Last week Martin Gruenberg, the Chairman of the Federal Deposit Insurance Corporation, gave a speech about the importance of federal deposit insurance for (among other things) maintaining financial stability. Just a few days prior, Gruenberg gave a speech warning about the systemic risks that nonbank financial companies pose to financial stability.

Reading between the lines, these two speeches demonstrate exactly how misguided the current approach to financial regulation has become.

For starters, the premise that government regulation can ensure stable financial markets is wrong. The United States has more than two centuries of contrary evidence, and the rest of the world has more. For some reason, though, people still put faith in that idea.

Yes, the conventional story is that deregulation caused the 2008 financial crisis, but the truth is that none of the firms who failed during the crisis were unregulated. It’s also untrue that regulators focused on system‐​wide risk only after the 2008 crisis, or that any of the risky behavior that led to 2008 took place in the shadows, away from the watchful eyes of federal regulators.

As for the most recent example, it is undeniable that Silicon Valley Bank, Signature Bank, and First Republic Bank were all heavily regulated under similar frameworks. And while the 2017 changes to Dodd‐​Frank (the tailoring) prevented SVB from adhering to the highest capital requirements for the largest banks, it’s also clear the tailoring didn’t cause SVB’s failure.

The squabble over tailoring amounts to nothing more than whether additional stress testing, capital, or liquidity would have saved SVB, and that’s incredibly unlikely given their interest rate risk exposure and the historic size and speed with which depositors left the bank. (It’s also true that SVB’s capital and liquidity ratios were well above the requirements–in some cases twice as high and even higher than the ratios reported by JP Morgan Chase.)

Another bad idea buried in Gruenberg’s speech is the idea that depositors moving their money around should be defined as a systemic risk, one that threatens the entire financial system. A massive deposit outflow from one bank is obviously a risk to that bank, as SVB demonstrated. But deposit outflows can only threaten the entire financial system if depositors take their money out and put it under their mattresses. If they move money into other banks, for example, then the outflows cannot possibly threaten even the banking system.

In the case of the 2023 bank failures, Gruenberg’s speech argues that business payment accounts “may pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects from the failure to make payrolls.” But this argument makes even less sense because those business accounts are the ones moving rapidly into other accounts to facilitate making continued payments. That’s the only reason those accounts exist in the first place, so the threat to the entire system is minimal.

Next, the speech damages the idea that government‐​backing and intervention can stop financial contagion (i.e., panic).

According to the speech–which repeats the conventional March 2023 bank failure story–the possibility that uninsured depositors at SVB would experience losses “alarmed uninsured depositors at several other regional banks,” depositors began withdrawing their funds, at which point Signature experienced heavy withdrawals. On March 12, just two days after SVB’s failure, state regulators closed Signature.

Then, because they were faced “with growing contagion in the system, the boards of the FDIC and Federal Reserve voted to recommend that the Secretary of the Treasury, in consultation with the President, make a systemic risk determination under the Federal Deposit Insurance Act with regard to the resolutions of SVB and Signature Bank.” [Emphasis added.] Even if one assumes that Signature’s failure was the result of contagion, by this logic, the contagion should have been stemmed.

Yet First Republic failed almost two months later, on May 1, 2023. And, according to Gruenberg, First Republic “was clearly impacted by the contagion effect of the previous two failures.” So, the effort to stop the contagion didn’t work. That’s good to hear from one of the regulators.

Interestingly, the remnants of First Republic were assumed by JPMorgan Chase. Presumably, they were immune from the contagion. Apparently, the same goes for Flagstar Bank and First Citizens, the two regional banks that purchased Signature and SVB, respectively, within two weeks after the failures. Of course, the fact that other banks purchased these failed institutions probably says something about the systemic risk involved as well, but there’s no reason to belabor that point.

Finally, the speech argues it is important “to recognize that both institutions were allowed to fail,” then boasts that unsecured creditors took losses. The problem here, of course, is that if our system requires government‐​backing to maintain financial stability and to stop financial contagion, then there’s no good reason these folks should take losses while uninsured depositors are made whole.

The FDIC’s systemic risk exception, just like the overall goal of maintaining financial stability, ultimately only further politicizes the federal regulatory framework. For all these reasons, the current framework is badly misguided. It needs to be pared back, not expanded.