After the demise of two regional banks, experts had some ideas for what the state could do differently. A clearer picture will emerge once the state’s regulator publishes a report, and lawmakers discuss options by GraceGedye
It’s important for the financial system that people believe their money is safe, and banks failing in quick succession tends to erode confidence. So what’s a state to do?
The type of risk that led to Silicon Valley Bank’s demise is “the most basic type of risk in banking,” said Levine, and it should have been “extremely obvious” to regulators. So, the main thing the situation calls for is not new rules but “competent regulatory agencies,” said Levine. Different banks have different regulators depending on whether the bank has a state charter or a national charter — you can think of a bank charter as a kind of business license for a financial institution. Banks with a state charter are regulated by both California and the federal government. Silicon Valley Bank and First Republic both had state charters. Other banks, including Bank of America or JP Morgan Chase, have national charters and are regulated primarily by the federal government.
Second, California regulators could put in place new rules surrounding bank executives’ compensation, so that they are rewarded for prudent management, and are not incentivized to pursue risky strategies. Executive pay at Silicon Valley Bank rose as“Silicon Valley Bank had no outside directors who had any experience, really, in the banking business, and certainly not in the risk management business.
States are disincentivized from putting in place rules that are drastically more restrictive or protective than federal rules because banks could theoretically sidestep those regulations by seeking a national bank charter instead.
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