How Risky Are the Banks Now? What Regulatory Reforms Make Sense?

October 2, 2023 at 1:00 PM ET

Six months ago, we experienced bank runs and three of the four largest bank failures in U.S. history. Regulators declared there was “systemic risk” and provided bailouts for large, uninsured depositors. What is the current situation? While things seem calmer now, what are the continuing risks in the banking sector? Banks face huge mark-to-market losses on their fixed-rate assets, and serious looming problems in commercial real estate. How might banks fare in an environment of higher interest rates over an extended period, or in a recession? Reform ideas include a 1,000-page “Basel Endgame” capital regulation proposal. Which reforms make the most sense and which proposals don’t? Our expert and deeply experienced panel will take up these questions and provide their own recommendations in their signature lively manner.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

[Music and Narration]

Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.

Colton Graub:  Good afternoon, and welcome to this Regulatory Transparency Project webinar. My name is Colton Graub. I’m the Deputy Director of RTP. As always, please note that all expressions of opinion are those are the guest speakers on today’s webinar. If you’d like to learn more about each of our speakers and their work, you can visit where we have their full bios. After discussion between our panelists, we will go to audience Q&A, so please enter any questions you have into the Q&A function at the bottom of your Zoom window. 

This afternoon, we’re pleased to host a panel that will cover what has transpired on the banking front since the panel that we hosted in June on the March 2023 bank runs. We’re very thankful to Alex, who is a Senior Fellow at the Mises Institute and moderating today’s conversation. Alex, I’ll pass it off to you and the rest of our panelists and kick things off.

Alex Pollock:  Welcome to all of you who are participating in with us today in this webinar. We’re going to take up the riskiness of the banking system. This story did not end, as we all know, with the runs on and the failures of three large banks last spring and the associated bailout of large depositors. 

A dominant ongoing issue in the banking system is interest rate risk. As one acute financial thinker wrote recently, “Nothing sedates rationality like large doses of free money.” “And we’ve had years of it,” another recently wrote, “of the illusion of value in a zero-interest rate environment,” which we experienced, of course, for years. 

Well, the free money and the zero-interest rates are gone, but their legacy has left a lot of damage on bank balance sheets, as interest rates have moved from lower for longer to higher for longer, as is so often said these days. In the Federal Reserve itself, this change has left the fed with a mark-to-market loss of over $1 trillion—well over $1 trillion—and the fed has operating losses of more than $100 billion in the last 12 months. 

Well, that’s the fed. What will higher-for-longer interest rates do to the private banking system? In this context, we have to consider that interest rates are not really high, historically speaking. They only seem high to us because we have lived through the abnormally low period. In a longer view, interest rates are normal. So the real issue is not higher for longer, but normal for longer.

Moreover, as is widely discussed, the banking system is yet once again, as it has so often in the past, facing looming credit problems in commercial real estate, exacerbated by the higher-than-normal interest rates. The combination of interest rate risk and real estate exposure reminds me of how our panelist and my good friend Bill Isaac nicely summed it up some years ago in a speech in Washington, in which he said, “While we weren’t looking, the banks became savings and loans.”

Our excellent panel is going to take up the risks and also the issue of what regulatory reforms would make sense. This involves such questions as mark-to-market accounting, a classic and still lively issue. Would we want to mark all bank balance sheets to market just now, for example? No, maybe not. A notable study earlier this year suggested that, if you did, the total tangible mark-to-market capital of the entire banking system would be approximately zero. What does that mean? 

Now here’s another issue. What should the role of interest rate risk be in risk based capital requirements? It’s my view, for example, that the risk-based capital requirement for 30-year, fixed-rate, mortgage-backed securities should be much higher than its current near-1.6 percent, per Fannie and Freddie MBS, and zero for Ginnie Mae MBS. 

This is not because of their credit risk, but because of their intense interest rate risk, and it ties into the dominance of the fixed-rate, 30-year mortgage in the U.S., which is a unique problem of the United States financial system. And it does not fit well into the international concepts of risk-based capital. 

As the banking system has become more SNL-like, another issue is, how should the Federal Home Loan Banks fit into the overall system? And also, we can consider, do we need fundamental reform of deposit insurance? Can it be a sound principle, for example, that no depositor should ever take any losses? 

Well, we have a panel of outstanding experience and outstanding insight to address these issues of risk and reform. Let me introduce them briefly and the order in which they’ll speak. First will be Bill Isaac, who was chairman of the Secure/Isaac Group and was chairman of the FDIC in the multiple crises of the 1980s. 

Next will be Larry White, who is a Robert Kavesh Professor of Economics at New York University’s Stern School of Business and was a director of the Federal Home Loan Bank Board in the tumultuous 1980s. Our third speaker will be Keith Noreika, who is executive vice president of Patomak Global Partners and their banking practice and has served as acting U.S. Comptroller of the Currency in 2017. 

Each panelist will make opening comments from seven to eight minutes. We’ll give each a chance to react to the others, and then we’ll move to a general discussion, including questions from the audience, which you could send in electronically. We’ll conclude at two o’clock. And, Bill, it’s great to see you as always, and you have the floor.

William Isaac:  Thanks for that, Alex, and thanks to all the people in the audience whom I can’t see but I know are there, and I appreciate it. I’m very concerned about where we are in the banking system today, and I believe that we need significant reforms and meaningful reforms, which, right now, it doesn’t look like we’re lined up to get. Congress has, I think, given up right now, and I don’t think they’re believing that they can really fix things in this session and in this political climate that we’re in. 

The banking system started off on a very bumpy road, and it continues to be on a very bumpy road. Some of you may be not as old as I, but I remember when Alexander Hamilton wanted to create the Bank of the United States and went through fits and so forth to do it. And he did get it done, and it had a 20-year charter. 

That was the original Federal Reserve, and it was part of the plan that they had for a sensible financial system in this country. And Hamilton fought hard and eventually got it, but it only had a 20-year charter. Nobody liked it—particularly, the Southern states were opposed to it—and so it went away after 20 years. 

And they tried again a number of years later—not too many years later—with the Second Bank of the United States, and it was just an awful fight. And so bank banking reform, sensible forward-looking reform, is not easy to get done, and our country basically has said time and again, “We will fix it if and when it is obviously broken, and then we’re going to fight about how we fix it, and we’re probably going to give up and enact some new regulations. We’re not going to truly fix it.” 

The structure is wrong. It really is. We have three regulators of banks at the federal level. I think we need to reform that. And then we have state banks, and I’m not opposed to state banks. I think that’s fine, but we need to make sure that they are regulated properly, and we’re not really doing that as well as we could. 

And we have an FDIC finally. It took us a long, long time to get there and a lot of banking panics before we got there. And that’s a good improvement, but the FDIC has been basically misused. It was supposed to be for small depositors; 5,000, 10,000. Eventually, it got up to 250,000 today, but it hasn’t, in fact, been used that way. Large banks have almost always been bailed out. 

And I’m not saying I’m not guilty of it, because I handled Continental Illinois, and people criticize that, and I would criticize it, but I did what I had to do. But I think we can do better, and the FDIC has actually put out some ideas for doing better. And I have written about it as well, and I plan to write some more, and hopefully, we’ll get that fixed. 

Anyway, the Comptroller of the Currency was created around the Civil War, and it was created because we needed a national bank. And the two national banks that Congress formed were gone, so we had to do something. We needed a nationally chartered bank, and so we created the Comptroller of the Currency to do that. But that was the only change we made then, and we didn’t do anything else. We didn’t have a central bank until about 1913, or whenever it was done. 1905. I don’t remember. 

Alex Pollock:  1913. 

William Isaac:  Pardon?

Alex Pollock:  ’13.

William Isaac:  Yeah. So we finally got a Federal Reserve, but it was one reform, and we still left a system that had state banks that were not regulated properly, and nobody was insured. And the Federal Reserve wasn’t sure what its job was, and so we wound up being in the Great Depression. 

Well, in the Great Depression, we decided that, rather than straightening out regulation and the banking structure, what we’re going to do is, we’re going to take the banks and put them in a box so they couldn’t do anything except for precisely what we told them they could do. 

And that left the banks weakened substantially. They didn’t have any diversity. They were not geographically diverse. They were not diverse by products. And they also weren’t — You know, we didn’t allow anybody else to come into the business, but we also didn’t allow banks to broaden themselves. 

So they were in a trap, and they wound up being leveraged with fixed-rate loans because that’s what they were allowed to do. And they weren’t allowed to branch and get geographic diversification. And so, basically, it led to a bubble, a bubble that happened to explode when I was chairman of the FDIC. 

It began in the 1960s, and then it went into the ’70s. And interest rates were going up and up and up, and banks were in more and more trouble. And so, eventually, it just all blew up in the 1980s, and we lost some 3000 banks in thrift. We lost all the thrifts, and we lost a lot of banks, Continental Illinois being one example, but there are many, many examples of large banks all over the country that failed in that period.

I believe we can fix that system so it works a lot better. I’ve been writing about it. I’m going to write about it some more. And I’m hoping that, when Congress comes back next year, they’ll be in a better mood and things will be more constructive, and we’ll be able to talk about these issues seriously. And it really does need serious discussion. We can fix these problems, or at least reduce them substantially. And I firmly believe that, and I’m going to be promoting that as much as I can. Thank you. 

Alex Pollock:  Thanks, Bill, very much. Larry, good to see you. 

Lawrence White:  Alex, good to see you. I want to thank The Federalist Society, Colton in particular, for arranging this as a follow-on to our previous session back in June, and I’m really pleased to be part of this session. 

Now, Alex, in his introduction, mentioned a couple of important things: interest rate risk, commercial real estate loan risk, mark-to-market issues, the Federal Home Loan Bank system and its role, and he talked about deposit insurance reform. I wish he had been a little more direct and said, “We have 40 percent of our outstanding deposits uninsured, and historical experience, including six months ago, tells us that makes banks especially fragile because those deposits are flighty.”

All right. So we’re supposed to talk about, what’s the current state of riskiness in the bank system, what to do about it. The quarterly banking profile. You can download this off the web. It’s an FDIC publication. The end of the second quarter, June 30, results came out a month ago, and I’m going to be telling you the important things that you can find. It’s a data-heavy publication.

Twenty-five percent of bank equity is wiped out by the unrecognized losses on bank balance sheets. That’s the consequences of the interest rate risk. Uninsured deposits, 40 percent of the overall level of deposits. Commercial real estate loans, 75 percent of banks’ capital overall. And if you look at the small- and medium-sized banks, they average 200 percent of their capital. And, of course, these are all averages. There are individual banks that are going to be a whole lot worse on many of these dimensions. 

So what do we do about this? If I could only choose one, I’m going to mention a number—Alex mentioned it—market-value accounting. Yeah, Alex, that comes as no surprise to you, mark-to-market. And that is consistent with The Federalist Society’s theme of greater transparency, getting more transparency into the bank call report data system, recognize reality rather than paying attention to some last-year or five-year-ago or ten-year-ago price that you paid for something. That’s not the way you would value your own house. That shouldn’t be the way we should be thinking about the value of banks. 

So if I could do only one thing, that would be it. All right. But I’m going to mention a few other things. And, in some ways, I’m very sympathetic to many of the things that Bill mentioned, the problems, and I’m going to offer some — besides market-value accounting. The whole bank supervisory system has to get more serious, more aggressive on interest rate risk. 

It is so clear that the Federal Reserve Bank of San Francisco was just not — You know, they sort of knew about the interest rate risk that was lurking in Silicon Valley Bank and First Republic Bank, and they sort of brought it to the attention of senior management, and then never did anything. And that just has to be seen as a much more serious issue. 

As a more overarching suggestion, we’ve got to simplify capital requirements. For a long time, I thought just a simple leverage ratio isn’t nuanced enough. And I still believe that, but I sure know — What was it? 1097 pages of the latest capital, the Basel III cleanup, I think it’s called. 1097 pages. I mean, give me a break. And there was a law firm that put out a simplified version on PowerPoint slides that runs to merely 230 pages. 

We’ve got to find a way to do it all—credit risk, interest rate risk, operational risk—in 30 pages. My guess is the four or so people that are going to be talking today, if we could get our heads together, we could probably come up with 30 sensible pages. You know, 1097? Give me a break. 

The most controversial thing I’m going to suggest — Alex, Keith, Bill, you already know this. We have a problem with uninsured depositors. In wishful thinking, they are monitoring the bank’s management. They’re keeping banks management to doing more sensible things. In reality, they do very little monitoring, but they get nervous at the last minute and they run, and their running causes other uninsured depositors to get nervous as well, and they run. 

That’s a classic negative externalities problem, a classic pandemic-type problem. So my solution is go to 100 percent deposit insurance, not because I love the idea of high-deposit-level individuals getting off and probably underpaying for the insurance. We’ve got to address the negative externality in some way. 

And, oh, by the way, if we went to 100 percent deposit insurance, a lot of the current bank secrecy no longer has a justification. The major justification—Bill, you must have had this; I know I had it when I was at the Federal Home Loan Bank Board—was, “We can’t be more transparent because that would make depositors nervous. They would run. That would destabilize the banking system.”

We can get much more transparency if we’re no longer worried about runs. Again, The Federalist Society is interested in transparency. One hundred percent deposit insurance gets you there. Now, of course, I want more monitoring. I want the regulators to be doing their job a whole lot better. I want things like subordinated debt or other kinds of loss-absorbing capital with some governance rights to be able to do that monitoring.

Alex Pollock:  Larry, you got one minute.  

Lawrence White:  Okay. And I understand, 100 percent deposit insurance, not the most popular idea around at the moment, but I just urge you to think. We have 40 percent across the entire system uninsured deposits. There are banks—small-, medium-sized banks—with much more substantial uninsured deposit levels. That just makes these banks, fragile, unstable, and prevents the transparency. 

So if we’re not going to do 100 percent deposit insurance, we’ve got to figure out some way of addressing the negative externality. Slow down the withdrawal process. Put gates in place. You know, recognize that perfect liquidity and perfect safety are simply not compatible in a banking system. Do something. Forty percent makes those system fragile. But if you’d like to know how I really feel about this, Alex… 

Alex Pollock:  Thanks, Larry. Okay, we’re going to go over to Keith. I remember visiting Keith when he was Comptroller of the Currency and seeing a copy of the original handwritten version of the National Banking Act up on this wall. So Larry, maybe — 

Lawrence White:  I love that. I love that, I wish I had a copy as well.

Alex Pollock:  I don’t know if it was Keith’s or it belonged to the office, but anyway, maybe an idea would be that no bank capital regulation could be longer than the original National Banking Act. Anyway, Keith, great to have you.

Keith Noreika:  All right. Well, thank you very much, Alex and Larry and Bill. Great to be on a panel again with you. That law actually belongs to the office, signed by Abraham Lincoln, two acts, one of 1863 and another of 1864. 

The topic today, I think Larry’s stated it well: where are things, and what should we do about it, if anything? You know, my own view is, we haven’t even gotten yet to the credit cycle. We’ve been through this interest rate risk dislodgement in the spring, which brought us together then. 

You know, just to paraphrase Donald Rumsfeld, those were the known knowns, and now we’re off to the known unknowns, which is the credit book of these banks, which is inherently not transparent. That’s why you have banking regulation that’s different than all other regulation in the first place. And then there’s the unknown unknowns, which is, what do you do about it, which is in a fluid environment.

You know, just as far as the credit cycle goes, before we move on, we’re seeing a lot of stress in, say, the leveraged lending market. I mean, interest rates are approaching 20 percent. How high and how long does that go before things start breaking, and what’s the exposure on the banking industry? 

One of the things that I’m going to talk about in a minute is, the banking industry itself is a lot different than it has been in the past. You know, assets under management of private equity, for instance, has now eclipsed that of the banking industry. We heard from Bill the story about SNLs sort of being put in a box, and now the banking industry becoming the SNL industry. How long before we don’t talk about the banking industry anymore because it’s gone by the wayside like the SNL industry? 

There’s a lot going on, and I don’t think it can be looked at in a vacuum. You know, the banking industry is one part of it. It’s used to maybe clear transactions and provide some leverage, but it’s dynamic and it’s changing, and it’s changing with respect to its competitors for capital elsewhere. 

When you look at the whole system of financial intermediation, you see things like private equity really cleaning the clock of both the public markets and the banking industry itself. And we have regulators who are very laser-focused on one thing and one thing only, their industry, and not being held accountable for some blow-up. But if the effect of that is driving their industry out of business, then we have something else to maybe consider going forward. 

The way one of my predecessors put it to me early in my career, even before I was at the OCC, was, “Keith, bank regulators regulate for safety and soundness.” And he’s like, “A lot of times, soundness gets shunted to the side, but soundness sort of goes into that.” What is the business model of the industry? What do we want it to do, and how do we want it to do it? And what type of return do we want it to achieve? Because that third part is how you attract capital to it. 

And if other industries can attract a lot more capital because they can offer safer returns at a higher rate, then the banking industry is going to have to do something else or shrink or become a public utility, or you need to redesign the banking industry in a way that it can achieve its purpose of financial intermediation without the risks presented. 

So I think, at some point, we’re going to have to have a Treasury commission or even a presidential commission to think about what the banking industry is for, where it should be going in light of everything else, and not in this hot-pressure attitude of, “There have been failures.”
And there will be failures. I think we’re going to have more failures where the attitude of Washington seems to come down like a ton of bricks. 

I think what you’re seeing right now from the regulators, even with these large capital proposals and the like, those were already in the works. They’re just being repurposed as a solution to a problem that didn’t exist at the time they came up with these proposals. And the idea that — I think even the current regulators will realize that you can’t come down like a ton of bricks on the industry or else it will collapse underneath it at the moment. 

That’s a challenge. We’re getting to the hard question, I think, of the nature and future of the banking industry. And I think, well, you have to figure that out before you can have any type of legislative proposal to deal with it. For instance, if you really go back—and people like Alex, Bill, you’ll remember this, Larry—there were proposals for, say, a narrow bank where you wouldn’t even need insurance. It would be fully collateralized. 

Maybe we need to pull out some of the old thoughts and think about them a little bit more of the nature of it. Because, again, if something like private equity is better because the people who are funding it can’t run — And again, that’s a big if. I’m making an assumption there. 

I don’t have any data to support and may not be supported, but if it is, then maybe we should move that way for the making of non-transparent loans that have to be carried at cost, or it’s hard to mark-to-market—and we’ll get to that—and then move the transactional runnable things off to something that’s maybe a little bit more transparent and liquid.  

Again, I’m just throwing ideas out there. I think this would be sort of a long, involved process, but we certainly have that — I think we’re getting to be at an inflection point where we can have that conversation. So, with that, I’ll turn it back over to you, Alex. 

Alex Pollock:  Thank you very much, Keith. Let’s go back through the panel in the same order. Now you have two or three minutes to respond to anything anybody else said or add something else you want to add. So, Bill, you’re first. 

William Isaac:  I have so much I want to talk about. I’m not sure how I could do it —

Alex Pollock:  You got three minutes. 

William Isaac:  You got to give me at least three. Anyway, some very interesting comments have been made I just want to touch on. First of all, Larry talks about mark-to-market accounting, and Alex did too. I want to tell you that I am absolutely unconditionally opposed to mark-to-market accounting. 

That’s a big part of our problems in the banking system, has been since the 1980s when the SNL industry blew up, in large part because of mark-to-market accounting issues. They were underwater, and interest rates went up to 21 1/2 percent. 21 1/2 percent, the fed raised the interest rates to.  

And no SNL and very few banks could actually survive that if they were doing full-blown mark-to-market accounting. To me, we’d be out of our mind to submit ourselves to market regulation to that degree. I mean, I know that because, interest rates, they change. The people who are setting those interest rates are worried about tomorrow and the day after tomorrow, not a year from now or two years from now. 

And they are betters. They are heavy betters, and they’re going to destroy whatever’s in their paths. They make a lot of money having banks fail or other firms fail, and we can’t let them run the country and its financial system. And so I’m absolutely 100 percent opposed to mark-to-market accounting. And, for the same reason, I’m absolutely 100 percent opposed to 100 percent deposit insurance. 

Alex Pollock:  Bill, before you go into that, I put that mark-to-market up there on the list because I knew that you and Larry would come out in interesting opposition. I thought that was — All right. Let’s go on to 100 percent deposit insurance.

William Isaac:  Yeah. By the way, you just used two of my minutes, so I’m taking them back. 

Lawrence White:  I want to have your kind of ruler that goes from this all the way to that, Bill. Two minutes.

Alex Pollock:   Hang on. You’ll get a turn next. 

William Isaac:  I don’t even know what that means, so I’m going to ignore it. But in any event —

Alex Pollock:  You have two minutes, Bill. 

William Isaac:  Okay. I’ve got two minutes. All right. One hundred percent deposit insurance is a terrible idea. We have trouble enough disciplining the system when you’ve got $250,000 deposit insurance, and we can’t regulate enough or examine enough to keep on top of the situation. 

I think that the answer is—and I’m posing this—is to make sure that we cause some loss to the big depositors. They don’t really have to take huge losses, but they have to be punished for having their funds sit in institutions that are not safe. 

And so I do want to reform the deposit insurance system, and we can reform it to make it a whole lot better than it is right now. And I have proposals to do that. Subordinated debt, Larry mentioned, and I don’t want him to think I’m picking on him because I actually favor that. I think that’s one of the things we should use to discipline the big depositors and the reckless acts that some banks might undertake. 

We need subordinated debt in the picture, and it should be significant. Smaller banks probably can’t reach the market, but I can tell you that, when I started my career at a law firm and I was representing a large bank, and it made a lot of loans to correspond to correspondent banks. And one of the things they did is that large correspondent bank bought subordinated debt from those banks. 

And that was a great way to control reckless behavior because those banks that are loaning that money, or insurance companies that are loaning that money, are going to help the FDIC and the regulators control the behavior that bank. That is an excellent idea that I favor. Do I have any time?

Alex Pollock:  No.

William Isaac:  Okay. Thank you. I’ll have more time later.

Alex Pollock:  You will. Okay. Good. Larry.

William Isaac:  Actually, I take that back, Alex. One other thing I want to say. Congress causes most of this mess. They do not have control of the budget, and the fed can’t take control of the monetary policy very well with Congress spending bazillions of dollars that it doesn’t have. And so we wind up with very, very high interest rates and interest rate volatility. So Congress is a principal cause of these problems we’re having, and we need to fix that, too. I’m done. 

Alex Pollock:  Okay. Thanks. Larry.

Lawrence White:  All right. Bill, pleased to hear we’re on the same page of subordinated debt. Great. And I was really disappointed. Sub debt or loss-absorbing some things was actively talked about after 2008, and it’s just disappeared from the conversation. We got to get it back. 

William Isaac:  The FDIC did that internally already, Larry. After the 1980s, we proposed sub debt, and the next administration didn’t carry it out.

Lawrence White:  All right. As I said, I understand 100 percent deposit insurance is not the most popular thing on the table. Forty percent uninsured deposits make a banking system fragile. There’s this negative externality. I hear that Alex is pulling his money out of his bank, I get nervous. I don’t understand my bank, but man, if Alex is pulling his money, better safe than sorry. I better pull mine. 

And we have a run, a negative externality process. We’ve got to address it in some way. We can’t just put our heads in the sand. That was at the heart of what, on that Thursday, March 9, did in Silicon Valley Bank, $35 billion of running with another 65 billion scheduled to run the next day. 

Let me just say, Keith, you didn’t endorse this, but man, anytime I hear, though, somebody say, “Well, geez, maybe we ought to turn X into a public utility,” and banking is now being talked about—there’s a law review article somewhere that’s going to be coming out—public utility? Man, we have enough trouble trying to regulate a relatively simple entity, like an electricity company, distribution company, or a natural gas distribution or a water distribution. Why would anybody think public utility? Again, you didn’t endorse it, but I know it’s out there on the table. 

Presidential commission? Yep. Probably a good idea. But let me remind you that, during the 1970s, there were at least three commissions, all of whom brought in recommendations that said, “The savings and loan industry that can only borrow short and lend long is a disaster waiting to happen. It needs to be reformed. We need to give them more flexibility on the kinds of loans they can make and what they can do,” and it got totally ignored until the crisis of 1979 happened. 

And then Congress decided, oh, before, they could say, “It ain’t broke. We’re not going to try to fix it.” Now, suddenly, in ’79, they saw it was broke. They had the DIDMCA Act of 1980 and the Garn-St. Germain Act of 1982, both of which were sensible, but were way too late. Had they been done 10 years earlier, I might not have had the opportunity to write a book about the savings and loan debacle. 

So alas—and this is partly what Bill was saying—We have what we’ve had for a long time: Congresses that have the ethos “If it ain’t broke, don’t fix it.” And they have a lot of trouble seeing that anything is broke until the water is absolutely gushing down on top of their heads. 

Alex Pollock:  Good stopping point, Larry. Thank you very much. Keith.

Keith Noreika:  All right. Well, thank you. Great discussion. You know, just a couple of things to react to. I guess mark-to-market — I would wonder if there’s a distinction to be made between a bank securities portfolio versus its loan portfolio. You know, securities portfolio is much easier to mark-to-market. I think loan portfolio is much harder and gives rise to judgment.

So I just sort of throw that out there. There may be a distinction to be made. Maybe not if you’re Larry and you want full transparency. One hundred percent deposit insurance, at least to me, seems like a bad idea. You know, you are taking whatever private monitoring function, and you’re substituting the government. So what’s the difference between that and nationalizing the banks? 

Fiscal deficit. I agree with Bill, I think that’s behind all of this. You know, the Treasury is pumping—and the Federal Reserve—tons of public debt into the markets that has to go through the banks, and the banks are the intermediaries of first resort. And when that changes, they’re the coupler holding the railroad cars together, and there’s going to be a lot of stress between them. 

You know, I know, Alex, you’ve written about decoupling from the gold standard, and this is where we are 40 years later. We have money that’s just backed by the full faith and credit of the government, and we have the watch extraordinaire, our legacy of the reserve currency that allows us to live way beyond our means that other countries don’t have. 

And all that stress comes through the banking system, and if there’s going to be financial pressure or eventual financial distress, it’s going to go through the banking system. So, in some ways, you can’t talk about that in a vacuum or in a bubble, divorce from what Congress is doing, and the administration, as far as spending beyond their means. 

And, finally, I certainly don’t endorse the banking industry as a public utility. I think that’s more why I’m thinking about different ways to structure it. The fundamental weakness of the banking industry is this runnability. We’ll have short-term liabilities and long-term assets, same as the SNL industry, maybe a little less exacerbated than it was then. 

But if you’re going to find a way to perhaps decouple that to make it safer, then you don’t need all this regulation, and you can have a privately ordered system of financial intermediation. So I’ll just leave it at that.

Alex Pollock:  Okay. Thanks, Keith. Thanks all for a very lively and very obviously knowledgeable conversation. I want to go along to some questions from the audience who are paying attention and who are writing in. This is going to change the topic a little bit. This is a question from Wayne Abernathy. 

We have three experienced senior regulatory officers on the panel. And Wayne knows a lot about this, as we know, through his own experience, both in the Senate and with the American Bankers Association. 

He writes, “Financial regulators are expected to be nonpartisan. They admit they missed a lot with regard to the recent failure of the large banks this spring and were caught by surprise. The business geography of these large banks and their customers is hard to overlook. To what extent were the regulators susceptible to political influences in the supervision of these banks? And in general, how should reform avoid partisanship in financial regulation and supervision?” That’s a question anybody can take at once. 

William Isaac:  Well, Wayne is a good friend, and I’ve known him a long time. And he’s spot on with his question. The system, in my opinion, has become more politicized than it should be, and I think we need to change that. And one of the proposals I’m making is that we have the Comptroller of the Currency taken out of Treasury and turned into a federal banking commission. 

And it was a five-member board. The fed gets out of bank supervision and regulation and has a seat on that board. And the FDIC give up its supervisory powers except the oversight of the regulators and the jobs they’re doing in banks. In other words, the FDIC has to have oversight. Somebody has to be looking at the system and make sure it’s working, and that would be the FDIC, but the FDIC doesn’t need to be approving branches and new charters, and all that. 

And so I would have it as a member of that commission, and then I would also have a Deputy Secretary of the Treasury as part of that commission. And then there are two presidentially appointed board members, the chairman of the FDIC and the vice chairman, and they’re opposite parties. 

Alex Pollock:  That’s your unitary regulator? 

William Isaac:  Yeah, exactly. And then I think that system will get a lot of the politics out of bank regulation, and I think it’s really needed, desperately needed. The president should not be involved in deciding how bank failures are going to be handled, nor should the Secretary of the Treasury. We have professionals that can take care of that, and they report to them and they can tell them what they’re doing and ask their opinion and so forth, but they shouldn’t be — The president and the Secretary of the Treasury shouldn’t be involved in those decisions. 

It’s a mess. It really is. It’s hard enough to handle bank failures without that interference, and it’d be impossible with it. So those are my thoughts on that subject, Wayne, and thanks for bringing it up.

Alex Pollock:  Other comments from anybody?

Keith Noreika:  I guess I would disagree with that. We have the most political agency. The Offices of the Comptroller of the Currency, has, at least to date—knock on wood—been the most successful with the banks that have faced stress. We have the Federal Reserve and the FDIC as the primary regulators for all of the banks that have failed recently. 

So this expert approach, I don’t think necessarily works if there’s no accountability attached to it. At the end of the day, you have to have political accountability for the voters. You’re spending their money. The least we can do is give them a say in that in some respects. So I think it’s fine that the President of the United States has to — or the Secretary of the Treasury — If you’re going to be spending hand-over-fist of the taxpayers money, maybe the voters should have some accountability of these people. 

And I think it’s a false idea that the bureaucracy doesn’t have any political views. I think, in many ways, the bureaucracy’s number one goal is to perpetuate the bureaucracy, and they will do that. If it means aligning with a political party to save them, they’ll do that. So I think you have to be a little bit realistic about the way Washington works. 

I think part of the problem — I am very sympathetic to your concerns, Bill. And I think there’s a lot right. I think probably a lot of it emanates from over regulation. If you have a regulation that makes everything a violation of law and you give people discretion in how they enforce it, they will use that to advance their political interests. 

And I think they’re seeing that, in the banking industry and elsewhere, where that’s striking people as unfair, but I think, at the end of the day, that’s probably the result of too big of government. I mean, you do too much and then you give people discretion in how to enforce that, there’s bound to be unfairness and how things are applied.  


Alex Pollock:  Bill, hang on. Hang on.

William Isaac:  Let me say a couple of things, Keith. First of all, I think the Comptroller of the Currency has been an excellent regulator for the most part. That’s why I selected it to be the regulator. That would be the tent that holds the regulatory stuff. I just don’t like it accountable to politicians. I really don’t. 

And I speak from a lot of experience. I know what politicians at the Treasury and elsewhere were trying to get me to do when I was chairman. And, fortunately, I’m not a very political person, so I ignored it, but a lot of people don’t ignore it and can’t ignore it. 

Alex Pollock:  Hang on. Gentlemen, that’s good. We can have a whole conference just on this very good question. 

Lawrence White:  That’s fine. That’s fine, Alex.

Alex Pollock:  No, no. We’ve got a lot — Hang on. We need to go on and give other questioners a fair chance here. So I’m going to go on and let’s hold this. Maybe the next time we get together, we’ll give this more — 

William Isaac:  I see there’s another panel coming down the line. 

Alex Pollock:  It’s certainly an important question, but here’s another important question. And I’m going to make a comment here — give you the question, then I’m going to make a comment, then open the floor. The question is, “How do you pay for 100 percent deposit insurance?” It’s a very good question, and my answer is, part of the way you’ll pay for it is by having an exceptionally risky financial system. 

Henry Thornton, writing in 1802 an inquiry into the paper Credit of Great Britain, said, “If you make it clear to the bankers that the Bank of England and the Treasury will always rush in to bail out the system from its mistakes, the banks will engage in the very risk which will bring the system down.” I think that was right in 1802, and I think it’s still right, but I open the floor to the panel to comment. And, Larry, since you missed out last time, maybe you want to comment on how do you pay for 100 percent deposit insurance. 

Lawrence White:  Sure. And at the beginning, you have a much better risk-sensitive deposit insurance system. Think of deposit insurance as insurance. And how do insurers keep going? Partly, they levy premiums on the beneficiaries and potential beneficiaries. Also, they establish rules to protect themselves. 

And the right way to think about prudential regulation, or as Bill and I used to say in the olden times, safety and soundness regulation—and, Keith, you brought that up as well—the way to think about safety and soundness prudential regulation, it’s the rules that protect the deposit insurer. 

So if you have a good set of rules and a good set of deposit insurance premiums, the amounts — Yes, there will be the occasional bank that does go bust. There is the occasional payout to the insured depositors, 100 percent, but that [no audio 52:17] better premiums and thinking about safety and soundness regulation as the rules the insurance company puts in place to protect itself.

Keith Noreika:  Should we have a private insurance company set the premiums? 

Lawrence White:  Well, if Goldman Sachs were providing deposit insurance to bank depositors, I am sure they would be thinking quite carefully about what kind of rules they would have in place to protect themselves. No question in mind.

William Isaac:  I think that’s an absurd idea. I really do. And there’s no way to have 100 percent deposit insurance without nationalizing the banks, and if you nationalize the banks—we have lots of experience with that around the world—it’s destructive. It’s very destructive.

Alex Pollock:  It’s always a failure. We know that. 

William Isaac:  It’s always a failure. The FDIC has the power right now to set risk-based premiums, and it uses it to some extent.

Alex Pollock:  Okay, we’re going on to the next, gentlemen. This is terrific. We could have a whole conference just on this one. Now let me go to the next question. This is from Steve Dewey. “The Supreme Court is hearing a case tomorrow on whether the CFPB is funding by the fed set up under Dodd Frank is in violation of the Appropriations clause of the Constitution. If the court rules and see CFPB spending is unconstitutional, what happens then, and what does it mean for the banks?” Anybody want to take that on?

William Isaac:  I think it’s a great idea. And it’ll help the banks, and the Congress will do what it should have done, which is, they’ll put a proper governance in place for the CFPB instead of a single individual. And that individual will have to go to Congress and ask for money. So it puts that agency under some sort of reasonable oversight, and that’s what Elizabeth Warren didn’t want it to have.

Lawrence White:  Bill, I’m not a lawyer. I would never practice law without a license. But the bank regulator, the bank regulators, get an appreciable amount of their revenue through levies on the banks, not through appropriations from Congress. I think that’s where that question is directed. If the CFPB funding process is suspect, how about the funding process for bank regulators more —

William Isaac:  The CFPB is taxing are taxing the fed, not the banks. And there’s no control over it whatsoever. At least the FDIC has banks that are unhappy with their premiums go up. CFPB doesn’t have to worry about it.

Keith Noreika:  Yeah, there’s no check. I think the other bank regulators have some check. The OCC, you can just change your charter to a state charter. FDIC, you can change around your deposit premiums and the like. With the CFPB, it does seem — You’re getting into more metaphysical questions, and we’ll see what the justices come up with.

When that was first enacted—I’m surprised it’s taken this long to get to the Supreme Court—I always thought the same people proposing this — Imagine Don Rumsfeld had been a Bureau of the Federal Reserve and can fund himself just by writing himself a check to run the Defense Department and war. Somehow, I think a lot of people might not be okay with that, and it doesn’t get better just because it happens to be a pet project of certain fringe political groups. 

Alex Pollock:  Thank you. Very good. Now, we’ve got three minutes left, so you’re each going to get one minute on this next question, which I think is a very good one to end on. It’s Ned Headley writing in, and he says, “Would each participant give just one legislative proposal?” We’ve heard some already, but now you get the chance. “And what’s your top legislative proposal to help solve some specific problem?” 

So can we go in the same order? Bill, what’s your top one legislative proposal? Is it your reorganization of regulation?

William Isaac:  Well, certainly, I favor that that should be a very high priority. We’ve got to fix the financial system, but number one, kill inflation. Stop it. And that means get these deficits under control. That’s it.

Alex Pollock:  Thank you. Larry, one top legislative idea.

Lawrence White:  I’ll come back to mark-to-market accounting, increasing transparency. It’s not like suddenly a bank wakes up and, “Oh, my gosh. I have to mark.” Once the culture of, “If I buy a long treasury and interest rates go up, I’m going to have to show that on my balance sheet. Geez. First, maybe I ought to think twice before I buy that long treasury. And second, if I still want to do it, I’ve got to hedge.” And so a culture of hedging would also accompany the mark-to-market accounting,

Alex Pollock:  The only adjustment I’d make to that is, they’re much more likely to be buying a 30-year, fixed-rate, mortgage-backed security, which is much harder to deal with than say a 10-year —

Lawrence White:  Even more so, but there are hedges. You can get hedges. Silicon Valley Bank had hedges and then let them all run off during 2022. How could that happen?

Alex Pollock:  Okay, great, Larry. Keith, one minute. What’s your top legislative priority? 

Keith Noreika:  Same as Bill. You know, have a budget, first of all, for Congress and then try to balance it. I think if you did that, the whole industry would be in a lot better place.

Alex Pollock:  Okay, thank you. And you have been an extremely interesting, not to mention entertaining, panel. Thank you all very much. And Colton, we’ll go back to you for The Federalist Society close. Great panel. Thank you again.

Lawrence White:  Thank you, Alex, for making it happen. 

Colton Graub:  Excellent. Well, I just want to echo Alex’s comments. This has been another amazing panel, and I do think that we would love to have you all back to discuss a couple of these issues in more detail. I think that they’re definitely warranted, and our audience certainly would appreciate it. 

For those of you in the audience who joined the conversation midway through, you can watch the recording via YouTube or listen to it via your podcast feed, and it should be available everywhere you listen to podcasts. We welcome listener feedback by email at [email protected]. With that, thank you for joining us. This concludes today’s discussion.


Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at


      This has been a FedSoc audio production.

William M. Isaac


Secura/Isaac Group

Keith Noreika

Executive VP & Chairman, Banking Supervision & Regulation Group

Patomak Global Partners

Lawrence J. White

Robert Kavesh Professorship in Economics

Leonard N. Stern School of Business, New York University

Alex J. Pollock

Senior Fellow

Mises Institute

Financial Services & Corporate Governance

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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