Stricter capital rules for US banks are a lazy way to keep them safe

livemint.com:

SVB) shows, sometimes even supervisors are unaware of the risks a bank is taking, or are unable to stop it when they see it. Moreover, capital regulation will often fail to limit a bank’s pursuit of tail risks that earn profits in good times, because those earnings will add to its capital and allow it to take still more risks—at least until the bad times come. Finally, insofar as more capital gives bank management a longer leash, higher capital requirements may come with an offsetting cost.

The farther off the reservation management goes, the greater the losses for investors before a run finally closes the bank. Just think how much more value the SVB management team would have destroyed—with the connivance of the board and supervisors—if uninsured depositors had not pulled the plug on its inglorious reign by demanding their money. This is not to suggest that SVB’s uninsured depositors were an alert group of stakeholders.

On the contrary, they had little idea of the risks that were building. But once they caught a whiff, the party was over. In fact, bank runs can also have a salutary effect if bank management, knowing the extreme penalty associated with excessive risk, manage prudently.

Viewed in this light, the occasional depositor run is a feature of the system, not a bug to be eliminated by raising banks’ capital requirements. By effectively insuring all uninsured deposits after the March mini-crisis, the Fed and the US Department of the Treasury prevented a wider bank panic. But they also kept a lot of incompetent bank managers in place by turning uninsured depositors into passive onlookers—and, indeed, into capital.