Banks keep failing because policies reward risk

Top headlines

• What authenticity means in time of generative AI
• Studying evolution can improve cancer treatments
• U.S. case puts missionary system on trial

Lead story

The banking crisis that began when Silicon Valley Bank went belly up in a matter of days in March has claimed another victim. First Republic surpassed SVB as the nation’s second-biggest bank failure after the Federal Deposit Insurance Corp. seized control of the lender this morning and sold it to JPMorgan Chase. The FDIC, which will assume $13 billion in losses in the deal, had little choice as First Republic’s share price tanked in recent days on growing concerns over a sharp drop in the value of some of its assets.

Market watchers, lawmakers and regulators are all looking for what or who is to blame for the spate of bank failures that began with SVB’s collapse in March, with an eye toward preventing them from happening again. But the U.S. has been down this road before, write economists Alexandra Digby, Dollie Davis and Robson Hiroshi Hatsukami Morgan, who study and teach the history of financial crises. Today’s turmoil is fueled by the same forces that created the savings and loan crisis in the 1980s and the global financial crisis of 2008: incentives that reward excessive risk-taking.

“Banks provided incentives that encouraged executives to take big risks to boost profits, with few consequences if their bets turned bad,” they write. “In other words, all carrot and no stick.”

[Sign up here to our topic-specific weekly emails.]