In 2017, US Treasury Secretary Yellen said in an interview that "I believe I will never see a financial crisis again in my lifetime", but now her face has been slapped by banks in Europe and the United States.

Of course, although the current banking crisis is largely confined to regional banks and does not extend to larger banks (Credit Suisse is different from Silicon Valley banks), but the incident highlights major problems in the banking system in Europe and the United States.

Since 2008, rules that have been put in place to prevent a full-blown crisis may have simply transferred risk from banks deemed "too big to fail" to banks slightly lower.

Small banks are ignored

Rather than not anticipating the banking crisis, regulators focused on the big banks, ignoring the regional ones that would happen.

According to the rules relaxed by regulators such as the Bank for International Settlements around 2018Regional banks of less than $250 billion are no longer required to have the same liquidity, capital and stress tests as big banksAnd this has become one of the root causes of a series of thunderstorms in these regional banks.

Unlike in 2008, the banking crisis was not triggered by the credit crunch, but was dragged down by falling prices of US Treasuries and government-backed MBS, once considered one of the safest securities in the world.

When deposits are rising, some regional banks regard these bonds as risk-free and buy them in large quantities, ignoring the fact that they put pressure on balance sheets when interest rates soar.

According to FDIC, with the Fed raising interest rates at its fastest pace in 40 years,As of last year, unrealised losses on the balance sheets of US banks had reached $620 billion.

If banks hold bonds to maturity, these losses may not be a problem. But the run accelerated the liquidity crisis after the disclosure of unexpected losses at Silicon Valley banks.

At the same time, US regulators set a dangerous precedent by creating a "systemic risk" exception in the Silicon Valley banking turmoil, bailing out their uninsured depositors. raises the question of whether other banks will receive similar backup support in the event of bankruptcy.

This incident also accelerated the formation of a dual-class banking system.On the one hand, the "too big to fail" banks of the privileged class have the implicit support of the government. On the other hand are small banks with assets of less than $250 billion.

Although the US government says it will do its utmost to protect uninsured depositors this time, no one can expect a rescue in the future, especially now that US regulators face criticism for violating the rules. Yellen later indicated that she would not expand deposit insurance coverage.

How to close the regulatory loophole?

With regard to the regional banking crisis, some economists hope that the Fed stress tests will increase the focus on interest rate risk, while others believe that scrutiny of smaller banks should be resumed.

There is no denying that the banking industry is bound to have problems due to the rapid rise in interest rates, which has led to the collapse of areas such as technology, cryptocurrency and real estate. Regional banks also play a key role in these areas, such as commercial real estate and loans in specific regions and areas.

Jim Bianco, president of research firm Bianco Research, wrote in a report this month that if these businesses dry up, or if deposits flow to big banks, the economy could be hit.

Thomas Hoenig, former president of the Federal Reserve of Kansas City, saidRegulators should pay close attention to the signs of stress caused by the accelerated growth of bank assets and the unstable deposit base:

When I worked for regulators, we thought the acceleration in assets and stress was a red flag.

Saule Omarova, a law professor at Cornell University, said regulators should be able to respond more quickly as social media and messaging apps magnify the impact of a "run".

Omarova, a former candidate nominated by Biden for head of the US Monetary Supervision Authority, also pointed out thatSilicon Valley Bank is one of a number of regional banks that lobbied for these changes in 2018 when Congress and the Federal Reserve weakened several rules laid down after the 2008 crisis. Banks with assets of less than $250 billion are now exempt from stress tests, and liquidity requirements for regional banks have been weakened:

The tool was taken away by Congress and voluntarily abandoned by the Federal Reserve.So the monitoring team didn't notice the exact problem with SVB.That's not surprising.

If a stress test is conducted on SVB, the liquidity test will immediately reveal problems on its balance sheet.

Some experts say it is time to lift the $250000 limit on FDIC deposit insurance. But this possibility was recently rejected by Yellen.

Omarova thinksThe government should not explicitly support the liability side of the balance sheet while ignoring the risk on the asset side. Without more control, banks may make riskier bets, which may eventually undermine public trust in banks.:

You will double the moral hazard, which will be the worst-case scenario.

Edit / phoebe