How Should Regulations Evolve to Keep Up with the Banking Industry?

Read the original Financial Brand article here.

Here is a brief summary of the article:

• Last year saw three of the largest bank failures in US history: Silicon Valley Bank, Signature Bank and First Republic Bank.
• The Brookings Institution analyzed banking trends over the past 25 years and noted a shift in the asset side of bank balance sheets away from traditional lending to long-term securities.
• Brookings constructed a simple model and found that strengthening liquidity regulation is the most viable solution to reduce the risk of destabilizing bank runs.
• The banking industry has changed significantly over the past 25 years, with traditional banks delivering a smaller share of credit to nonfinancial corporations than before.
• Banks historically earned revenues by screening and monitoring borrowers, but this model of information-intensive lending has come under pressure as non-banks have gained more share in business lending.
• Brookings recommends modifying the Liquidity Coverage Ratio to require banks to pre-position sufficient collateral to withstand a bank run.
• Two potential solutions to mitigate the risk of bank runs are expanding deposit insurance and subjecting uninsured deposits to liquidity requirements.
• Brookings proposes a regulatory change requiring banks with more than $100 billion in assets to back their uninsured deposits by pre-positioning collateral at the Federal Reserve’s Discount Window.
• Brookings recommends treating interest-rate risk in the regulatory capital regime, as current risk-based capital requirements do not account for ex-ante interest rate risk on long-duration securities.