Discussion paper

DP18302 Making Banking Safe

Following the bank failures of 2023, what should be done to make the financial system safe? We draw two key lessons from the recent episode: first, a banking system that relies heavily on supervisory discretion is unlikely to be resilient; second, authorities with emergency powers to bail out banks during a panic cannot credibly commit to refrain from doing so. The only way to address these challenges is to have a rigorous framework focused on crisis prevention.
To meet this goal, we argue that regulation should be more rule-based (less reliant on supervisory discretion); simpler and more transparent; stricter and more rigorous; and more efficient in its use of resources. Applying these principles to a range of proposals, we identify reforms that best address the glaring deficiencies made so clear by recent events: namely, increase capital and liquidity requirements; shift to mark-to-market accounting; and improve the transparency, flexibility and severity of capital and liquidity stress tests.


Cecchetti, S and K Schoenholtz (2023), ‘DP18302 Making Banking Safe‘, CEPR Discussion Paper No. 18302. CEPR Press, Paris & London. https://cepr.org/publications/dp18302