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What’s next for financial regulators after the banking jitters?

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Feeling a sick sense of deja vu — a la the 2008 financial crisis — because of the current bank turmoil? The rescues of Silicon Valley Bank, Signature Bank and Credit Suisse bring back memories of the failures and rescues of troubled financial institutions 15 years ago.

While the damage has so far been contained to the three banks, with a fourth on the ropes, the episode has revealed a lasting unease about the banking sector even after reforms like the Dodd-Frank Act were supposed to fix things. According to Marketplace senior economics contributor Chris Farrell, the instability in the financial system holds lessons for regulators as they develop new strategies.

“Legislators, regulators, they respond with addressing gaps in regulation and they add more rules,” Farrell said in an interview with Marketplace’s David Brancaccio. “Yet as Andy Haldane said when he was chief economist at the Bank of England … you don’t fight complexity with complexity. Instead, embrace simplicity.”

The following is an edited transcript of their conversation.

David Brancaccio: Level with me. There must be a better way.

Chris Farrell: There is a better way. But it isn’t surprising that we’re at risk [of] another financial meltdown. I mean, look, there’ve been various reforms over the decades, [including the] Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. But they have fallen short of dealing with the systemic risks that come from these bank failures.

Brancaccio: Silicon Valley Bank was initially included in tougher regulations that followed the last financial big collapse. But it’s a regional medium-sized bank. It was just under the limit for the tougher regulation and eventually got itself out from under the tougher rules because of its size — it’s a medium-sized bank.

Farrell: So here’s the problem. Legislators, regulators, they respond with addressing gaps in regulation and they add more rules. Yet as Andy Haldane said when he was chief economist at the Bank of England … you don’t fight complexity with complexity. Instead, embrace simplicity. By the way, this conversation is increasingly important because regulators have now decided, let’s ignore this $250,000 [Federal Deposit Insurance Corp.] limit because they insured everybody at Silicon Valley Bank and Signature.

Brancaccio: We’re going to be talking about this, policymakers are going to be talking about this. What do you think they’re gonna look at?

Farrell: You know, I think they’re gonna say, “You’re gonna have to have more capital.” I mean, look, there are a number of good ideas out there. But the one I would highlight is the Minneapolis Plan. It was developed by the Federal Reserve Bank of Minneapolis in 2016. The Minneapolis Plan says, by the way, banks with $250 billion in assets, good-sized banks, they have to hold common equity — not debt, but equity — equal to 23.5% of their risk-weighted assets. If the Treasury decides, you know what, this institution puts the whole financial system at risk, 38%.

Brancaccio: And I can imagine at the time, there were bank lobbyists up in arms about that. Bank managers worried about profitability unless, of course, these higher reserves kept them from failing when push came to shove.

Farrell: They hated the idea of what was proposed in 2016 because here’s the thing: Banks would make less money. So these kinds of equity levels might even push big banks to break themselves up or just accept lower returns. To modify a famous insight by economist John Maynard Keynes, “If bankers could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” And a large equity cushion might well accomplish that goal.

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