The sudden closure of New York-based Signature Bank by regulators on March 12, 2023, marked a critical moment in a wave of banking turmoil that swept through the financial system. Coming swiftly after the failure of Silicon Valley Bank, the decision by the New York State Department of Financial Services to take possession of Signature Bank, appointing the Federal Deposit Insurance Corporation as the bank’s receiver, was framed as a necessary step to contain panic and prevent broader contagion.
This intervention highlighted the vital, albeit often unglamorous, work of institutions like the FDIC. For 92 years, since its creation during a period of national financial panic, the FDIC has served as a cornerstone of stability. Its primary functions include insuring consumer deposits up to $250,000 and, critically, monitoring banks to prevent failures from happening in the first place.
Signature Bank, a regional institution, had, like SVB and First Republic, been particularly dependent on uninsured deposits. As fears spread following the SVB collapse, customers began withdrawing money, prompting regulators to step in. At the time of its failure, Signature Bank held assets totaling $118 billion, making it the fourth-biggest bank failure in US history, according to FDIC data.
The swiftness of the 2023 bank runs – affecting SVB, Signature, and later First Republic – was striking and unprecedented. Experts like Shane Pearlman, North American Regional Forum Liaison Officer for the IBA Banking Law Committee, attribute this speed, in part, to the rapid spread of information in the social media age and the immediacy of electronic banking systems. This dynamic significantly heightens the risk of a ‘domino effect’ where the failure of one institution could rapidly impact others.
Against this backdrop of renewed instability, scrutiny has intensified on the effectiveness and capacity of financial regulators. The current turmoil, involving multiple significant bank failures, serves as a stark reminder that financial regulation is intended to be strong enough both to prevent such crises from emerging and to resolve them quickly if they do. However, as Jesse Griffiths, CEO of the Finance Innovation Lab, notes, the system “has failed on both counts in this case.”
Indeed, regulatory bodies themselves have acknowledged shortcomings. The FDIC, in its separate report on Signature Bank’s failure, admitted that it was slow to escalate issues it had identified with the lender’s management. This mirrors findings regarding other failures; the Federal Reserve, for instance, admitted in its review of the SVB collapse that it had failed to act with “sufficient force and urgency” in its oversight of that bank.
Michael Barr, the Fed’s Vice-Chair for Supervision, who led the review, explicitly stated that the lesson from SVB was the need for tighter rules. He highlighted regulatory standards that were “too low” and supervision that lacked any sense of urgency, noting that the Fed’s policies had missed the risks posed to the wider system by difficulties at a mid-size bank. The US Government Accountability Office also reported that Fed officials moved too slowly once problems were uncovered at the banks.
Part of the debate surrounding regulatory effectiveness centers on legislative changes. Critics argue that a law passed by Congress in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, contributed to the problem. This legislation eased oversight requirements for banks with assets below $250 billion, raising the threshold significantly from the $50 billion set by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The 2018 Act exempted many smaller community banks from stricter rules and oversight put in place by Dodd-Frank, which was the central US regulatory response to the 2008 financial crisis. Then-President Donald Trump had criticized Dodd-Frank as a “job-killing regulation” when signing the 2018 bill, stating that proponents had “fixed it, or at least have gone a long way toward fixing it.”
Dennis Kelleher, CEO of Better Markets, a non-profit advocating for financial reform, argues that reports like the Fed’s effectively state that removing regulatory oversight increases lawbreaking, similar to removing police from high-crime areas. He contends that the deregulation and weakened supervision that occurred starting in 2017 and throughout the Trump administration incentivized financiers to take greater risks, inevitably leading to recklessness, failures, and crisis.
Adding to the concerns about regulatory capacity are internal challenges at the FDIC itself. The agency, responsible for monitoring some 4,500 banks, primarily smaller institutions, has been grappling with staffing shortages and reports of a toxic workplace culture, including complaints of sexual harassment and discrimination, documented in an outside review and a 2023 Wall Street Journal report.
The FDIC had indicated in its annual report last year that it had a staff of around 6,000 and was trying to hire an additional 800 people. However, it struggled to do so. The agency has stated that its staffing problems were already making it harder to adequately supervise banks and mitigate the risk of failures – a point underscored by its own admission regarding the slow escalation of issues at Signature Bank.
These pre-existing challenges have been significantly exacerbated by recent government workforce reductions. Hundreds of FDIC employees have been affected by cuts under the administration, which aims to reduce the size of the federal government. According to Bloomberg reporting, about 170 probationary employees were fired in one month, following some 500 workers who had accepted a deferred resignation offer.
This reported reduction amounts to more than 10% of the agency’s workforce. Furthermore, the FDIC has rescinded more than 200 job offers to new examiners – the front-line staff crucial for monitoring banks for early warning signs of trouble, as reported by The Washington Post in January. A spokesperson for the FDIC confirmed the figure of 500 accepted deferred resignations but declined further comment on the cuts.
Alarm bells are ringing among regulatory experts regarding these actions. Mayra Rodríguez Valladares, a financial risk consultant who works with banks and regulators, expressed deep concern, stating that these cuts “are incredibly unfortunate” and “potentially quite dangerous for America’s financial stability — which, of course, means for all of us as ordinary American consumers.” She warned that this approach is “sowing the seeds for the next financial crisis.”
Interestingly, these reductions at the FDIC do not save taxpayer money, as the agency is funded by quarterly dues paid by banks, based in part on their deposit levels, not by taxpayer dollars. Historically, the agency has operated with a degree of independence from the White House.
The approach to the FDIC appears similar to proposals outlined in Project 2025, a conservative policy blueprint, despite the administration publicly distancing itself from it while campaigning. This 900-plus-page document suggests restructuring the financial regulatory system, including potentially merging the FDIC with other banking regulators. Some advisers are even reported to have expressed interest in abolishing the FDIC altogether, according to The Wall Street Journal in December.
The administration’s stated goal, as articulated by a White House deputy press secretary in an emailed response, is to improve the personal financial situation of every American by working to “cut regulations, reshore jobs, lower taxes, and make government more efficient.” However, critics argue that weakening a critical financial watchdog undermines, rather than enhances, stability.
Some Democratic lawmakers are publicly warning about the impact. Senator Elizabeth Warren, D-Mass., ranking member of the Senate Banking Committee, stated that these cuts “threaten the reliability and integrity of federal deposit insurance and inhibit the FDIC’s capacity to ensure the stability and confidence that underpin our nation’s banking system.”
Rodríguez Valladares acknowledges that regulatory bureaucracy can indeed make business more difficult and increase costs, a long-standing complaint among bankers. However, she views the approach of sharply cutting agencies and firing staff without first studying their roles and responsibilities as potentially creating long-term chaos for the U.S. economy. Having worked in markets for over three decades, she characterized this action as “literally one of the most dangerous, one of the most insane things I’ve ever seen.”
The 2023 banking crisis, which included not only SVB, Signature Bank, and First Republic but also the troubles at Credit Suisse in Europe, has inevitably led to calls for more regulation or, at least, more effective enforcement of existing rules. The failures highlighted weaknesses even within what were thought to be resilient institutions, such as Credit Suisse, which, according to global banking regulations for “globally systemically important banks,” seemed to meet enhanced capital buffer requirements just days before its government-brokered takeover by UBS.
The Credit Suisse situation also cast a spotlight on “additional tier 1” (AT1) bonds, a form of debt designed after the 2008 crisis to absorb losses before shareholders in a bank failure. The Swiss regulator’s decision to wipe out $17 billion of Credit Suisse’s AT1 debt as part of the UBS deal sparked controversy and forced European regulators to quickly affirm that in the Eurozone, AT1 holders would suffer losses only after shareholders were wiped out.
While European banks generally appear more secure and tightly regulated than some US counterparts for the moment, the Credit Suisse episode, particularly concerning the AT1 bonds, underscores the complexities and cross-border implications of banking crises. The Swiss regulator FINMA defended its decision, stating that the AT1 instruments issued by Credit Suisse contractually provided for a complete write-down in a “Viability Event,” specifically if extraordinary government support was granted, which they stated occurred when Credit Suisse received emergency liquidity assistance loans secured by a federal guarantee.
This action, while potentially contractually permissible, had a significant impact on the AT1 market globally, making it difficult to sell these bonds at acceptable conditions, according to Dirk Bliesener, Senior Vice-Chair of the IBA Banking Law Committee. He noted that the market would take time to recover but that there was pressure to create this form of capital. Legal challenges have been launched against FINMA’s decision, with appeals registered representing thousands of investors, though Bliesener expressed skepticism about the likelihood of success in Swiss or European courts.
The crisis has also reignited debate about the effectiveness of “living wills,” the resolution plans that large banks are required to develop under Dodd-Frank. These plans are meant to provide a roadmap for quick and orderly dissolution in the event of failure, avoiding taxpayer bailouts. However, the Swiss authorities reportedly deemed Credit Suisse’s living will unworkable during its implosion, opting instead for a rescue takeover.
This raises questions about the purpose and utility of these costly plans if they are not relied upon in a crisis, especially when authorities cite an “extremely fragile environment” as a reason to bypass them. Bliesener suggests that the reluctance to use living wills is political, as they are untested and might have undesirable repercussions, noting a lack of strong political will to enforce resolution rules for very large crises.
