There is a very easy fix to emerging banking crisis

The emerging banking crisis is a problem of under-regulation of the vast majority of banks. At the end of 2017, laws were passed to exempt all banks with less than $250 billion in assets from the entire “stress test” regulatory framework that was put in place after the financial crisis of 2008.

According to Federal Deposit Insurance Corp. banking industry data, there are 4,706 banks in the U.S. Only 13 have more than $250 billion in assets and are truly fully regulated. Thus, 99.7% of U.S. banks are under-regulated.

The 99.7% under-regulated banks do not report any liquidity metrics. The vast majority of them would fail the threshold if they were subject to the full stress test regulatory framework.

The under-regulated banks have an inadequate liquidity position for a simple reason. It costs money to maintain a liquidity position that meets the stringent stresstest regulations. The regulatory liquidity metrics force fully regulated banks to invest in short-term low-yielding and safe securities. That impairs a bank's profitability versus long-term, high-yielding, more-profitable securities. Higher yielding securities are associated with interest-rate risk (when rates increase, they lose value) and liquidity risk.

All banks should be fully regulated and comply with the stress test regulatory framework put in place after the 2008 crisis. This has maintained the financial robustness of the big banks. We should extend this successful regulatory framework to the entire industry.

— Gaetan Lion, Mill Valley