In assessing the stability and viability of financial institutions, it is critical to gain a clear understanding of banks’ risk profiles, business models, asset concentration, and growth profiles. That was the central theme at a roundtable discussion titled “Banking Liquidity and the New Financial Ecosystem,” hosted by Wharton’s Future of Finance Forum in October 2023.

Among the discussants at the roundtable were partners at top corporate law firms, former U.S. Treasury personnel, and thought leaders in policy and economics. They addressed critical issues in banking, including liquidity, the size and composition of the banking ecosystem, depository insurance, supervision and examination, and proposed regulation.

“The bank failures in March of 2023 put on the agenda key issues in the regulation of the financial system,” said Wharton finance professor Itay Goldstein, who led the discussion. Goldstein is also chair of Wharton’s finance department and co-director of the Wharton Initiative on Financial Policy and Regulation.

The collapse of Silicon Valley Bank (SVB), triggered by a run on the bank, brought into sharp focus the challenges faced by financial institutions. The contagion effect of the SVB crisis extended to the failures of Signature Bank and First Republic Bank.

A pivotal moment in this crisis was the invocation of the systemic risk exception by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, the panelists noted. That decision effectively insured all depositors, emphasizing the systemic significance of the crisis. The issue of the “too big to fail” framework was also discussed, which underscored broader concerns about the financial system’s robustness.

“The bank failures in March of 2023 put on the agenda key issues in the regulation of the financial system.” — Itay Goldstein

The discussion delved deep into the intricacies of the deposit insurance regime, with a specific focus on the $250,000 deposit limit. This limit has been a longstanding feature of the system and prompted various viewpoints regarding its purpose and efficacy. It was pointed out that the primary intent of deposit insurance was to safeguard smaller depositors, not corporations or larger entities. The discussion urged an honest understanding of the deposit insurance system’s true purpose.

“One of the key issues is the design of deposit insurance that needs to be revamped,” Goldstein said. “Another one is the importance of maintaining a balance in the banking system between large, mid-sized, and small regional banks.”

Experts at the roundtable highlighted the intrinsic value of local and community banks in the financial ecosystem. These banks often play a crucial role in supporting local communities and businesses, emphasizing their role in promoting economic stability.

There were concerns regarding whether smaller banks, often labeled as “too small to succeed,” can effectively compete in the evolving financial landscape. Smaller banks face distinct challenges in technology adoption and compliance with an increasingly complex regulatory environment, the panelists pointed out. Maintaining a level playing field for smaller banks to compete fairly was a key concern, they said.

This article is based on a summary published on LinkedIn.