Deep Dive Episode 270 – The 2023 Bank Runs and Failures: What Do They Mean Going Forward?

This year’s sudden collapse of First Republic, Silicon Valley, and Signature banks were the second, third, and fourth largest bank failures in US history, bringing perceived systemic risk and bailouts of wealthy depositors. In addition, the global Credit Suisse bank collapsed and commercial real estate losses threatened. Politicians, regulators, and bankers are debating why the massive regulatory expansion following the last crisis didn’t prevent the renewed failures. Some emphasize repetition of the classic financial blunder of buying long and borrowing short. Others question the 2018 reforms to the Dodd-Frank Act, or cite the monetary actions of the Federal Reserve. Various proposals include more deposit insurance, mark-to-market accounting, higher capital requirements, more stress tests, or bigger regulatory budgets.

Our expert panel discusses the issues and risks going forward, the outlook for new legislation and regulation, and what, if anything, should be done.


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:  On June 16, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled “The 2023 Bank Runs and Failures: What Do They Mean Going Forward?” The following is the audio from the event.


Good afternoon. 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 of 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 a 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 discussion on the recent bank runs and failures that we’ve seen in the United States, and what they might mean for the future of banking regulation. We’ve very thankful to Alex, who is a senior fellow at the Mises Institute, for moderating today’s conversation. Alex, I’ll pass it off to you to introduce the speakers and kick things off.


Alex J. Pollock:  Thanks so much, Colton. And let me add my welcome to all who are participating today, as we think about all these sharp banking problems of this year, meaning as we go forward through our regulation legislation, and for the banking business itself. And we look at the bank runs, and the short but sharp panics and bank failures of 2023, the egregious bailouts of wealthy depositors, and the widely dispersed banking risks that they have brought to light.  


I think we can observe, by way of a wider context, that all finance is political finance, and all financial crises call for new political and regulatory responses, intended to prevent any future crises. And, of course, in this, they fail. And, in time, we have another crisis, in spite of all the best efforts. This is caused by the unexpected behavior that emerges of financial actors, and of the central banks and regulators, and politicians themselves.  


Well, just so in this cycle, the buildup of fatal interest-rate risk and of liquidity risk — risks induced by the policies of the federal reserve — including the fed’s historically new desire to subsidize mortgage finance. These accumulating risks were not prevented, obviously, by the complex risk-based capital and other rules which mark the regulatory efflorescence after the last crisis.  


So now, we have not only significant banking collapses, but the emergence of systemic interest-rate risk in the entire banking system. A risk so large as to suggest that the entire banking system may have something like zero capital on a mark-to-market basis. On top of that, there’s yet again the risk of commercial real estate losses looming. The Federal Deposit Insurance Corporation’s insurance fund is below, already, its statutory minimum level. And, too-big-to-fail banks — which, in the past, was a great campaign to not have too-big-to-fail — instead we have too-big-to-fail more powerful, and the too-big-to-fail banks literally have fundamental advantages that are obvious.  


Well, what to do? How will this experience turn into new laws or regulations, or both? Various proposals that are discussed include to change liquidity requirements, to increase capital requirements, to move to mark-to-market accounting, to limit deposit concentrations, to claw back executive bonuses and failed banks, to increase, or even make unlimited deposit insurance coverage, and, finally — one we might expect to come from the relevant agencies — to significantly increase the budgets of the regulatory agencies.


Considering this year’s striking events and all this discussion, what form are new banking legislation and/or regulations likely to take? What form, if any, should they take? We have a panel, outstanding in experience and insight, to explore these questions today. And I’ll briefly introduce them in the order in which they’ll speak. 


First, Bill Isaac, who is chairman of the Secura/Isaac Group. Bill was chairman of the FDIC in the tumultuous 1980s when, in case we’ve forgotten, more than 2,000 banks and thrifts failed in a decade. He founded the Secura Group, was chairman of the board of the Fifth Third Bank, and is the author of the book, Senseless Panic: How Washington Failed America


Next will be Larry White, who is the Robert Kavesh Professor of Economics at New York University’s Stern School of Business. During the 1980s, Larry was a member of the Federal Home Loan Bank Board, so was also in the midst of the crisis and, indeed, crises of that memorable and instructive time. Larry is the author or editor of more than twenty books. And, in particular, I’d like to mention two: The S&L Debacle: Public Policy Lessons for Banking and Thrift Regulation; and Guaranteed to Fail: Fannie Mae and Freddie Mac and the Debacle of Mortgage Finance. Financial history does seem to be peppered with debacles, Larry, indeed. 


Our third speaker will be Keith Noreika. Keith is executive vice-president of Patomak Global Partners, leading in its banking, financial technology, and regulatory issues. Previously, he was a partner at Simpson, Thacher and Bartlett, in their financial regulation practice. Keith has served as acting U.S. Comptroller of the Currency. And, in that office, therefore, also as a director of the FDIC, and as a member of the Financial Stability Oversight Board. 


Each panelist will make opening comments of seven or eight minutes. We will then give the panel a chance to react to each other, or clarify points, and move to a general discussion and to questions from the audience, which, as discussed, you can send in electronically. And we’ll conclude at 2:00. And now, Bill, you have the floor.


William M. Isaac:  Thank you, Alex. Alex and I go way back, and are great friends. And he’s actually taught me most of what I know. But not everything he knows. This latest debacle was — well, it was that. It was a debacle. It didn’t have to happen. Everything that did happen was foreseeable and should have been foreseen. Let’s just take Silicon Valley Bank. The Federal Reserve Bank of San Francisco saw everything that was going on in that bank. The Federal Reserve Board in Washington saw everything that was going on in that bank. And I believe the FDIC saw everything that was going on in that bank. And nobody stopped it.


And I don’t know how you fix that system, but it has something to do with the regulatory system. Obviously, the officers and directors of the bank were the primary responsible parties. They did all these things and, therefore, they have to take their responsibility for all these things. But there was a lot of knowledge about what was going on, among the regulators that I just identified, and probably, as well, in the rating agencies and all the other people that oversee banking. There was no surprise there at all.


The Silicon Valley Bank had a terrible mismatch. And they should have known that that mismatch was going to get them in trouble. We had a mismatch just like that in 1979, when First Pennsylvania Bank failed. It was the oldest national bank in the United States at the time. And it had been a good bank. And they decided that they were going to load up on government bonds, basically. And so, they loaded up on government bonds at fixed rates, and didn’t take into account the interest-rate risk that they were undertaking, and the fact that Paul Volker was coming in as chairman of the fed, and might want to raise rates, since we were in dire straits, with respect to the economy.


And so, he came in. He raised rates a lot. Took rates from probably around 8 percent, when he came in, to a high of 21½ percent. And, of course, that didn’t sit well in a bank like First Pennsylvania, which had fixed rates, investments in fixed-rate bonds. And, therefore, it failed, and cost the FDIC a fair amount of money. And that happened then. It was notorious. And all the regulators, from that point forward, started sending out all sorts of vibes about, “You shouldn’t take interest-rate risks. You should hedge your risk.” All this sort of stuff.


And what good did that do, when, I guess that’s about 50 years later, 40 years later, this bank in Silicon Valley did the same thing? And I don’t know how you can watch that happen twice and say that you were surprised by it. But they were. And the regulators were, apparently. So, what good does it do to put a lot of rules in place that are not followed? Those rules were clearly in place. But they weren’t followed, and they weren’t enforced. And it tells me that there’s something very much wrong with the way the system works. And, at the regulatory level, we’ve got to fix it.


And I don’t see how you do that by not changing the system materially. We tell regulators, “You’ve got to do this. You’ve got to do that.” And they either do it or they don’t. And, usually, they don’t. Because, if they did, there wouldn’t be any more problems. And, by the way, the problems change, too. We make a lot of rules about the past problems, and then we don’t detect the new problems that are coming up, as a result of those rules. So, in my view, what’s desperately needed is a regulatory system that is truly revised. I don’t think we can get along without regulation. I think we need regulation. I think regulation is extremely important. 


We can’t expect the private markets to carry on without observing the new risks that are coming. We’ve got to have a new regulatory system that really works. And I actually have an idea of how that would be done. And I think we need to do it. And it’s very, very important, also, that we punish people who do things wrong. And we just can’t say, “That’s too bad. I’m sorry you did that.” We really do need to take some actions against those people, for personal liability and so forth, if they get involved.


But, most of all, what we need is a very strong regulatory system that doesn’t have a lot of conflicts, that does the right things for the right reasons. I think we can do that. And we have no choice. We’ve got to do that. We’ve got to fix it. And I think that that’s what we ought to spend our time in the months ahead, really debating what kind of regulatory reform do we need to make this system work? And I hope it’s more than just the usual fix that we need to slap somebody on the wrist. 


We really do need to have a better regulatory system, a strong regulatory system, and one that is enforced. And I think we can do it. We have no choice. We have to do it. The private sector is not going to take care of this alone. But the public sector has to be much more observant of what’s going on, and much more decisive about what needs to be punished and stopped. I think that ought to be enough for now, Alex.


Alex J. Pollock:  Thank you, Bill. Thanks very much.  Larry.


Lawrence J. White:  Great. Well, Alex, thank you. Thank you for inviting me. Thank you to The Federalist Society for hosting this and inviting me. I’m going to spend the early part of my seven or eight minutes talking about what went wrong with Silicon Valley Bank. Bill and Alex have already mentioned this, but I’ve got to sort of emphasize, they were borrowing short and lending long. That’s a nice way to make a living, so long as interest rates stay stable, or only go up very modestly. But, as Alex and I both learned during the savings and loan debacle of the 1980s, as Bill learned as well, interest rates go up and you’ve got a problem, and the regulator, the deposit insurer has a problem.


And, unfortunately — and this is a theme I’m going to come back to — the accounting is backward-looking and is not properly registering the change in values that happen when interest rates change. Further, something that hasn’t been mentioned, 90 percent of the deposits at Silicon Valley Bank were uninsured. That means Silicon Valley Bank was very fragile. Those guys are going to move their money quickly. But they’re not very good monitors. And I’m going to come back to that. 


As early as October of 2022, when the third-quarter results for Silicon Valley Bank were published, it was clear Silicon Valley Bank, if you looked not all that hard at their financials, you would have learned they were basically out of capital. If their hold-to-maturity assets were mark-to-market, they were out of capital. But nobody said anything. Nobody did anything, nobody. Amazing, just amazing. All right. What else? They had an undiversified depositor base. They had an undiversified loan portfolio. They had grown rapidly between 2019 and 2021. Rapid growth of any institution is likely to increase strains and problems. They had inadequate capital and inadequate liquidity for the risks they were taking on. And, as Bill properly pointed out, there was a massive regulatory failure on the part of the Federal Home Loan Bank — sorry, the Federal Reserve Bank.


Alex J. Pollock:  That was a different debacle, Larry. 


Lawrence J. White:  Yeah, a different debacle. And we’ve since had similar problems with Signature Bank and First Republic. Going forward, are there lurking problems still in the banking system? I think there are. Overall, their level of uninsured deposits is 40 percent. This is new. As recently as 30 years ago, the overall level of uninsured deposits was 20 percent. So that’s double. Uninsured deposits make a banking system fragile because they’re going to run. They’re going to run at the last minute. They’re going to destabilize banks. And, again, I can’t say this too many times, they’re not very good monitors.


And there are still the embedded losses in the banking system because we’ve not marked-to-market. Alex hinted at that. There are at least five to six hundred billion dollars of just securities losses. And if you started marking loans, as well, the capital evaporates pretty quickly. And, finally, there is the cratering commercial real estate picture that, because gap accounting is backward-looking, we’re only going to get the recognition of those bad commercial real estate loans slowly, over time. But I think we’ve got a ticking time bomb. I’m going to come back to that. 


All right, what do we need to do? We need to increase capital levels, generally. We need to have an explicit linking of capital to interest-rate risk. It is just mind-blowing to me that 35 years after the S&L debacle, we still don’t have a formal linking of capital requirements to interest rate risk — unbelievable. We need to measure capital better, which means mark-to-market accounting. Or what the accountants will call fair value accounting. All the bankers will immediately yell and scream, “Oh, this will destabilize, oh.” Ignore them. If it’s really a problem for them, they can hedge. Look, we’re in an uncertain world. That’s got to be recognized. 


Next — and this won’t be a popular idea, in this crowd — we need to go to 100 percent deposit insurance. That will get rid of the runs. That will get rid of the instability. Remember, this is about regulatory transparency. We will get much more regulatory transparency. Those CAMELS ratings can get revealed. Right now, everything is hidden, because the regulators are worried about runs. Runs go away if we have 100 deposit insurance and we get the transparency. Now, immediately, somebody will shout, “Moral hazard.” 


But remember, those depositors are not good monitors. So they’re not the ones who are keeping bank managements in check. Instead, what we should get is private sector monitoring through much more extensive use of subordinated debt, or what used to be called CoCo: some kind of contingent debt that will have knowledgeable people, knowledgeable institutions monitoring and keeping bank managements in check. And, of course, we need better bank regulation, at least partly simpler, more enforceable rules. And it wouldn’t hurt to have better trained and better paid regulators, as well. Now, we may be in a quiet period right now, because —


Alex J. Pollock:  Larry, you’ve got one minute left.


Lawrence J. White:  — there haven’t been any failures since First Republic at the end of April, early May. But we’ve got those 40 percent uninsured depositors, and we’ve got cratering commercial real estate. I am really worried for the future. We’re in a quiet period right now. Just remember, the best time to fix the roof is when the sun is shining. Alex, back to you.


Alex J. Pollock:  Thank you very much, Larry. Okay, Keith.


Keith Noreika:  All right. Well, thank you very much for having me. It’s great company to be in, Alex, Bill, Larry. Learned a lot from all of you over the years. So, look, I kind of approach this all as sort of back-to-basics. Why do we regulate banks differently than every other company? Other companies are really regulated. Conduct regulation: banks are regulated prudentially, so you have sort of an invasive regulator inside the bank, trying to understand what the real situation of the bank is, often with, as Larry alluded to, confidential supervisory information. 


And so, if you really think back-to-basics, the reason for that is, historically, a bank’s balance sheet is inherently unstable. You have long-term assets that are not transparent — there’s asymmetric information — that are held at historical cost. There’s almost nothing you can do about a loan that was made, a 30-year mortgage that’s held on a bank’s balance sheet, in year 16, and the person may not have a job to pay the loan back. The interest rates may have changed. The neighborhood may have gone down or increased in value.  


And so, again, the reason why you have this special banking regulation that’s very intrusive, that’s very expensive, is to go into the banks. And not just for that bank, presumably, it’s the systemic effect of, if one bank fails — and a bank, as we’ve seen, can fail very quickly — it can take other banks down too, because there are payments connected. There may be similar attributes among the banks.


So that’s sort of like the basics, the way I look at it. And then, in the framework of the bank regulators and what they’re looking at, I would almost default to sort of the way Don Rumsfeld looked at the world. There are the known knowns, the known unknowns, and the unknown unknowns. So, there’s the known knowns, as, I think, what we’ve all been discussing. The securities book of a bank is fairly transparent. Anyone can go on the internet and look at the call reports and see the marketable securities government debt, which, credit-wise, shouldn’t be too risky, but does have interest-rate risk attached to it.  


There are the known unknowns. And that’s really the reason for banking regulation in the first place, which is these non-transparent loan assets on a bank’s balance sheet. And then, the unknown unknowns. And that could be, are depositors going to notice this and run? Are people who hold capital going to know this and run? What can the bank regulators do about it, both before the bank fails, and after the bank fails? So that’s sort of, I think, the framework in which I kind of approach all this. 


So then, taking two of the actual specifics of what we’ve seen over the past few months, I agree with Bill that this is an entirely foreseeable crisis. We’re at déjà vu all over again. And this was the known knowns. So, this wasn’t even, like, the hard part of banking regulation. This was the easy part of banking regulation, where you pull out a bank’s balance sheet — both for a board of a bank, the management of a bank, and the regulators — and you can see what a bank’s worth. And, for whatever reason, that was missed. Certainly, the regulatory priorities of the administration are not comforting. 


Right before Silicon Valley Bank failed, the FSOC put out its yearly priorities. And it was climate change. It was crypto. It was nothing to do with the stability of bank balance sheets. And that’s pretty much been — not that we don’t all have long-term or short-term memory issues, but it doesn’t take a lot to know, like, a year ago, the administration was not talking at all about these issues. It was talking about what I would call more exotic issues that really sort of helped keep the Democratic Party coalition together, if you want to be brutally frank about it. And the ball was lost. The ball was dropped. 


And so, I think if you’re going to go back to basics, you need to go back to basics. And you need to understand why you’re doing it, and then actually do it. Secondly, I do think there is this notion of piling on. Like, we’re always trying to fight the last crisis. And a lot of these banks were running around. My reaction, when I read the Barr report, was, like, how do you make heads or tails of it? Everything was a high priority at the end. Well, what was the highest priority of the high priorities? 


And if bank regulators are just going just pile it all on bank management and boards and say, “Deal with this, and we’re going to hold you responsible, but we’re not going to tell you what,” there is going to be a notion of trying to drive the car and looking at all the instruments and not having a chance to look outside the window and seeing the car or the wall that you’re going to run into. So, then the question becomes sort of where should we go from there? 


So, again, my view would be to get back to basics. Follow what you’ve known throughout history. Get away from the sort of exotic issues. And then you have to come to the question of, do you want things like unlimited deposit insurance, different accounting treatments? And some of those may be yes: more accountability for management. I’m not sold on either deposit insurance or accountability for management, because, again, as I recall, under FIRREA the standards for management and boards went up incredibly, compared to other industries. And at some point, you’ll just drive people out. People just won’t want to do it. 


Or, you’ll have the situation of what we’ve seen with Silicon Valley bank and Signature of you just get a bunch of people from, like, the ruling coalition alumni and try to protect yourself. You get a Barney Frank on your board or a Mary Miller, and you dare your former colleagues to indict you or to do something. So, again, I think those issues have to be bridged before you pile on more. It seems like the reaction to Washington of regulatory accountability is always to give regulators more power, rather than to hold the regulators themselves accountable.  


As far as deposit insurance goes, again, I would disagree with Larry on this point, because I do think they serve a great monitoring function. They keep the cost of capital and long-term debt lower. And we can talk about — and regulators can talk about — wanting to increase capital all you want, but who’s going to buy it? Where’s it going to come from? And, certainly, if you’re taking actions that make it even more expensive, that’s going to be really hard. 


I think one thing that hasn’t been mentioned yet — and, certainly, Bill will understand this from having lived through the S&L crisis — is it does seem like the banking industry needs consolidation. It needs more of a regular lifecycle to return. So, this would normally be the time of consolidation. If you want to get capital levels up, you need to allow and perhaps even encourage consolidation. The current administration has almost a religious-like objection to that, which I don’t, frankly, understand. 


Somehow, they think if banks are consolidating, it’s evil capitalists getting richer. But that’s actually capitalism working. Capitalism works in a cycle. There will be consolidation at some point when the economic cycle turns and you’re back in a period of regeneration and growth. Then there should be more charters chartered, which the current administration has also been very reluctant to do, the current head of the FDIC. So, again, I do think there’s a way out. But you have to sort of go back to the basics. 


Alex J. Pollock:  One minute, Keith, one minute.


Keith Noreika:  All right. Well, I’m going to turn it back over to you, Alex. And we can have a discussion. 


Alex J. Pollock:  Okay, great. Thank you all for a lot of really provocative, and, obviously, very well-informed and educated comments. I want to go back down the panel and give each panelist two minutes to react, agree, disagree, and expand on your own comments. And Bill, you’re first.


William M. Isaac:  Okay. This is going to be a tough two minutes. But I wrote down some notes, and I’ll try to be quick here. Larry suggests that we have subordinated debt requirements. I think that’s actually a decent idea. That’s a form of discipline. If you can get subordinated debtors in there to provide some capital, that can be helpful. In fact, we recommended that back when I was at the FDIC, as one form of discipline. Larry mentioned 100 percent deposit insurance. I’ve never seen such a bad idea in my life than that. The problem we have is that there’s not enough discipline in the system. And 100 percent deposit insurance destroys whatever semblance of discipline there might be. I mentioned fixing the regulatory system because I think that’s a major problem. We do need a better regulatory system. We have too many regulators that are doing competing things. 


I have a proposal that calls for a significant reform of the regulatory system. Take the fed out of supervision, take the control of the currency out of supervision, take the FDIC out of supervision, and create a single regulator that’s in charge of bank supervision. And it’s not any one of those three agencies. We don’t have three different agencies. We have one agency. And it’s run by a five- member non-partisan board of notable people, people that really know what they’re doing. And they’re going to be funded independently.


Alex J. Pollock:  We’re just going to move the panel over, Bill. We’re just going to move this panel over to be the board.


William M. Isaac:  There you are. And the FDIC would retain oversight authority as the deposit insurer. But it would not be a regulator. It wouldn’t tell banks it could have branches, or it couldn’t have. So that’s that. And then, I think somebody was calling for more consolidation. I think that was Keith. And I wouldn’t have more consolidation. I’d create more banks. We need smaller banks. And we have great big banks that are already consolidated way more than they should be. And I’m concerned about that. We’ve got to fix and deal with that. 


And then, finally, most importantly, we need to fix monetary and fiscal policies. You look at what happened in the period that I was chairman of the FDIC. It was awful what happened there in the 60s and 70s with fiscal and monetary policy. And the whole system was out of control, and that led to massive inflation and massive spending and so forth. And that led to, I think it was 3,000 bank failures during the 1980s. And then we have the same thing again now. 


We fixed all that with Volker, and fixed all the inflation and the monetary policies that were out of control, and we turned them over to the next generation. And they went right back to the same thing. We’re in the middle of massive inflation and massive overstimulation of the economy with monetary policy. And we’re right back in the same problem again. And that’s why we have this problem. We must fix monetary policy and fiscal policy. That’s the most important thing we can do. And the rest of this would be a lot easier if we had those things under control. My two minutes is more than enough, I’m sure.


Alex J. Pollock:  Thank you, Bill. A great two, plus a little, minutes. Larry.


Lawrence J. White:  All right. I seem to be the only one to say the words “mark-to-market accounting,” so I’ll say them again. It’s terrifically important. And if there had been mark-to-market accounting that applied to Silicon Valley Bank, then, by mid-2022, it would have been clear that Silicon Valley Bank was in difficulty. It would have been much harder for the regulators to ignore this. It would have given the FDIC much earlier warning, “Hey, something’s going to have to happen.” There could have been a much more orderly purchase and assumption transaction at less cost to the FDIC. Just, good things happen when you face reality through mark-to-market accounting. So, I can’t say that too many times.


Alex J. Pollock:  Larry, would you mark only the bonds? Or also the loans? 


Lawrence J. White:  Oh, everything, I would mark, to the extent that we possibly could. And maybe the prospect of mark-to-market accounting might have deterred the senior management of Silicon Valley Bank from taking on that huge interest-rate risk in the first place, maybe. All right. The other thing Keith emphasized — and I wish I had, but I’ll just pile on, on top of Keith — about the contagion. The systemic effects that it isn’t just an individual depositor pulling his or her money out of a bank, that there is contagion. In economists’ language, it’s a negative externality. 


Other depositors, either at that bank, or at other banks, start to get nervous. “Oh, I don’t know much about my bank’s financials. Better safe than sorry. I better pull my money out.” And suddenly, we have a run. We have contagion. That’s my principal reason. Yes, it’s going to be rich people or substantial companies that have more than $250,000 in a deposit. Look, it’s a negative externality. It makes the banking system fragile. And remember, it’s 40 percent. Bill, not when you and I were dealing with depository institutions. 


After the S&L debacle, we didn’t even worry about uninsured depositors. They were a minor, minor thing. 40 percent — the system is fragile. If you can’t live with 100 percent deposit insurance, then we’ve got to think about some other way of dealing with the negative externality. Maybe impose fees on withdrawals, slow down withdrawals in some way. Jeffrey Gordon, a corporate finance professor at Columbia University has some interesting ideas about dealing with this. 


My colleagues here at Stern have interesting ideas. It just may be that unlimited liquidity and stability of depository institutions are simply incompatible. And either, again, we guarantee everything — and if you can’t live with that, you’ve got to think about some other way of dealing with that negative externality. You’ve got to throw some sand into the gears. You’ve got to introduce frictions. Otherwise, we’re living with a fragile depository system with 40 percent of deposits uninsured. 


William M. Isaac:  You’ve been saying that a few times, the 40 percent. That was not our experience. S&Ls had probably 100 percent deposit insurance. But 40 was not the experience of the banking industry. There were a lot more uninsured funds than that in the banking industry. By the way, I also think that we have to change the deposit insurance system. And I have some thoughts on that. So I think there’s points of in-between.


Alex J. Pollock:  Hold that. We’re going to come back to that as the first question when we finish this round here. But I want to give Keith his chance. And then, the first question is going to be how to change deposit insurance. And you can start. 


Keith Noreika:  Very quick, Alex. I agree entirely with what Bill said about having to fix monetary and fiscal policy. I think that’s the basis of all of this. The banks sort of sit as the intermediaries between all that and the public. And so, there’s a lot of pressure put on them when you’re increasing the money supply by 100 percent, in the course of a year or so, and then you suck it all out. So, again, that’s probably, like, the number one thing, is for the federal government to get its own house in order. And a lot of the issues would be solved. 


Mark-to-market accounting, I find very intriguing. I think the devil would be in the details, probably always, historically, has been. But you could imagine, like, if you could literally mark every asset of a bank to market on public statements, I’m not even sure you would need banking regulation anymore. You would have an instantaneous view of the health of a bank. Now, we’d want to think through what all the implications are, and if that was even possible. And you do get the sense, if you dig a little deeper there’s this dirty little secret of lots of banks being insolvent and no one knowing for long stretches of time. And maybe that’s historically the way it’s always gone. But I think we’d want to think, are there any sort of technological advances to do that? 


Then, I get into a sort of medium area. Perhaps I would agree to take the Fed out of supervision. The one reason that you would have them in the supervision is they control monetary policy. But it doesn’t seem like they understand their own monetary policy in regulating banks, so it sort of argues against that. What happens after that? Maybe I’d not agree to the rest of that. But I do think that the Fed has been a particular blind spot, both in the financial crisis, and now. I do think if you’re then talking about subordinated debt, more capital, there’s no one buying the stuff, at the moment. 


So, absent consolidation or government infusions of capital, certainly maintaining no dividends, whatever — but how are you going to get more capital in banks, other than there just has to be a healthy consolidation? Maybe the largest banks don’t have to get bigger. But some banks are going to have to consolidate into one another. And then, on the deposit insurance issue, I think there are negative economic effects from unlimited deposit insurance. But, as a practical market effect, I think one of the advantages that small banks have now is a separate charter where they can offer a separate amount of deposit insurance, so you see all these sweep programs. I’m not sure. 


I just get the feeling that unlimited deposit insurance would advantage the largest banks of all, because you can go to JP Morgan, have everything insured. And you can get the full suite of services of an oligopolist. And the more you have, the better you’re treated. And you don’t need to worry about hedging your portfolio with deposit insurance by spreading some of that money around to smaller and community banks that may need it to make loans and have a viable business plan. So, I think, careful what you wish for there. So, I’ll turn it back over to you, Alex. 


Alex J. Pollock:  Okay. Thanks Keith and Larry and Bill, for very good comments. I’m going to come back, as promised, to this deposit insurance question for a minute. As Larry said, liquidity is a fascinating issue. It’s the thing that’s always there when you don’t need it, and not there when you do need it. And as we all know, any single deposit is liquid, but all deposits cannot be liquid. All of anything can’t be liquid. Everything can’t be sold at the same time. So, there is this trade-off. When it comes to unlimited deposit insurance, if you combine that with brokered CDs, I think that would give you an interesting system to think about. Bill, let’s come back. You volunteered some thoughts on deposit insurance. Let’s go to you for that. 


William M. Isaac:  Well, I think that what we’ve got with deposit insurance, we started at 5,000, or whatever, and now it’s up to 250,000. But it doesn’t matter. 5,000 doesn’t matter. 250,000 doesn’t matter. That’s designed to protect people who can’t protect themselves, people who don’t understand banking, don’t understand what a good bank looks like. And so, we’re trying to help the ordinary depositors to protect themselves by giving them deposit insurance. 


Well, I think that’s fine. And I wouldn’t want to go a whole lot further than that, except I believe that we have a serious issue in the deposit insurance system. Because there are massive amounts of deposits that are highly volatile because you’ve got payroll accounts and things like that. And so, when you have a payroll account — and let’s say it has $3 million in it — you can’t afford to let that hang around when a bank looks like it might have trouble. And so you take that money out. Or, worse yet, the bank fails, and all those deposits are gone, and all those payrolls are gone. You’re hurting the communities. 


And so, I believe that we need to recognize that a lot of the deposits that banks carry cannot be allowed to fail. I know I didn’t want to see some failures when I saw large amounts of payroll accounts sitting in community banks. You can’t do that to a community. You can’t destroy their banks and have those kinds of losses in those communities. So, what I would do with the deposit insurance is — I would do several things, but one thing I’d do — most important would be that all non-interest-bearing accounts are fully insured. Fully insured. 


Alex J. Pollock:  And interest-bearing, insured up to some limit?


William M. Isaac:  Well, all deposits are insured up to the 250, or whatever it is. But all non-interest-bearing accounts are fully insured, 100 percent insured, no matter how big they are. And that means that, whenever a bank fails, the FDIC doesn’t have to worry about all the payroll accounts that are going to go down the drain and destroy all of these households. And so, I think that would be a — and these deposits aren’t chasing rates. They aren’t being careless with their money. These are payroll accounts. They’re non-interest-bearing. We should pay them off 100 percent on the dollar. And then the FDIC doesn’t have to worry so much about what happens to the community. 


Alex J. Pollock:  Okay. Thanks Bill. Any other comments on deposit insurance? And I’m going to go to audience questions. 


Keith Noreika:  So, I would just say I agree with the payroll issue. And certainly, I think Silicon Valley Bank put that front and center with a bank failing on a Friday morning, which was payday. I don’t know that I would extrapolate as far as all non-interest-bearing accounts. Because the last time I checked, at least, the FDIC does have rules that allow pass-through insurance for the benefit of owner accounts. So, if a large pension plan has money awaiting distribution and they keep a ledger that, like, a $1,000 dividend or annuity payment goes to Bill this month, 2,000 goes to me, that — even though it’s in an omnibus account — would all be covered. 


And I don’t see why a very small change couldn’t be made to push those rules to cover, as well, payroll accounts. So even if I haven’t officially been paid, but that money is sitting there waiting for me on a Friday, it would seem a very small change with a very large benefit that wouldn’t necessarily get into, perhaps, some of the other thornier issues with unlimited deposit insurance that we’ve been discussing. 


William M. Isaac:  I think this, obviously, has to be studied and worked through to figure out what we’re doing. But I’ve gone through a lot of those issues, and, basically, where I come down is, unless you can tell me why we should limit insurance to accounts that are not getting any interest payments, I don’t know why. I don’t know why we should not give them full insurance. Because they’re not doing anything to bribe the bank or to strip money out of the bank. 


This is non-interest-bearing funds. And they’re there for a reason. And nobody’s trying to make any money off of it. Why would we say those shouldn’t be insured? Again, I’m happy to hear the other side of the argument but, off-hand, I can’t come up with a reason why we should not put full insurance on those accounts. 


Alex J. Pollock:  Okay. Well, we could have a whole seminar only on this question. And thanks for all the thoughts. But I think I’m going to go ahead now. We have a lot of questions from the audience, which we won’t, unfortunately — thanks for all the questions, those of you who are sending them in. But we’ll see how many we can get through. Bill Bergman writes in, and we’ll see who’ll want to take this. “What would you say to people who say our banking system, as a whole, is well-capitalized?”


Lawrence J. White:  I’d say, “You’ve got to be kidding me.” Especially if we marked everything to market. You’ve got to be kidding me.


Alex J. Pollock:  I mentioned that one study of the mark of both securities and loans concludes the mark-to-market is a negative 2 trillion on the system and the tangible capital of the system is 1.8 trillion. That’s where we get this idea we may have a system with zero on a mark-to-market basis. Any other comments on that? Okay, Bill, you heard the answer there. With all that said, Larry, while we’re at mark-to-market, this is a question for you, Larry. But anyone else can comment. “In regards to mark-to-market, would you also mark liabilities to market?”


Lawrence J. White:  Yes. Do I want to go all the way? Look, it’s easy to mark securities that have a good liquid market: you go to securities, there’s a bid, there’s an ask which to use for the mark, you’ve got less liquid things. You’ll have to bring some modeling into the picture. That’s going to be true on the liabilities. What is the deposit base worth? 


There’s not an instant market, but we do know from acquisitions what acquiring depository institutions are willing to pay for deposit bases that have certain characteristics. You can mark those things to market. So, the more we do that, the more realism we’re going to get into bank accounting and it’s going to do wonders for better regulation and better management if everybody is looking at a real bank statement, rather than a phony-baloney bank statement. 


Alex J. Pollock:  Some famous thinker said, “I’d rather be approximately right than precisely wrong.” 


Lawrence J. White:  Well, there you go. 


William M. Isaac:  I don’t agree with Larry on this. 


Alex J. Pollock:  Okay, Bill.  Yeah, go ahead. Take a minute on this, Bill, on the non-agreement.


William M. Isaac:  I think that the reason why we don’t have mark-to-market accounting is because there’s no market there. You’ve got little depositors who are coming in with their savings accounts and they’re getting a little bit of money in there. But then they want to take out a 30-year mortgage. And that’s critical to our financial system. I don’t know what you would do to the public if you said everybody has to mark everything to market, because the ones who are getting a real benefit of not marking to market are the smaller savers and the smaller borrowers, the people who are taking out mortgage loans. 


The banking system is supposed to be taking money from all of these little depositors and then packaging it up into loans that are made to people who are borrowing substantial amounts of money. And they need maturity. If you can’t take the funds out before maturity, what are you going to do with it? You can’t loan it. You can’t build a factory with it. You really have to come up with — 


Alex J. Pollock:  In the current problems in these banks, a lot of people talk about how they were buying long treasuries. What they were really buying was mortgages. It was strictly mortgages. We have an intertwining of this year’s failures —


William M. Isaac:  I agree with that.  And I think the answer to that is if you’re going to do that kind of stuff, you should be hedging it. And that’s what they weren’t doing, is hedging it. And so, I think people — 


Alex J. Pollock:  Or have a lot more capital. Or have capital that’s [inaudible 00:54:19]


William M. Isaac:  Or have a lot more capital. And so, what regulators ought to be doing, if people are doing that on purpose, regulators ought to be requiring more capital, or they ought to be requiring hedging. 


Lawrence J. White:  Add more hedging.


Alex J. Pollock:  I do think there’s really this interesting intertwining of the mortgage question and the house finance question —


William M. Isaac:  Exactly. 


Alex J. Pollock:   — with banking question, as the savings and loan, which used to be a separate financing circuit, has blended into the banks —


William M. Isaac:  Right.


Alex J. Pollock:  — and into the Federal Reserve itself, who, as we know, has $2.5 trillion of 30-year mortgages.


William M. Isaac:  I agree with Larry. There’s a problem here. I just don’t think that the solution to it is mark-to-market. I don’t. I think better regulation, maybe. 


Alex J. Pollock:  A problem with mark-to-market is in the crisis it doesn’t work. 


William M. Isaac:  It doesn’t work. The market stopped working, as we learned in the S&L crisis. 


Alex J. Pollock:  That’s right. And every crisis. 


William M. Isaac:  Yes.


Alex J. Pollock:  I want to go on to another question. Steve Dewey writes in, “A primary purpose of Dodd-Frank was to prevent ‘too big to fail,’ and to establish authorities to resolve big banks and so on. However, it looks like we have a question: is Dodd-Frank a failure in its mandate to prevent ‘too big to fail,’ considering the current banking system?” Anybody want to address that?


William M. Isaac:  Yes, but we can fix it.


Alex J. Pollock:  Yes, it is a failure, but it could be fixed?


William M. Isaac:  Yes.


Alex J. Pollock:  Anybody think it isn’t a failure, as far as “too big to fail” goes?


Lawrence J. White:  Yeah.  Yes, the big five or so banks are too big to fail. In a pinch, the living wills and the point-of-entry could sort of work things out. But, realistically, JP Morgan Chase, or City, or Bank of America, or Wells, are unlikely to fail. But what that means is — and here’s where I disagree with Keith — even without 100 percent deposit insurance, people have been fleeing to those large depositories, because they think even a large deposit is safe in those places. One of the arguments in favor of 100 percent deposit insurance is that it could make smaller banks more viable vis-à-vis larger banks, in terms of depositors being less nervous. So, I disagree with Keith as to who is favored there. 


William M. Isaac:  And the problem that I have tried to address, and, hopefully, will — when I was chairman of the FDIC, we did not want to bail out all the big depositors all the time. And so, what we developed was a way: pay off, up to some insurance limit, all of it. And then, if you got some other favored things, you could do that, as well. But nobody, no big depositor gets out 100 cents on the dollar.


Keith Noreika:  So, just like a little voice in the dark here.


Alex J. Pollock:  I agree with that.  Go ahead.


Keith Noreika:  But I don’t think we’re talking about the largest banks being too big to fail. Silicon Valley Bank was too big to fail. I mean, it was all bailed out. Everyone was bailed out. 


William M. Isaac:  Well, it’s way more than it used to be.


Keith Noreika:  Yeah.  I mean, First Republic was too big to fail, right? 


William M. Isaac:  They shouldn’t have been.


Keith Noreika:  Yeah.  So, I think, in that way, Dodd-Frank, it certainly props up the biggest banks. It protects them from competition. It puts a regulatory moat around them. And there is this notion of they are too big to fail. 


Lawrence J. White:  Guys, come on. Those banks failed. The depositors got protected. They got bailed out. But the owners, the senior managers, they were washed away. Those banks —


Alex J. Pollock:   They’re too big to impose lawsuits on depositors. 


Lawrence J. White:  Those banks failed. 


Alex J. Pollock:  This is a great panel. Thank you all.  But we’re running up against our time limit. The Federalist Society has to have us back. 


William M. Isaac:  One second. There’s no reason why there’s any depositor who shouldn’t be [inaudible 00:58:51]. We can do that. We can fix it.


Alex J. Pollock:  They don’t necessarily lose everything. I think, Bill, you told me the average loss to a deposit, when depositors did take losses, is 15 to 20 cents on the dollar.


William M. Isaac:  Twenty cents on the dollar is the average over the lifetime of the FDIC.


Lawrence J. White: That’s a recipe for fragility, guys. That’s a recipe for runs and contagion.


William M. Isaac:  Oh, Larry, you don’t mean that.


Alex J. Pollock:  Okay, gentlemen. You’re a great panel. We barely missed our time limit. Thank you very much for really provocative and interesting and important comments. Thanks to the questioners and the audience. We’re sorry we couldn’t get to all of your questions, but we appreciate your being with us. And we really appreciate the excellent panel. And Colton, back to you.


Lawrence J. White:  Thank you, Alex. Thank you, again, to The Federalist Society. 


Colton Graub:  Well, thank you, Bill, Keith, Larry, and Alex. We are incredibly grateful to you for your time today, and for the insightful discussion on this important issue. As everyone knows, both the panelists and the audience, we could have gone much longer, given the quality of our audience questions and the conversation as a whole. But, alas, we are limited to an hour for this discussion. We will definitely have everyone back on to continue the conversation at a future date. 


For those in the audience who joined the conversation midway through, you can watch the recording via YouTube, or listen to it via our podcast feed, which is available everywhere you listen to podcasts. We welcome listener feedback by email at [email protected]. Thank you all 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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