Regional Banks

Bank regulation in the wake of SVB

Note to readers: I recognize that today’s post is quite long, even by my standards. But trust me, this post took a lot longer for me to write than it will take for you to read (even collectively perhaps). I promise to try and do better in the future, with shorter and less rambling posts, but please bear with me in the interim. I hope you all had a great 4th of July. Now back to work!

The New York Times published an interesting article recently on the subject of regional banks, with the caption “Do You Even Want Us to Exist?”. The caption was a quote from Ken Vecchione, the CEO of Western Alliance, a $70 billion bank holding company based in Phoenix, whose question was addressed to bank regulators, presumably out of sheer frustration. Like other regional banks, Western Alliance has been struggling for several months to stabilize its business in the wake of the dramatic collapse earlier this year of Silicon Valley Bank, Signature Bank and First Republic, three of the largest commercial bank failures in US history.

The SVB collapse in mid-March triggered over $100 billion of deposit outflows from regional banks in just one week. Western Alliance itself lost $6 billion of deposits, 12% of its total, and saw its share price fall by 65% in a matter of days. Since then, deposits have stabilized at most regional banks, including Western Alliance, whose share price has doubled from its early May lows. But the WAL share price is still down 50% from its pre-SVB price and the shares are now valued by the market at a discount to tangible book value, compared to a big premium (2-3x book value) during 2021 and 2022. At $35 per share, WAL shares are now priced at just 4x annualized Q1 adjusted EPS (excluding investment losses), not exactly a vote of confidence in the company’s future prospects.

And so it is that Mr. Vecchione remains frustrated, and with good reason. He understands that the future of his bank may ultimately depend not just on his team’s success in navigating higher funding costs and managing risk in a volatile economic environment, but also on the continued willingness of the government to step in yet again to bail out the next large bank that hits the wall. And in the meantime, the Fed is preparing to tighten the regulatory screws on those banks seen as particularly vulnerable, including some regional banks.

All of which raises interesting questions about how we regulate commercial banks in this country and what else the regulators may have up their sleeves.

Let’s explore.

What are ‘regional banks’? The US commercial banking sector consists of close to 5,000 banks, with assets ranging from over $3 trillion (JP Morgan) to under $100 million (many community banks). The Fed defines a ‘regional bank’ as a commercial (ie depository lending) bank with total assets of $10-100 billion. By this definition, there are around 100 regional banks in the US with total assets of around $3 trillion, an average of $30 billion per bank. However the widely cited KBW Regional bank index includes the stocks of just thirty publicly traded banks, a group which does not include Western Alliance, which considers itself not a regional bank but a ‘national bank with a regional footprint’.

For purposes of today’s discussion I would like us to think about ‘regional banks’ somewhat more broadly as to size, including banks with assets in excess of $100 billion, and somewhat more narrowly as to business model, focusing on banks that primarily serve business customers as opposed to consumer or retail customers (recognizing that most banks do both). For our purposes, the banks’ regional footprint is less important than what customers they serve, what services they provide and how they fund themselves. As explained below, it is in part the business customer focus of regional banks, and their resulting concentration of commercial loans and uninsured deposits, which makes them particularly sensitive from a regulatory perspective.

Why are regional banks important? Whatever definition we use, most US regionals are not large banks and apart from the ‘super regionals’—US Bancorp, Truist and PNC (each with assets of ca $500 billion)—few if any regional banks have historically been considered by regulators to be systemically important. Which of course is more than a bit ironic in light of the recent failures of SVB, Signature and First Republic, all regional banks with $100-200+ billion of assets which were not considered by the regulators to be systemically important, at least not until they failed.

But whether or not individual regional banks are deemed to be systemically important, they do play a critical role in the markets they serve, most notably in providing credit to small and mid-sized businesses which are not well served by the larger national banks and do not generally have direct access to the capital markets. Regional banks are also big lenders to the commercial real estate industry, an important but volatile sector of the US economy which is currently under pressure and of increasing concern to banks and their regulators. (Read here, here and here.) When the regional banks cut back on commercial lending, as seems to be happening now, the economic impact often reverberates across the US economy (with variable time lags). And this in turn can become a problem for the Fed, adding to its already significant challenges fighting inflation.

Who regulates the regional banks? The US has a strange and disjointed bank regulatory system, with various layers of regulation and supervision applicable to different types of banks. State banks are chartered and regulated at the state level by state banking authorities. National banks are chartered and regulated at the national level by the Office of the Comptroller of the Currency (OCC), a branch of the US Treasury. Banks which are members of the Federal Reserve System (about half of all banks, concentrated among the larger banks) are regulated by the Fed, as are bank holding companies. And banks with federal deposit insurance (the vast majority) are regulated by the FDIC, which is also charged with resolving failed banks and paying off insured depositors.

If this sounds complex, that’s because it is (or can be). In the case of SVB, for example, the Fed was the primary regulator and supervisor of both SVB Financial Group, the publicly traded bank holding company, as well as Silicon Valley Bank, a California state bank which was also a Fed member bank. Because Silicon Valley Bank had FDIC insured deposits, it was also regulated by the FDIC as an Insured Depository Institution (IDI). When Silicon Valley Bank failed, it was a closed by the CA bank regulator which in turn appointed the FDIC to act as receiver, charged with liquidating the bank’s assets and paying off depositors and other creditors. The failure of Silicon Valley Bank also triggered the insolvency of its parent company, SVB Financial, which was not itself an IDI and so is being resolved not by the FDIC but rather through the standard judicial bankruptcy process.

The standard FDIC resolution process took an unusual turn in the case of Silicon Valley Bank, however. Because fewer than 10% of the bank’s deposits were insured, the closure of the bank left $100+ billion of uninsured deposits in limbo pending liquidation of the bank’s various assets. In order to stem the ensuing panic, the FDIC elected to take extraordinary action and guarantee the full and immediate payment of all deposits (insured and uninsured) at Silicon Valley Bank and Signature Bank, which also had a heavy concentration of uninsured deposits. The FDIC was legally able to do this only by exercising its statutory ‘systemic risk’ authority, which required approval from the Fed and the US Treasury Secretary. The bailout of uninsured depositors at SVB and Signature will cost the FDIC ca $20 billion, which will be recouped from the banking industry (not taxpayers) through a special assessment on other IDIs.

And so if we ask who was the primary regulator of SVB, the answer is ‘the Fed’. But a lot of other regulatory agencies were also involved, most notably the FDIC. Which is the case for most other regional banks as well.

What is the relevance of bank size to regulation and supervision? Bank size, typically measured as total assets, plays a big role in the US approach to bank regulation and supervision. In the wake of the GFC, regulators have concentrated their attention primarily on the large systemically important banks, including the ‘big four’ banks which between them now control close to $10 trillion of asserts, roughly half of the US commercial banking total: JP Morgan, Bank of America, Citi and Wells Fargo. These are the ‘too big to fail’ banks, and they are even bigger today than they were at the time of the GFC. All of these banks are regulated by the Fed, both at the holding company and subsidiary levels, and are now subject to enhanced prudential regulatory standards. As a result of enhanced regulation, as well as improved risk management, the big four banks are today on much sounder financial footings than was previously the case. In fact they are now considered to be safe havens during times of financial instability, as we saw in the wake of the SVB failure when a large share of uninsured deposits moved out of the regional banks and into the big four. Which is of course quite a change from the dark days of 2008.

Of course these are not the only banks which are considered by regulators to be systemically important. The current list of Global Systemically Important Banks (GSIBs) includes eight US banks: the big four plus Goldman Sachs, Morgan Stanley, BNY Mellon and State Street. Goldman Sachs and Morgan Stanley are both very large ($1+ trillion) investment banks, considered systemically important for that reason, and since the global financial crisis they have been regulated by the Fed as bank holding companies. BNY Mellon and State Street are much smaller banks, each with ca $300 billion in assets, which are considered systemically important not because of size but rather because of the important role they play operating critical parts of the US banking system infrastructure (custody, clearing and settlement, repo etc) and their resulting ‘interconnectedness’ with hundreds of financial institutions across the world.

In the wake of the global financial crisis, a Democratically-controlled Congress in 2010 passed the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank), which subjected all depository banks (and bank holding companies) with more than $50 billion in assets to enhanced prudential regulation (EPR), pursuant to rules to be developed by the Fed. Banks with less than $10 billion in assets, a threshold meant to exempt most community banks, were subjected to much less regulation and more limited supervision. Within a few years, however, the Dodd Frank regulatory framework came to be regarded as onerous, particularly for medium sized banks, those with ca $50-100 billion in assets, a group which includes many regional banks.

And so in 2018 a Republican-controlled Congress substantially revised the Dodd Frank regulatory thresholds with the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA). The EGRRCPA raised the minimum size threshold for mandatory EPR from $50 billion to $250 billion, and increased the low-end threshold from $10 billion to $50 billion. Congress recognized that raising the upper bar this high might in some instances be considered excessive, and so it authorized the Fed in its discretion to subject individual banks with over $100 billion in assets to some or all of the same EPR requirements as the larger banks, discretion which the Fed subsequently chose not to exercise with respect to SVB, Signature and First Republic.

The immediate impact of this legislative change was to reduce substantially the number of US banks subject to EPR (from 40 to 14 or so) which was of course Congress’s intent. But the EGRRCPA also seems to have encouraged a more ‘hands off’ supervisory culture within some of the regulatory agencies, as the Fed acknowledged in its SVB post-mortem report.

The current state of enhanced prudential regulation. This is a big topic and I won’t go into great detail, other than to note again that with the passage of the EGRRCPA the Fed’s EPR requirements have been tailored for banks of various sizes, largely excluding all but the biggest US banks from enhanced regulation. Under current law, EPR requirements basically apply only to banks (or bank holding companies) with over $250 billion in assets, although as noted the Fed does have the authority (to date largely unexercised) to require that banks with over $100 billion of assets comply with some of the same EPR standards. Currently, the most stringent EPR requirements apply only to banks with over $700 billion in assets, a total of nine banks including the eight GSIBs. (The ninth bank is Northern Trust I believe.)

Current EPR requirements address three broad areas of concern: capital adequacy, liquidity and and risk management procedures, with various regulatory provisions applicable to each area of concern. And so we measure capital adequacy with both leverage and risk-weighted capital metrics, at both the holding company and subsidiary (operating company) levels. We measure liquidity from several angles, most notably with LCR and NSFR metrics. We stress test both for capital adequacy and liquidity in various ways at various time intervals, with the tests by the Fed and/or the banks themselves. And we require that all banks with over $50 billion of assets have dedicated risk committees on their boards of directors, charged with providing company level oversight and governance with respect to regulatory compliance and risk management more generally.

As you would expect, the Fed’s EPR rules are quite complicated, keeping the bank regulatory lawyers quite busy and well paid, but if you would like a quick overview of how the EPR regime works, I encourage you to look at this helpful summary from the Congressional Research Service put out in May 2021. (See Table 3, page 18).

I will also note that there is an ongoing public debate over the extent to which our current more ‘tailored’ approach to EPR, implemented by the Fed pursuant to the EGRRCPA, may or may not have contributed to regulatory or supervisory failures at SVB et al. In the interests of time, I won’t get into it the details here, but I encourage you to read more about this important topic: here, here and here.

Regional bank risk. As far as I can tell, there is very little that is truly unique to most regional banks that makes them inherently more or less risky than other commercial banks of similar size and with similar customer bases and business models. But regional banks do share one particular risk factor which, although not unique, makes them of more than usual interest to regulators: a heavy reliance on funding from uninsured deposits. Regional banks primarily serve commercial (ie business) customers and the deposits held by these customers tend disproportionately to be uninsured, because over the $250,000 cap for FDIC insurance. And for many regional banks, uninsured deposits account for 50% or more of total deposits and perhaps 40% or so of total liabilities. Which is a big deal if these uninsured deposits prove to be more volatile than other deposits or if the banks with large concentrations of uninsured deposits tend to be riskier than other banks for some other reason(s).

SVB and Signature Banks both failed because of a massive run on their uninsured deposits, which at each bank accounted for ca 90% of total deposits and 80% of total liabilities. At SVB, the top four customers each held over $1 billion in deposits at the bank, including Circle Internet (host of the stable coin USD) with $3.3 billion and Sequoia Capital (the big tech VC firm) with $1 billion of its own money and perhaps several billion more deposited by its various portfolio companies. Many of these customers kept most or all of their cash on deposit at SVB rather than mitigating risk by spreading the money around among several banks, and a large share of this cash was apparently held in demand deposit accounts. At SVB, customers attempted to pull essentially all of their uninsured deposits out of the bank at one time, with over $40 billion withdrawn the day before the bank failed and another $100 billion in the queue to leave the next morning, at which point regulators stepped in to close the bank.

Of course, regional banks also have other risk factors which may be of concern to regulators. As was the case at SVB and First Republic, some regional banks have significant unrealized losses embedded in their investment portfolios and/or loan books, incurred after the Fed began raising rates in March 2022. This sort of interest rate risk is not unique to regional banks, however. The amount of unrealized losses among all US commercial banks is estimated to be as high as $650 billion in bank investment portfolios and two or three times this amount ($1.3-2 trillion) if we include unrealized losses in their loan books as well. And these losses could get bigger if bond yields increase further (or decrease if rates fall). To put these numbers into context, the total amount of regulatory capital at US commercial banks is currently around $2.4 trillion.

Regional banks also tend to have relatively large commercial real estate (CRE) loan exposures. Again, this is not unique to regional banks but it does seem quite prevalent and of particular concern recently. It is estimated that regional bank CRE loan exposures exceed 30% of total assets and 175% of total capital, which if my math is correct suggests that each one percentage point increase in expected credit losses in the regional bank CRE portfolios would reduce capital by ca 1.75 percentage points or so. And so an 8% incremental credit loss in regional bank CRE loan portfolios would effectively wipe out 100% of regional banks’ regulatory capital. I cannot tell you how likely it is that regional banks’ CRE losses could reach this level, but I have no doubt that bank supervisors are paying attention, as they should be.

But even acknowledging these concerns, it still seems to me that the biggest systemic risk associated with regional banks is liquidity risk associated with their heavy reliance on uninsured deposits. Uninsured deposits are not necessarily unstable, but they can be, particularly when held by large and volatile customers or concentrated groups of customers with correlated business and funding risks, as was certainly the case at SVB.

Where was the Fed (on SVB)? This is a loaded and multi-faceted question, but one worth considering briefly. As we know, the Fed is charged with maintaining stability both in our real economy and our financial system. And it has three main policy tools with which to do this work: monetary policy, liquidity provisioning (lender of last resort), and banking regulation and supervision. As we consider the failure of SVB—the primary responsibility for which must lay primarily at the feet of its management and board (and perhaps its deposit customers)—I think it is nevertheless fair to say that the Fed must also share some of the blame.

Much has been written about the widespread impact of the Fed’s recent monetary policy decisions—most notably its decision(s) to hike rates by 450bp (4.5%) in just twelve months, the fastest rate hikes in forty years—so I won’t comment farther, other than to note that SVB and some other banks got burned really badly. (Which is their fault, not the Fed’s). But the Fed more clearly fell down on the job, I think, in the areas of both regulation and supervision (discussed elsewhere) and possibly also in the are of liquidity provisioning, that is the Fed’s exercise of its lender of last resort responsibilities. And so let’s dig a little deeper into this.

Bank runs are always problematic, of course, but in most cases banks can deal with moderate or temporary liquidity pressures by tapping into backup funding available from the Fed or other sources (eg the Federal Home Loan Banks). These borrowings tend to be a bit more expensive than other market rate funding sources, which provides an incentive for banks not to rely on them as a permanent part of their funding structure. And the borrowings must be collateralized with a lien on bank assets, including eligible loans and investment securities, which provides credit support to the lender and allows the borrower to generate liquidity without selling its assets at an inopportune time or at a low price.

But backstop funding from the Fed or other lenders of last resort will not always save the day, as we saw at SVB and Signature. This can happen for various reasons, for example when a bank is already insolvent, or does not have sufficient available (unpledged) collateral, or when the lender’s loan-to-value requirements (haircuts) limit the size of available funding to less than is needed. Or when a bank’s deposits (or other funding sources) leave the bank more quickly than the bank can get its act together to arrange emergency funding, as seems to have been the case with SVB.

Shortly before it failed, SVB had ca $15 billion or so in available cash and $25 billion in cash proceeds from the sale of AFS bonds. The bank also had another $160 billion or so (face value) of investments and loans which could have been pledged to secure some (lesser) amount of additional backstop funding, perhaps $100 billion or so. In normal times this amount of available liquidity would have been more than sufficient to keep SVB on a stable footing in the event of just about any imaginable scenario. And it might even have been sufficient to meet the extraordinary $140+ billion run on deposits that occurred over just 24 hours in March, had SVB been able to arrange the backstop funding in time. But this was not to be, as reported here in a very entertaining account by Bloomberg’s Matt Levine, someone always worth reading.

Of course there is more to the SVB story than the inability of SVB to arrange emergency funding after the Fed’s 4pm closing time. There is also the $16 billion unrealized investment loss in SVB’s HTM bond portfolio, an amount which if charged against capital would have rendered SVB insolvent and might have made SVB ineligible for Fed borrowing in any case. (At the time it failed, SVB was a arguably solvent on a going concern basis, but insolvent on a liquidation basis.) As noted above, it was also the case that the Fed’s discount window collateral eligibility rules would have required very large haircuts to face value for any lending secured by SVB’s underwater bond portfolio or its loans, severely limiting the amount of SVB’s available liquidity.

In response to the failures of SVB and Signature, the Fed introduced a new Bank Term Funding Program which made available to eligible banks one-year emergency funding collateralized by UST securities, with the collateral valued not at market value (as with standard discount window borrowings) but at par. Had the BTFP been in place a few weeks earlier it might well have saved SVB if not Signature, although in the end it was not sufficient to save First Republic, whose market value losses were largely embedded in its loan book not its investment portfolio. Which also seems to be the case with many other regional banks.

The regulatory agenda post SVB. As one might imagine, the Fed and other US bank regulators have been busy recently in the wake of the failures of SVB et al. I do not claim to be on top of all this regulatory activity, but I have come across a resource that I have found helpful and which I recommend to all of you who would like to learn more: BankRegBlog. I will not attempt to summarize all that I have learned from my reading, but I will comment briefly and at high level on just a few items that I believe may be of particular concern to regulators in the months ahead.

EPR tailoring. In a classic case of shutting the barn door after the cows have escaped, we can probably expect the Fed to apply its EPR requirements more broadly among banks in the $100-250 billion size range, as it is authorized to do. The Fed did not do this with SVB, Signature or First Republic and the optics look really bad after the fact, whether or not such preemptive regulation would have made much of a difference.

Capital. Capital adequacy continues to be a primary focus of bank regulators, and the Fed has recently proposed to increase the capital requirements applied to some larger banks and bank holding companies. (Read here.) Capital adequacy and insolvency concerns played a big role in the global financial crisis and there is no doubt that increased capital requirements imposed after the crisis have contributed significantly to the enhanced stability of our banking system. And so a further tightening of bank capital requirements at a time of elevated financial stress might seem prudent, not only for the largest banks but also for some of the larger regional banks.

Increasing bank capital requirements does not come without costs and consequences, however, as the bank lobby regularly reminds us. (For a case in point read this WSJ Op-ed piece, Regulators May Sink America’s Banks.) I do not have a particularly informed view on what the Fed and other regulators are currently proposing in the way of revised capital requirements, but I generally take industry opposition to stricter capital regulations with a grain of salt. The bank lobby is not always wrong, of course, but I don’t put much stock in the banking industry’s consistent conflation of higher capital requirements, increased borrowing costs, reduced lending and slower economic growth, an argument which as far as I know has little in the way of empirical (or even theoretical) support. There is little doubt, however, that higher capital requirements may put pressure on bank EPS, ROE and executive compensation, which I suspect is what the banking lobby really cares about.

Having said that, the Fed and other regulators do not always get things right either, as we have seen on numerous occasions in recent years. In the wake of SVB and First Republic, it makes sense that regulators would look more closely at the regulatory accounting for banks’ unrealized investment losses. And in particular to take aim at banks which seem to be gaming their AFS and HTM designations, a practice which may be particularly prevalent at banks with low capital ratios and high concentrations of uninsured deposits. It would also make sense for the Fed to restrict the ability of banks to opt out of the AOCI rules applicable to AFS portfolios, as SVB did. And while I am skeptical that such accounting shenanigans really hide anything important from anyone who is (or should be) paying attention, including the regulators and shareholders, I don’t see a lot of value in letting banks do this either.

Executive compensation. “Follow the money”, said the Deep Throat character (played by Hal Holbrooke) in the film version of All the President’s Men. (Watch here.) Which is generally good advice when trying to understand why otherwise sensible business executives do crazy things, like investing 60% of the bank’s assets in a long-duration bond portfolio with a yield of ca 1.5%. Of course there are often multiple reasons for these sorts of bizarre decisions, including that other observation of Deep Throat: “These were not particularly bright people.” But in the case of SVB et al I suspect the answer may have had more to do with perverse executive compensation incentives than with low IQs.

Like other types of business organizations (think Enron), banks and financial institutions often get into trouble when their senior executives get paid excessively large amounts of money to take big risks with OPM (other people’s money). But the problems do not always become manifest until the wind shifts, which it inevitably does. Or as Warren Buffett likes to say, when the tide goes out and we discover who has been swimming naked. Which seems to be what happened at SVB.

Of course taking risk is what bank executives get paid to do, but the manner in which they are compensated can skew the payoffs and incentives in ways that are sub-optimal from a social perspective and sometimes even from a shareholder value perspective. “Heads we win; tails you lose” seems to be how many senior bankers and their boards think about executive compensation, which has become a serious problem in this country and not just in the banking industry. But the banking industry is special, for many reasons, and this should be reflected in bank compensation policies and related regulations. The public has a vested interest in a sound and stable banking system, and skewed compensation incentives for senior executives may go some way to explaining why we don’t have one. And so I would expect the Fed and other bank regulators to focus on this as well.

Liquidity. Banks and other financial institutions sometimes fail not because of capital inadequacy or bad strategic or investment decisions, but because of liquidity problems caused by highly unusual exogenous events (eg a global pandemic or financial crisis). And while in normal times liquidity problems at solvent banks can generally be managed with backstop or emergency funding provided by the Fed, exercising its lender of last resort responsibilities, this is not always the case. As a general matter, however, we rely on banks to manage their liquidity risks in a prudent manner, which the regulators reinforce with mandated liquidity standards and stress testing for systemically important banks. Which usually works just fine, until it doesn’t. It didn’t work at SVB, Signature or First Republic, of course, and as a result regulators will be looking again more closely at the liquidity and related stress testing requirements currently applied to banks in the $100-250 billion range, particularly those which rely heavily on uninsured deposits.

Which brings me to our last subject, deposit insurance.

Deposit insurance. If you had asked me a few months ago about the notion of extending FDIC insurance coverage to all bank deposits, not just deposits under the current $250,000 limit, I would likely have reacted badly, citing the moral hazard implications of letting institutional depositors abdicate their responsibility for monitoring bank risk and giving bank executives yet another reason to load up their balance sheets (and compensation plans) with even more risk, relying on government insured deposits to provide funding stability. But my thinking on this topic has evolved, in part after reading Morgan Ricks excellent book, The Money Problem, which I mentioned in my Summer Reading post. And while I am not yet persuaded that extending FDIC insurance to all deposits is a good idea, I am more open to the possibility that it is.

In the film version of Too Big to Fail, the Hank Paulson character (William Hurt) famously said “moral hazard is something I take very seriously”. And he did so with no apparent sense of irony, even after receiving hundreds if millions of dollars of compensation while at Goldman Sachs. But I agree with Hank on this one: moral hazard is something we should all take seriously and it is a particularly problematic in the banking industry. “The banks have a gambling problem and we can’t keep bailing them out”, Paulson also said, and again I agree. But it seems to me that despite widely voiced concerns about moral hazard, bailing out banks is exactly what we keep doing and we just did it again with the uninsured depositors at SVB and Signature. And if the alternative is to continue bailing out uninsured depositors on an ad hoc basis for large and ‘systematically important’ banks, perhaps we should go ahead and insure all deposits and charge the banking industry a full insurance premium, instead of giving the big banks what is now essentially a free ride paid for by others after the fact.

I understand that there are many issues and legitimate concerns with this proposal, including the moral hazard concerns noted above and the migration of risk to the ‘shadow banks’, which don’t fund themselves with deposits but which do rely on other ‘money-like’ forms of funding. I also understand that expanding deposit insurance coverage will increase further the regulatory burden and costs placed on insured banks. And that this may well accelerate even further what many expect to be an impending increase in bank consolidation and mergers. But these are not necessarily bad things, relative to what we’ve got now.

It may also be true that expanding the scope and scale of deposit insurance will shift some regulatory power from the Fed to the FDIC. But in light of the Fed’s recent regulatory and supervisory performance, this may not be entirely a bad thing either. Particularly if it allows the Fed to focus more on its core competencies of monetary policy and liquidity provisioning.

Which could also use some improvement, as you may have noticed.