- Key insight: The only thing we know about the next financial crisis is that it won't look like the last one. But specific changes to bank safety and soundness requirements and clearer regulatory authorities would help us respond.
- What's at stake: Legislation is always enacted after a crisis to ensure the exact same problem never happens again. But the exact problem never happens again.
- Forward look: The combination of long-term debt requirements for all banks with over $100 billion in total assets, an effective lender of last resort facility, and the ability for the FDIC to quickly implement temporary liquidity guarantee programs is necessary before the next financial crisis.
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The unpleasant reality is that the U.S. government is not ready for the next crisis. Unfortunately, the most likely response will be to resort to another bailout, just as we have in every financial crisis since the Great Depression. Government bailouts are patently unfair to taxpayers, who don't create the crises they are meant to resolve. They also increase moral hazard by rescuing market participants who reap the rewards without having to bear the corresponding risks.
There is a straightforward way to effectively balance financial stability and market discipline. It requires three key steps.
First, all U.S. banking organizations large or interconnected enough to be capable of creating a financial crisis should be required to have enough long-term debt to cover
Such a requirement will help prevent contagion, by protecting other interdependent financial companies and by eliminating the risk for uninsured depositors at similarly situated banks.
In this scenario, the likely chain of events would be: (1) the market, not bank regulators, will determine when a systemically significant bank is unlikely to remain solvent; (2) the bank will experience a liquidity crisis; (3) the holding company will be forced into Chapter 11 bankruptcy proceedings; and (4) the bank's long-term debt will be converted to capital, which will allow the bank and other holding company subsidiaries to remain open and operational. Only the empty shell of the holding company would remain in bankruptcy proceedings, and unlike with the Lehman bankruptcy, financial contracts would remain in place, eliminating spillover effects at other interdependent financial organizations and a fire sale of assets.
This long-term debt requirement is not new. In fact, it is already in place for our eight largest, most systemically significant banks. We need to extend that requirement to midsize banks with assets greater than $100 billion. Such a requirement would place the risk of loss at these banks — there are currently 24 of them — on long-term debtholders who can't run, instead of on uninsured depositors who can. Even though bank regulators recognized the risk at midsize banks well before the run by uninsured depositors at Silicon Valley Bank, implementing regulations were never finalized.
Two U.S. banks have failed so far in 2026, continuing the recent pattern of smaller lenders collapsing abruptly due to firm-specific issues. January's failure of Metropolitan Capital Bank & Trust and the early May failure of Community Bank & Trust – West Georgia both fit that mold.
Second, the Federal Reserve must prioritize the modernization of its "lender of last resort" capabilities, so otherwise healthy banks can be protected from contagious bank runs.
The run at Silicon Valley Bank showed that the Federal Reserve's discount window simply is not ready for prime time. Ineffectual duality between the Federal Reserve and the Federal Home Loan banks over who provides banks liquidity, how collateral should be valued, and other operational problems need to be resolved.
Fixing the discount window should not be complicated. If the first recommendation is implemented and long-term bondholders at covered banks bear the cost of a failure, the Federal Reserve can safely lend to these banks in a crisis regardless of how it values their collateral.
Third, Congress needs to give FDIC explicit statutory authority to create temporary liquidity guarantee programs during a crisis without congressional approval, but only if the bank that created the crisis is not bailed out, so those that caused the crisis suffer some consequence for their actions or lack thereof.
This step is a necessary safety valve to preserve financial stability if the first two steps prove inadequate; and by not bailing out the first large bank to go, bank regulators retain some market discipline which should satisfy lawmakers' reason for putting the constraint on FDIC in the first place. Besides, in today's world, obtaining congressional approval fast enough to be helpful is unrealistic, even if Congress is in session, which they notably were not during the run at Silicon Valley Bank.
We cannot keep fighting the last war and expecting a better outcome. Legislation is always enacted after a crisis to ensure the exact same problem never happens again. But the exact problem never happens again.
Both Congress and bank regulators need to be bolder and more proactive. Today, bank regulators lack the tools needed to act quickly and effectively. The combination of long-term debt requirements for all banks with over $100 billion in total assets, an effective lender of last resort facility, and the ability for the FDIC to quickly implement temporary liquidity guarantee programs is necessary before the next financial crisis. Otherwise, we will find ourselves defaulting to more government bailouts and permanently abandoning the concept of market discipline.
