Opinion | The bank crisis is not over

At least stronger banks swooped in over the weekend to buy First Republic. JPMorgan Chase emerged as the winner in a bidding war that reportedly had multiple contenders. This means the nation’s biggest bank is getting even larger, helping make it not merely too big to fail but too enormous to fail. Yet the deal was about as good as could be hoped for. The upside is that the Federal Deposit Insurance Corp. did not have to bail out uninsured depositors, though some FDIC money — about $13 billion, according to an initial estimate — was needed to sweeten the transaction. In total, the FDIC has shelled out more than $35 billion so far for these bank rescues. It’s yet another reminder that preventing reckless banking before disaster strikes is better than cleaning up a mess after the fact.

This is a regional banking crisis, resulting from a combination of terrible managers, lax regulations and even laxer supervision of midsize financial institutions. Yes, the rapid rise in interest rates caused the banking equivalent of a hailstorm, but it’s the kind of weather bankers and regulators should have been prepared to withstand. Similarly, at Silicon Valley Bank, the first to fall, social media caused a bank run in hours that would have taken days (or even weeks) in the past, a possibility bank executives should have anticipated.

Before the Silicon Valley Bank collapse, Congress and the Federal Reserve Board rolled back regulations and scrutiny of midsize banks. The biggest error was not requiring them to hold sufficient capital (similar to the rules applied to large banks). The argument was these midsize banks were too small to matter. The nation — along with the world — has learned just how wrong that assumption was. While this crisis is not as drastic as the 2008 financial meltdown, it has still been a drag on the economy. It’s harder to get a loan now.

The immediate task is to ensure more banks don’t fail. Regulators set the unfortunate precedent of bailing out all depositors at Silicon Valley Bank, even those with far more than $250,000 per account in the bank. (The FDIC usually does not insure deposits over that limit.) The bailout money technically comes from fees banks pay into an insurance fund at the FDIC. But anyone who deposits money into a bank essentially pays a bit of that fee, one way or another. Congress is correct to be wary of a “blank check” guarantee of all deposits. That would be a waste. But clarifying the policy would help the nation avoid a similar mess. Formal FDIC backing of large business accounts used for payroll would be wise, but not more than that. The FDIC recommended such a “targeted coverage” approach in a report on Monday.

The second task is to enhance oversight of banks, especially regional ones. The Federal Reserve slammed its own failures that contributed to the downfall of Silicon Valley Bank in a 114-page report released on Friday. The Fed deserves credit for being more open than usual about its mistakes, stating bluntly it exhibited “slow identification of risks and slow pace of supervisor action.” A cultural shift is needed at the Fed. Michael Barr, the Fed’s vice chair for supervision, took over in July and has tried to step up oversight. But it’s especially alarming how even problems that front-line Fed staff did catch weren’t fixed.

It’s also disappointing that the Fed review stops short of naming any specific culprits. The central bank has refused to say whether anyone was fired over this fiasco. There’s a strong need for a truly independent assessment. The Government Accountability Office released its preliminary review on Friday that points out the many mistakes of the San Francisco Fed, including how regulators there “did not recommend the issuance of a single enforcement action despite [Silicon Valley Bank’s] serious liquidity and management issues before the bank’s failure.” (There was a draft action in the works when Silicon Valley Bank failed. It was related to problems spotted in 2022 and 2021, underscoring just how slow any action was.)

Change is coming. Mr. Barr has promised that. But it will take time — possibly years — to implement. This crisis underscores how important top regulators are in setting the tone. Mr. Barr’s predecessor — Randal Quarles — led an unwise rollback of midsize-bank scrutiny. Similarly, San Francisco Fed leader Mary Daly, while not involved in day-to-day bank supervision, should have been more vocal.

Seven weeks after Silicon Valley Bank collapsed, there are few consequences for those who caused this mess, and yet another bank has failed.