Commentary
During the 2008 financial crisis, banks failed because they assumed too much credit risk by holding complex assets that defaulted. So far during the 2023 crisis, banks have failed because they took on too much interest rate risk by holding too much long-term fixed-rate debt, including U.S. Treasuries. That’s a mistake undergrad economics majors aren’t supposed to make, which raises the question of who’s running major financial intermediaries.
Bank regulators make mistakes. One of the most important goals of bank regulators (famously called a “crazy quilt” composed of the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency, and/or state banking authorities) is to keep incompetent bankers out of the industry. They closely scrutinize the founders of brand-new banks and track the quality of management at established banks via the M in their CAMELS rating system (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity). Not since the Savings and Loan crisis in the 1980s have regulators turned over the “keys to the kingdom”—deposits—to such unworthies….