Lessons Learned from the Recent “Banking Crisis”
Reforms in light of the 2023 “banking crisis” should focus on structural flaws in supervision, regulation, and safety net policies, with a focus on creating credible incentives for informed and timely action that are both economically effective and cost effective. Supervisors should monitor measures of the fundamental economic condition of banks, not just accounting measures or qualitative compliance, on an ongoing basis and be held accountable for not providing timely reactions to those measures. Prudential capital ratio regulation should also adopt measures that reflect the economic condition of banks, not just their accounting ratios. Government safety net policy should limit the use of lending to banks with high insolvency risk and avoid 100% coverage of failed banks’ uninsured deposits in the absence of a preexisting emergency guarantee of uninsured deposits.