The recent market volatility has put banking regulators in a tough spot. In the wake of the financial crisis of 2008, regulators have been wary of allowing further consolidation of troubled banks. However, the recent collapse of several regional banks has forced their hand. The FDIC, one of the main banking regulators, was initially hesitant to allow bids from the largest U.S. banks for Silicon Valley Bank, which it took over in March. However, a month and a half later, it had to sell First Republic Bank to JPMorgan as it was the least costly option.
A dysfunctional regional banking sector is deeply problematic, as these banks provide credit to vast sections of the U.S. economy. Deposit flight has forced them to pull back on lending, and continued stress on these banks could push the economy into a recession. Although things have calmed down substantially since March, investors have refused to draw a line under the crisis.
Regulators, bankers, and other experts are floating ideas for additional steps Washington could take to stamp out the crisis. However, these options either encourage things that regulators don't want, like the creation of bigger banks or irresponsible behavior, or are steps that have not really worked in the past. That leaves regulators with tools that treat the symptoms but have unwanted side effects and don't provide the cure.
As one bank fails, another comes into the market's focus, creating a vicious cycle and putting pressure on regulators to intervene again. Treasury Secretary Janet Yellen said on Saturday that nearly all banks had access to sufficient liquidity, but pressure on earnings may lead to some midsize bank deals, which regulators would be open to if they occur.
Overall, the banking sector is facing a crisis of confidence, with some investors questioning the ability of some of these lenders to make money in the longer term. Regulators must find a way to restore confidence in the sector while avoiding actions that could create bigger problems down the line. It's a delicate balancing act that will require careful thought and action.
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