WASHINGTON, D.C.— Dennis M. Kelleher, Co-founder, President, and CEO, issued the following statement in connection with releasing a Policy Brief entitled “Ten Actions Necessary to Prevent Large Bank Failures, Strengthen the Financial System, and Protect Main Street Families”:
“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. It’s already happening – banks are reducing their lending, resulting in less credit available to small businesses and families. 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. The perfect storm 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.
“To prevent this from getting worse and happening again, policymakers need to take the following 10 actions that are detailed in a Policy Brief released today:
- Strengthen capital requirements. Banks must be able to absorb losses so that they can avoid bailouts and disruptions of the financial system.
- Restore liquidity requirements. Having capital without liquidity can cause fire sales and bank runs, like what happened at First Republic and SVB.
- Require banks to have robust, workable living wills so that they can be resolved in bankruptcy in an orderly fashion and without bailouts just like every other business in America.
- Put an end to bankers’ “all upside, no downside” incentive compensation schemes by clawing back compensation and prohibiting compensation arrangements that encourage inappropriate risk taking, as mandated by the Dodd-Frank Act.
- Make stress testing more stressful. Since 2017, the frequency and stressfulness of the stress tests have been significantly weakened.
- Strengthen supervision and banks’ risk management practices or prohibit shareholder distributions. Restore the CCAR qualitative objection—a powerful tool that gets attention of shareholders, media, Boards and executives quickly—which the Fed gutted after 2017.
- Reinstate the rules that prohibit bank gambling. The Dodd-Frank Act banned propriety trading, a risky practice that made large banks big bonuses. The provision was then gutted after 2017, which must be reversed.
- Police the shadow banking system. Nonbank financial firms, known as the shadow banking system, pose many risks that are not well-known due to the lack of regulation. The Financial Stability Oversight Council (FSOC) should step up to its mission and police these firms.
- Prepare for failures in advance. Regulators knew for weeks that First Republic Bank was on the precipice of collapsing and failed to plan. Regulators should regularly “war game” bank failures as well as establish guidelines for the inevitable auctions that follow.
- Elected officials should hold substantive hearings to consider restructuring financial regulation and supervision in the U.S. Given that may not be possible within the often stalemated and toxic political process, the country’s leading foundations should consider a jointly funded, independent undertaking to examine these urgent issues.
“These actions, if done quickly, will improve the resilience of the banking system, reduce the likelihood and severity of bank failures, and better protect Main Street families and the economy.”
The Policy Brief is available here.
Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.