The Sometimes Unintended Consequences of Banking Regulation

As regulators consider their response to the recent banking turmoil triggered by the collapses of Silicon Valley Bank (SVB) and Signature Bank, they would be wise to consider the full impact of their actions.

Regulations are put in place to create stability and instill confidence in the financial system with the goal of preventing financial crises. Although high-minded in intent, regulatory metrics are often implemented in a blunt manner or with a lens focused too narrowly on the causes of the previous crisis. As a result, regulations can sometimes lead to unintended consequences that, in certain cases, can contribute to the causes of future crises.

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