Tom Williams/CQ Roll Call via AP Images
Sen. Elizabeth Warren (D-MA) greets Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, during a Senate Banking Committee hearing titled “Recent Bank Failures and the Federal Regulatory Response,” March 28, 2023, on Capitol Hill.
This story is part of a Big Ideas series that brings together experts to offer steps that the government can take to protect the financial system, after the collapse of Silicon Valley Bank showed its inherent fragility. You can read all of the stories in this series here.
There is still a lot the American public needs to learn about the causes and implications of the current banking crisis. It’s already clear, however, that the domino-like collapse of Silvergate, Silicon Valley Bank, and Signature Bank reflected significant errors and gaps, both in these banks’ internal risk management and in the supervisory oversight at the state and federal levels. A typical policy response to these problems is to tighten various existing supervisory standards and bank governance rules. Higher capital and liquidity requirements, regular stress testing for interest rate risk, and tougher executive compensation limits seem like the most likely (and necessary) improvements to the current regulatory regime.
But this isn’t our first crisis rodeo. We’ve been in this mode of fixing specific past mistakes and tweaking specific rules many times before. We know from experience that the next fire is not likely to start in precisely the same place. Plus, no matter how it starts, it’s inevitably the American public who ends up paying the heavy price of corporate greed and regulatory failure. That’s why we need to think more broadly about changing not just discrete regulations but the very structure of decision-making in the banking sector, so that it is more effectively aligned with the public interest.
One way to do it is to give the American public a seat at the proverbial table where industry insiders and agency technocrats make important decisions affecting the stability and fairness of our financial system. It’s no secret that these two groups are often locked in an incestuous cycle, moving back and forth through the revolving door, building strong personal and professional relationships, and forming shared intellectual commitments to the financial industry’s version of the public good. To break this cycle of cultural capture and industry-dominated groupthink, we have to upset its intimate two-player setup by inserting a powerful third participant in the regulatory process: an independent public interest representative.
In my prior work, I have proposed the creation of a Public Interest Council, a dedicated new institution that would play this critical role. It’s time to revisit this idea.
The proposed Public Interest Council would be created by Congress and have a special status as an independent government instrumentality, located outside of the executive branch. Its explicit mandate would be to protect the interests of the American public and taxpayers in preserving financial stability and minimizing potential systemic risk in the financial markets.
Individual members of the Council would have to be strictly independent from both the industry and the regulators, and competent in issues of financial regulation. They would include academics with proven expertise in a wide range of relevant disciplines, respected public figures (who at the time are not holding any official post), and representatives of consumer and public interest groups. Professional staff would assist the Council in performance of its duties.
The Council would not have any rulemaking or enforcement powers. Instead, it would have broad authority to collect information from the regulatory agencies and private market participants, and to conduct targeted investigations and reviews of specific issues and trends in financial markets. The Council would have subpoena power; it would conduct interviews, informal inquiries, or formal hearings. It would be able to request regulatory agencies to report on their activities in particular areas or to address market developments it identifies as warranting regulatory attention. If necessary, the members of the Council would participate in regulatory rulemaking, in advisory and representational capacities.
In all of its activities, the Council’s goal would be to ensure that even the most technocratic agency decisions stay focused on what ultimately matters to ordinary Americans. It would serve as a check and a spotlight on an insular and obscure process.
The Public Interest Council would be required to submit regular reports to Congress, providing its independent assessment of how well financial regulators and supervisors are doing their jobs. In these publicly available “State of Our Financial Union” reports, the Council would make various policy recommendations to Congress and, where appropriate, petition it to take legislative action with respect to specific matters of public concern. A critical part of the Council’s job would be to communicate its findings to and keep the American public informed about important developments in financial markets and policy.
In short, the Council’s main function would be to keep both financial regulators and financial institutions under constant and meaningfully targeted public scrutiny. In that sense, the proposed Council may be viewed as a permanent equivalent of a congressional commission or a new kind of inspector general, with a broad mandate to shine disinfecting sunlight on the workings of the financial industry and its official minders, before a crisis strikes.
A similar body, the Congressional Oversight Panel headed by Elizabeth Warren, was established after the 2008 crisis. But its charge was limited mainly to overseeing the use and assessing the impact of the Troubled Asset Relief Program funds. The Public Interest Council would have a much broader reach and much longer time horizons, which would allow it to focus on key policy issues in a more dynamic and coherent fashion.
If we had such an independent expert body in place, for example, it could have made it a lot more difficult for the Federal Reserve, FDIC, and other regulators to quietly hollow out supervisory requirements for banks like SVB or Signature. It could have been pressing the regulators to answer some tough questions about the state of the U.S. banking system in light of recent monetary-policy shifts. And right now, it would be ideally positioned to lead a thorough and unbiased investigation of the supervisory failures that led to the current banking crisis.
Of course, many legal and administrative details would need to be hammered out before the Public Interest Council can become reality. Designing a new institution is not an easy task. In our current state of political dysfunction, it may even seem futile. But the predictable skepticism of untried ideas because the politics don’t immediately line up is not the right reason to stop searching for new, potentially more effective solutions to recurring banking crises. Technocratic fixes to the existing regulatory regime are simply not enough, because they often miss the underlying dysfunctions in the governance and politics of our financial system.
Let’s remember that Silvergate-SVB-Signature’s problems were not especially technically complex: They were plainly visible to bank executives and supervisors. Supervisors had the basic tools to force bankers to pay attention to their risks before it was too late. Regulators were aware of the changing macroeconomic conditions. These agencies’ heads also sat on the Financial Stability Oversight Council, our systemic risk regulator that’s supposed to scan the horizon for budding systemic problems before they spiral out of control.
Yet, somewhere along the way, every responsible party has made a conscious choice not to act in the best interests of the public, prioritizing some other goals instead. We need to alter the structural and political context within which these choices are made. A Public Interest Council, if implemented correctly, would do just that.
