Having studied finance in pursuit of his undergraduate and master’s degrees, Angelo Sciortino of Bethpage, NY, is an active trader in the markets. Focused on management and regulatory issues, Angelo Sciortino is looking to obtain a career in financial services.

A Center for Economic Policy Research article, written in the wake of the implosion of Credit Suisse and Silicon Valley Bank, makes the argument that the regulatory system has goals that, taken together, set the stage for similar bank failures and financial hazards moving forward. The G20 financial policy regime since 2000 has emphasized consistent economic growth and inflation at around a 2 percent target rate while mandating high levels of financial stability.

In the years following the 2008 global crisis, these objectives seemed to be moving in harmony, with quantitative easing (printing new money) coupled with low interest rates combining to rein in inflation. However, these policies created a dependency on low interest rates, with banks assuming that they would continue forever. Unfortunately, systemic risk increased, as banks relied on ever more money being printed, despite supply chain and commodity constraints that exist in the real world.

A logical solution is to increase bank capital requirements, potentially to the point where institutions hold 100 percent reserves on demand deposits and work to match assets to liabilities (at bond maturity). Unfortunately, such an approach makes loans to riskier small and medium-sized enterprises (SME) extremely hard to come by and is recessionary.

The authors’ proposed solution is to transition banks away from being “shock amplifiers” in times of financial stress. Banks essentially react in the same way to systemic shock, engaging in selling or buying simultaneously. Rather, heterogeneity should be encouraged among institutions, such that some buy while others sell, which in aggregate creates “random noise.”

In addition, the authors recommend doing away with the “moral hazard” of unlimited liability among banks that never seem to foot the bill when downside scenarios occur. While investors do need government-backed assurance of their investments’ security, senior bank management should not be immune when an institution fails and should face liability for their actions.