Safe Banking Is Largely Illusory So We Must Pursue It With Care

Rule-makers must acknowledge that perfect stability doesn’t exist

- Clive Crook

On taking over the distressed First Republic Bank last week, Jamie Dimon, CEO of JPMorgan Chase, said: “No crystal ball is perfect, but yes, I think the banking system is very stable." Well, what else was the boss of America’s biggest bank going to say? A determination to declare that things are under control is widely shared by industry leaders, regulators and policymakers alike. It’s understandable. Nobody wants to start a panic. But that’s also the root of the problem.

Banking is a fundamentally unstable business. Depositors might have no good reason to think their particular bank is in danger, but if they run, they’ll turn out to be right. Making banks safer through regulation, desirable as it might be, doesn’t always solve this riddle; depositors also need to believe they’re safe. Making banks safer and making people believe it are often at odds.

Hence a recurring pattern in such crises: Regulators hesitate to act pre-emptively to deal with stresses before they become dangerous, because identifying an issue and acting early to fix it risks causing the alarm they hope to prevent. So signs of trouble are quietly set aside, complacency rules, and banks are spared the embarrassment of conforming with accounting principles like marking assets to market. Partly because such candour might scare people.