America needs more giant banks - by Matthew Yglesias

In 2010, Congress responded to the global financial crisis by passing the Dodd-Frank overhaul of America’s financial regulatory system.

The primary goals of Dodd-Frank were to make bank failures less likely and to create a process for dealing with the failures of large financial institutions rather than having government officials make it up on the fly. Because bank regulation is a sprawling topic, things like the creation of the Consumer Financial Protection Bureau and various securities regulations also found their way into the legislation. But the bill passed because of a desire to avoid situations in which government officials were improvising their response to bank failures, ideally by avoiding failure in the first place.

And yet here we are in 2023, reading press releases about the FDIC invoking special authority to insure uninsured deposits and the Fed creating new special lending facilities for banks.

I don’t think there’s any big problem with these decisions, but they raise the question of how we came to this point after a major legislative debate about how to avoid exactly this scenario. And the answer turns out to be pretty straightforward: in 2018, the GOP-controlled House of Representatives wrote and passed a bill substantially curtailing the regulation of banks that are roughly the size of Silicon Valley Bank on the theory that banks of this size are not systemically important and could be resolved through the ordinary FDIC process. Moderate Senate Democrats who felt the need to burnish bipartisan cred chose this bill as their big bipartisan gesture, calculating that of all the possible issues they could defect on, this was the one that progressive groups were least invested in. 1

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