler Treatment Under Trump.” The seeds of this crisis were fertilized by banking supervisors who egregiously failed to do their jobs, as detailed in recent reports by the Federal Reserve, FDIC, and GAO.

The combustible mix of weaker rules and lax oversight by the banking agencies incentivized bank executives to take excessive risks and engage in irresponsible and reckless—if not illegal—behavior because they get to enrich themselves very quickly by basically gambling with other people’s money.  When that leads to bank failures, those deficient (or worse) executives merely lose their jobs but get to keep the money they pocketed while shifting the losses to taxpayers, other banks, and the public.  This “all upside, no downside” for bankers makes more misconduct and bank failures inevitable.

This should surprise no one.  Eliminating or gutting financial protection rules and weakening banking supervision are like banks in a high crime area getting rid of their security guards, taking the locks off the doors, and removing the alarm systems while at the same time the police are reducing the number of cops patrolling the streets.  There is only going to be one result: higher risk, reckless, and illegal behavior.

The good news is that the actions necessary to change this—and strengthen the banking system, prevent crises, and protect Main Street—are well known, not particularly complicated, and the least costly option.  First, of the approximately 5,800 banks in the U.S., the failed regulation and supervision contributing to the current crisis relates to a relatively small number of banks, only the largest 35 with more than $100 billion in assets.  Second, increased regulation and supervision are not that costly, especially when considered in relation to the costs of bank failures and crises.  For example, the most recent failures are estimated to directly cost more than $40 billion in bailouts and about $132 billion in lost GDP and these costs will only increase as the banking crisis continues.  And we should all remember that the 2008 financial crash cost more than $20 trillion dollars.

Preventing crashes is always much less expensive than trying to stop, mitigate or clean up after they happen. As pointed out in a March 23, 2023 Report “The Ongoing Use and Abuse of Cost-Benefit Analysis in Financial Regulation,”

“[f]inancial rules that protect consumers, investors, and financial stability cost money for compliance, personnel, and technology to prevent reckless, illegal, and even criminal conduct.  However, not having those rules in place is far more costly ….  Thus, the issue is not whether there are costs associated with financial regulation; the issues are who is going to pay those costs and when.  Will it be the financial industry or the public, and will it be before another crash or after?”

Thus, the industry’s never-ending claims that the costs of effective financial regulation and supervision to them and the U.S. economy are too high are outweighed by the much higher although never mentioned costs of the potentially devastating consequences of non-regulation or under-regulation and weak oversight by the banking agencies.  Additionally, the industry’s always exaggerated claims should also be discounted because, as private companies, they put profit and bonus maximization above all else, thereby always subordinating the public interest and the costs to the public to their own private interests.

Unfortunately, the bad news is that the financial industry is more powerful than ever and exercises outsized influence in Washington from Congress and the banking regulatory agencies to whatever administration is in place at the time and the media.  The money, access, and political power of the financial industry and its allies makes implementing even the most basic remedies very difficult to achieve.  But putting big bank profits over the public interest must end. Below are summaries of the most important actions to take to address the key deficiencies and reduce the likelihood and severity of future banking crises.

Most of the proposed actions are rule changes that financial regulators can and should do immediately through interim final rules, not in a multiyear rulemaking process as proposed by the Fed in its report on SVB.  Such an extended timeline for this process would greatly empower the financial industry, result in endless delay, and almost certainly lead to much weaker rules.  Not only would that process inevitably be too little too late, but it may well not happen until after the next crisis.  Interim final rules are a much better way to go, and there is longstanding precedent for such action.  Regulators need to act now with the will and courage to prevent crashes as quickly and decisively as they respond to them once they happen.

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