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Testimonies of CEOs' failed banks are paving the way for government to regulate the banking sector

It’s been a hectic day on Capitol Hill, especially for the former CEOs of Silicon Valley Bank, Signature Bank, and First Republic Bank; three major banks that failed and created panic in the banking industry. The collapse of SVB was undeniably the most significant of all three failures. Thus, Greg Becker who was the former CEO of the failed bank, got the most grilled by the Senators. He told lawmakers Tuesday that he was justly compensated as “unprecedented events” caused the lender’s failure, pushing back against assertions that he enriched himself while ignoring risks. Several members of the Senate Banking Committee asked if he planned to give back any money earned in the run-up to the bank’s March 10 seizure, and if he was aware SVB was in trouble when he sold stock in the weeks before the collapse. Becker was non-committal about returning any compensation but asserted that he believed he was not in possession of any material, non-public information when he sold stock in late February. The two other sizable institutions, Signature Bank and First Republic, were also seized by regulators in the chaos that followed. Scott Shay, former CEO of Signature Bank told the Senate Committee that he did not plan to give his compensation back to the FDIC.

Greg Becker attributed the collapse of SVB to events beyond his control, citing an aggressive series of interest rate hikes by the Federal Reserve, rumors fomented by social media, and a vicious bank run. The Senate Committee on Banking believes that the three CEOs were simply very careless, had extremely poor risk management, and did do insider trading, especially Greg Becker. The fact that Greg Becker sold his stocks a week prior to the collapse implies that he implicitly knew what was coming. For Congress, the failure of SVB, Signature Bank, and First Republic Bank was nothing else but pure mismanagement of systemic risk, greed, recklessness, and lack of accountability.

The failure of these three banks raised concerns about the sustainability of the banking sector. Politicians believe that the banking sector needs more regulations to strengthen the core of the banking system. But what would these regulations lead to? It will lead to greater centralization of the banking system, which will further exacerbate the banking system. SVB collapsed because it did not have the liquidity to meet depositors' demands for their money in part because the bank had put much of that money into longer-term government bonds that declined in value as the Fed raised interest rates. The issue is deeper than that. The issue is the fractional-reserve banking structure. Under a fractional-reserve banking system, banks are exposed to the risk of bank runs because banks lend more money than they actually have in their vault. Since the amount of deposits always exceeds the amount of reserves, it is obvious that fractional reserve banks cannot possibly pay all of their depositors on demand as they promise—thus making these banks functionally insolvent.

So even if bureaucrats change banking laws by implementing more regulations, so long as the fractional-reserve banking structure is still in place, banks remain exposed to potential bank runs that could collapse the whole banking system. Therefore, regardless of the forthcoming regulations that the federal government plans on implementing they will not have any real and substantial effect on the banking sector since the system itself is built on weak foundations.


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