Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Better Markets reports on unresolved risks in American financial system, (Mar 5, 2025)

By Jonathan Anderson

The report details what has happened since the 2023 banking crisis and what steps regulators and banks should take to help prevent future failures.

Better Markets has released a report urging regulators to address what it argued were unresolved risks in the American financial system. The report, entitled “Two Years After the 2023 Banking Crisis, Main Street is Still in Danger,” described Better Markets’ views of what caused the 2023 banking crisis and proposed actions aimed at more meaningfully addressing those causes and reducing systemic risk. Proposals include stronger regulatory capital rules, requiring better recovery planning, and more formal and public enforcement actions.

Background. The report, which comes two years after the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank between March and May 2023 (see Banking and Finance Law Daily, Mar. 10, 2023, Mar. 13, 2023, Apr. 28, 2023, and May 1, 2023), said there were multiple causes of the 2023 crisis and highlighted three in particular.

First, Better Markets cited “inadequate capital requirements and recovery planning,” which the report said exacerbated the bank failures. Silicon Valley Bank, Signature Bank, and First Republic Bank failed, the report said, “because they did not have enough capital to absorb losses resulting from the unreasonable risks that bank management chose to take.” Further, the report cited nonexistent or ineffective planning to address substantial distress, despite requirements that “systemic banks be resolvable in an orderly fashion that did not cause contagion or require bailouts.”

Second, the report argued that “deregulatory actions targeted and weakened bank supervision, and were a catalyst for the bank failures.” The report, citing other studies, said supervisors had identified weaknesses at the failed banks but “were burdened by the demands to find even more evidence, hampered by a lack of support from layers of Agency management both in the field and in Washington, DC, or hesitant to bring forward concerns because of the messages their superiors were sending.”

Third, the report found that “deregulatory actions contributed to inadequate corporate governance and board oversight.” The report cited a 2017 proposal from Federal Reserve Board Chairman Jerome Powell that Better Markets said “fundamentally changed the Fed’s existing practice regarding the communication of critical supervisory findings to boards.” As a result, supervisory authority was reduced and boards were deprived of key information to engage in oversight.

Proposed changes. In light of what caused the 2023 crisis, the report proposed the following actions to the banking system:

Stronger regulatory capital rules. The report said large banks remain undercapitalized and “pose an unreasonable risk to the financial system and taxpayers.” As such, capital requirements should be strengthened. The report cited research showing that “lack of sufficient bank capital leads to bank runs and bank failures.”

Better preparation. Better Markets called for annual or biennial recovery planning and urged regulators to strengthen their engagement with banks throughout the recovery planning process. The report also said more work is needed to ensure banks have access to and are prepared to use the discount window.

Accountability, risk management guidelines. The report called for enforceable corporate governance standards that protect the public and promote accountability of senior management and boards of directors. The report also urged the Federal Reserve to revisit 2021 guidance regarding supervisory expectations of boards of directors for the largest banks, referring to the guidance as “generic,” “weak,” and “grossly inadequate.”

Bank executive oversight. The report urged stronger incentive compensation regulations, including compensation claw backs and a prohibition on “compensation arrangements that encourage inappropriate risk taking.” Better Markets also voiced support for the bipartisan Failed Bank Executives Clawback Act.

Enforcement actions, public assessments. The report voiced support for more formal enforcement actions that are publicly disclosed. Better Markets also proposed making public supervisors’ assessments of the largest banks.

Power of supervisory guidance. The report called on financial regulators to rescind a 2018 joint statement regarding the role of supervisory guidance. Better Markets argued that the statement “greatly limited supervisors’ use of guidance to address a bank’s risky conduct even if it threatened safety and soundness or financial stability unless it also broke a specific law or rule.”

Companies: Better Markets; First Republic Bank; Signature Bank; Silicon Valley Bank

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