Bank failures of yesteryear

Aiden Reiter

Audio by Paper2Audio.

Jul 09, 2026

Morning Money

Presented by American Bankers Association.

Thu, Jul 9 at 08:02

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There are two key questions defining bank supervision and regulation today. First is whether supervisors should focus solely on “core” financial risks — liquidity, interest rate risk — or expand their remit to “softer”, more subjective issues, like reputation and management risks. Second is whether banks should hold more capital to protect against a potential crisis.

The current regulators have a clear view, and have had remarkable success in pushing it. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have moved in lockstep over the past 18 months to shift the focus of supervisors to “core” financial risks, focusing oversight on tangible financial issues and raising the threshold at which supervisors can ding banks for weaknesses in “softer” categories.

At the same time, regulators jointly issued a proposal to lower the amount of capital required for nearly all banks, a major reversal from 2023's proposed increases.

The goal of these changes, as in all bank regulation, is to simultaneously promote lending to the economy and protect against financial crises.

A new paper from researchers at the Federal Reserve and the Massachusetts Institute of Technology gets at these questions — the importance of the balance sheet and the need for capital — and has excited folks in the regulatory space.

While a lot has been written about bank runs, when depositors rush to a bank to get back their money, our knowledge of bank runs before the Great Depression — when they were far more common — is sparse. The researchers used artificial intelligence to analyze newspaper coverage of bank runs from 1863 to 1934 to create a database of 3,000 bank failures, and used the database to get a deeper understanding of the effects of bank panics and how to prevent them.

According to the research, issues on a bank's balance sheet — what the paper's authors define as problems with “a bank's capitalization, profitability, and ability to finance itself with cheap deposits relative to expensive noncore funding” — are the key determinants of bank runs. Banks with balance sheet issues were much more likely to experience a run, and usually failed when they did: 63 percent of runs on unhealthy banks resulted in failure. Strong banks also experienced bank runs, the report said, but rarely failed.

When a bank panic occurred without a failure, the economic impacts were minimal: manufacturing activity, deposits, and lending in localities remained steady. But a failure of a weak bank often became an issue.

"Poor bank fundamentals are necessary for bank runs to translate into failure and for bank distress to generate severe economic distress," wrote Sergio Correia, Stephan Luck and Emil Verner, the authors of the report.

The researchers pointed to a couple of important mitigators. Accommodating customer withdrawals, either through borrowing from other banks or bank owners injecting cash during a panic, was often critical at calming things down. When bank runs became more severe, limiting withdrawals or pausing them altogether was crucial. And clear signs to the public that regulators were overseeing a failing bank helped assuage borrowers' fears.

The findings of the study are not perfectly representative of our current situation: Today's banks are more heavily regulated, bigger and can access liquid assets from the central bank in a pinch. But the research does suggest that, at the end of the day, balance sheets are the linchpin. That would seem to support regulators' shift towards "core" financial risks.

Yet, the paper suggests that other moves taken by regulators could make the system more vulnerable.

Capital rules are explicitly designed to limit the likelihood of a run and ensure that banks have enough assets on hand to discourage panic. Lowering capital requirements, as the agencies are proposing, could be seen as particularly unwise in light of the findings. And the shift away from “softer” oversight coupled with the recent headcount cuts at the O.C.C and expected reductions to the supervision division of the Federal Reserve could make it harder for regulators to spot issues early and engage with banks to address them.

It's Thursday — If you've got tips on the banks and the agencies that regulate them, send a tip to Aiden at areiter@politico.com. (You can still send hate mail to Sam Sutton, but he won't see it until he gets back from vacation.)

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A message from the American Bankers Association:

The Senate is considering the Clarity Act, the first comprehensive framework for digital assets. Lawmakers attempted to close a major stablecoin loophole that jeopardizes local lending, but their job isn't done. Despite the Senate Banking Committee's intent to safeguard communities, the Clarity Act would continue allowing crypto companies to pay interest-like “rewards,” reducing funds for small business, farm and home loans. Urge the Senate to strengthen the Clarity Act by closing the stablecoin loophole.

Driving the Day

Thursday... Securities and Exchange Commission Chair Paul Atkins will speak and participate in a fireside chat at the Society for Corporate Governance's national conference in Nashville at 9 a.m. ... The S.E.C has a closed meeting at 1 p.m.

A bridge to Trump: Treasury Secretary Scott Bessent is heading to East Tennessee today to unveil the newly renamed Donald J. Trump Bridge along Interstate 40, joining G.O.P Sens. Bill Hagerty and Marsha Blackburn and other Tennessee Republicans for the ceremony.

At the Fed

Fed minutes — Almost all of the Federal Reserve's governors at the latest F.O.M.C meeting said the central bank will likely have to raise rates if inflation stays hot, reports Victoria Guida. The officials were not sure where prices will head, given lingering uncertainty over the war in the Middle East and the tariff outlook, but the meeting's minutes suggest that the current level of inflation could spur rate hikes, which will likely enrage President Donald Trump.

The International Scene

Back at it, alone — The war in ee-rahn appears to be back on, and Europe is unfazed. New U.S. strikes started Tuesday evening. But, as Jack Detsch and Paul McLeary report, U.S. allies at the nato summit on Wednesday shrugged it off, and said that the ceasefire's end “only stiffened their resolve to be less dependent on the American military and stand alone. The war has pushed leaders on the continent to become less dependent on their ally across the Atlantic.

“After seeing what's happening in ee-rahn and Ukraine, we first of all, have to build our own military might, and then everybody will respect us: Americans, Russians, Iranians or Chinese,” said a European official. “The more muscles you have, the less political anger you show.”

Trump revives Spain trade fight — The administration is compiling a list of Spanish goods that could face an embargo after President Donald Trump ordered officials to halt trade with Madrid. Treasury, U.S.T.R and Commerce are preparing options as the move threatens to upend the U.S.-E.U trade deal.

Image summary: A political advocacy graphic from the American Bankers Association featuring a pile of one hundred dollar bills topped with a large orange warning sign containing an exclamation point. The text states, LENDING IN YOUR STATE IS AT RISK. Tell Senators to strengthen the Clarity Act, followed by a call to action that reads, ACT NOW.

Treasury

Trump Account hiccup — Some parents of newborns are having issues setting up their Trump Accounts as the White House and Treasury Department make a push to boost enrollment in the new investment vehicles, reports the Wall Street Journal. The issue appears limited to babies born in 2026, who were newly issued Social Security numbers, the Journal reports.

More reshuffling at Treasury: Jonathan McKernan, the Treasury Department's undersecretary for domestic finance, is expected to leave the agency next week, according to two people familiar with the matter. McKernan has been a key architect of the Trump administration's efforts to ease rules on banks and reshape financial regulation during President Donald Trump's second term.

On the Hill

Crypto tax fight: Our colleague Brian Faler reports on the high-stakes battle over how lawmakers should tax complex digital asset transactions: “An arcane debate in Congress over taxing cryptocurrencies has morphed into an unlikely battle over baking bread, deep-sea excavations, carpentry and baseball cards, with millions of dollars in the balance.”

At the Regulators

S.E.C-Musk settlement advances: A federal judge has signed off on a proposed $1.5 million settlement between the Securities and Exchange Commission and Elon Musk over allegations tied to his past purchases of Twitter stock, despite her "significant misgivings" and "red flags" in the S.E.C's handling of the case, Declan Harty reports.

Overhauling fair housing: A senior Department of Housing and Urban Development official, Craig Trainor, told employees that “a dynamic organizational transformation” is coming to the agency's civil rights office, reports Cassandra Dumay. In an internal email to employees, Trainor said he has plans to “leave [this office] in dramatically better shape than I found it.”

A message from the American Bankers Association:

Protect local lending. Strengthen the Clarity Act.

The Senate is considering the Clarity Act, the first comprehensive regulatory framework for digital assets, but unless lawmakers close a major stablecoin loophole, the legislation could put local lending at risk.

The Genius Act banned stablecoin issuers from offering interest on stablecoins to prevent them from drawing away the deposits that banks use to lend and generate economic activity. But other crypto companies continue to offer interest-like “rewards” for holding stablecoins, threatening the funding for small business, farm, and home loans. The Senate Banking Committee recognized the need to protect communities and local lending, but the bill's language does not go far enough. With a few simple changes, the Senate can finish the job, supporting financial innovation without undermining Main Street.

Urge the Senate to strengthen the Clarity Act by closing the stablecoin loophole and protecting the lending that helps power the economy.

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