We have seen a range of proposals now from the White House, pundits, opinion pages and others to strengthen bank capital rules to minimize the risk of bank failures. This is the wrong plan. Capital rules can go far, but in the end, culture and management behavior count for more than anything else. Solutions to bank stability must target behavior first and more capital rules only much further down the line.
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What I see in common to these two implosions as well as Bear Sterns, Lehman Brothers, et. al. is that in each instance the poor decisions that led to theses institutions’ demise were undertaken by a small group within that bank. In SVB’s case the decision to invest ballooning (demand) deposits in long dated government securities was in all likelihood made by the bank’s Treasurer or investment committee. Rank and file staff were most likely unaware of these decisions and certainly not empowered to question them. CS’s mistakes were also the responsibility of senior staff and not front book traders. I can site other examples; JPM’s London whale would have probably tanked a smaller institution, but you get the idea. Bank regulation is a constant game of Wack-A-Mole. No sooner have you addressed the most recent problem (poor quality assets-2008) than a new problem (maturity mismatch) rears its ugly head.