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Outside the Box: No regulation or law can fix incompetent bank management, former FDIC chief says

“ Where was SVB’s Board of Directors?  How could they not have a hedging strategy? ”

After every banking crisis, the call is for the reform of regulations, new laws, and stronger oversight by banking regulators at the Federal Reserve, the FDIC, the OCC, the CFTC, and CFPB. The final product, designed to prevent another crisis, which is always based on the last calamity, often has a bias that pits small banks against big banks, which is unfair. 

While there are unique seeds in every banking crisis, there are also fundamental tenants of finance that are always violated.  Remember that every bank operates in the same economic environment, and size does offer both advantages and disadvantages.

I have been a CEO of a troubled community bank, a board member of a large bank, and the nation’s top banking regulator. Each experience offers the same lessons with a somewhat different twist.  Our flawed tendency is to blame policy, regulations or whatever, rather than focus on the traits and culture of successful banks. Why do some banks fail, some recover, and others are never compromised? 

Successful and stable banks all possess the same traits, which include superior management and a high-quality board of directors who are independent, possess moral authority, and who have a working knowledge of the banking industry.  This leadership can and should focus on risk without compromising the bank’s duty to both its customers and shareholders. They also should never compromise the quality and ethics of the bank’s employees. Culture is ever present and of ultimate importance.  Where was SVB’s Board of Directors?  How could they not have a hedging strategy?

It is important to remember the majority of the nearly 5,000 banks in America are sound, and they are critical to innovation, economic dynamism and community growth.  Banks are dedicated to supplying the lifeblood of the American free enterprise system — one which has allowed the U.S. to prosper like no other.

Confidence and trust are core to the culture of most banks, which is enforced by management and set by the board of directors. Independence, moral authority, and a working knowledge of banking should describe every director of an insured bank. A bank director mindset requires a fiduciary attitude that inspires that trust from all observers — which means focusing on the mission of taking care of money for other people. It does not mean involvement in areas unrelated to the mission of a bank.

SVB’s collapse shows what happens when there is a lack of trust. Without trust, the banking system risks becoming yet another institution that has become marginalized, political and dysfunctional.  There have been many references in light of the Silicon Valley Bank collapse to “It’s a Wonderful Life,” the classic film about bank runs during the Great Depression.  Just as George Bailey couldn’t prevent a bank run then, there is no law or regulation that can prevent a Twitter-led, panic-infused bank run, which came as a result in a lack of trust in the system.

Read: SVB’s sudden collapse wasn’t a social media triggered ‘Twitter run.’ It’s what people always do when their money is threatened.

Policy debates, including new or revised regulations, are helpful and should always be reviewed; however, experience and adhering to fundamental values at the banks themselves must always be first and foremost. 

At the heart of oversight is thoughtful independence, moral authority and knowledge of the working order of the entity.  We need to return to those basics.  Safety and soundness are paramount. 

Donald E. Powell was chairman of the FDIC from 2001-2005. He has served on numerous bank boards, including Bank of America. He is currently on the board of Dallas Capital Bank.

More: Is your cash in a real FDIC-insured bank or a look-alike? Are you sure?

Also read: Sen. Sherrod Brown: American consumers losing power over their savings and paychecks is an emergency, too.

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