The Hoover Prosperity Program’s Financial Regulation Working Group recently hosted a joint event with the Centre for Economic Policy Research (CEPR), presenting the findings of the 27th Geneva Report on the World Economy, Much Money, Little Capital, and Few Reforms: The 2023 Banking Turmoil.
The report was introduced by two of its authors, Stijn Claessens, executive fellow at the Yale School of Management and CEPR affiliate, and Amit Seru, senior fellow at the Hoover Institution, professor of finance at the Stanford Graduate School of Business, and CEPR affiliate.
Shortcomings in the Regulatory Framework for Banking Supervision
The report examines the significant banking failures that took place in March 2023, including the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank in the United States, alongside the failure of Credit Suisse in Switzerland. These events revealed that despite the reforms that followed the global financial crisis (GFC) of 2007–8, funding vulnerabilities, regulatory gaps, and supervisory fragmentation remain dangerously persistent. The report identifies that low interest rates and prolonged quantitative easing policies contributed to excessive maturity mismatches and dependence on unstable, uninsured deposits. When rates rose sharply, these vulnerabilities translated into liquidity stress and insolvency risks.
Claessens and Seru underscored that while the immediate triggers for turmoil were poor risk management and oversight failures, the root causes were structural and systemic. In the United States, supervisory fragmentation enables banks to “forum shop” for lenient oversight, leaving regulators ill prepared to manage dynamic risks. The report highlights how post-GFC reforms—particularly the full implementation of Basel III (a set of international banking regulations developed by the Basel Committee on Banking Supervision)—have been delayed or weakened in key jurisdictions, including the United States. This has left banks with insufficient capital buffers and unresolved exposures to interest rate risk.
The authors also emphasized that regulatory efforts have failed to keep pace with financial innovation and shifting risks. In particular, the report calls for a rethinking of lender-of-last-resort frameworks, along with more robust liquidity stress testing, and requirements for banks to preposition collateral with central banks. Additionally, the report proposes that banks with capital shortfalls be required to raise new equity promptly, creating a real-time market test of solvency.
Regulators’ Missteps: Comedy, Tragedy, and Horror
Ross Levine, Booth Derbas Family/Edward Lazear Senior Fellow at Hoover and co-director of the Financial Regulation Working Group, served as discussant for the panel conversation, organizing his discussion of the report around three narratives: comedy, tragedy, and horror. The “comedy,” he explained, referred to the almost absurd breakdown in communication between monetary and financial policymakers—with leading officials on the same floor of the Federal Reserve seemingly unable to coordinate or even comprehend basic duration risk. This observation raises a serious question: Even with better training and regular coordination meetings, can regulatory agencies tackle complex, evolving threats such as crypto assets and non-bank financial intermediaries (NBFIs)?
The “tragedy” referenced the repetitive cycle of crises and post-crisis reform checklists that ultimately fail to address underlying political economy constraints. Levine referred to those obstacles identified in Fragile by Design, a book by Charles W. Calomiris and Stephen Haber that explores how politics inevitably intrudes into bank regulation. Levine pressed the panelists on whether the current reform proposals risk becoming another iteration in this cycle. He asked how the report authors’ thinking on political economy influenced their recommendations and whether they saw realistic pathways for overcoming institutional inertia.
The “horror” stemmed from the phenomenon described by banking supervisor Aristóbulo de Juan in his book From Good to Bad Bankers: good bankers transform into bad bankers as incentives deteriorate. Levine questioned whether capital requirements alone could shape incentives or if governance reforms and ownership structures should be brought into sharper focus.
Levine further encouraged the panel to clarify the purpose of banking regulation—whether it should be narrowly aimed at shielding taxpayers from bailouts or more broadly designed to foster the efficient allocation of capital. He suggested that the latter framing could make the authors’ policy prescriptions even more compelling.
Additional Vulnerabilities within the Financial System
The discussion also ventured into the challenges of NBFIs. Levine asked how the recommended reforms might interact with this rapidly growing and increasingly interconnected segment of the financial sector. Additionally, he raised a provocative question regarding European banking: Given persistently low valuations and structural inefficiencies, will deeper integration and cross-border consolidation provoke failures, and are European authorities prepared for that eventuality?
As moderator of the discussion, Stephen Haber, Peter and Helen Bing Senior Fellow at the Hoover Institution and director of the Hoover Prosperity Program, added an important lens of institutional design and political feasibility. Drawing on his work in Fragile by Design, he prompted both presenters and the discussant to consider the durability of reforms in the face of vested interests and shifting political coalitions.
Urgent Priorities for Fostering an Efficient, Stable System
In closing, the panel coalesced around several urgent priorities: completing and enforcing Basel III without further delay; improving the integration of monetary and financial stability policies; rationalizing the fragmented supervisory architecture in the United States; and advancing banking union in Europe with a robust deposit guarantee scheme. The authors also emphasized the need for stress-testing frameworks in ways that go beyond checkbox exercises to actively address tail risks, as well as contingency planning for global systemically important banks (G-SIBs) that include real-world tests of recovery and resolution mechanisms.
However, the discussion made it clear that while regulatory reforms are important, the fundamental source of fragility lies in the excessive leverage of banks. Raising more equity capital is the ultimate antidote to ensuring that banks can withstand shocks—whether they arise from interest rate risk, as seen in 2023, or credit risk, as in the GFC. Regulation and supervision have their limits; banks must internalize the risks they take. Shadow banks, which provide many similar intermediary services, often operate with significantly higher equity capital, offering a striking contrast and a potential model.
The panel event highlighted that the banking turmoil of 2023 was not merely a failure of risk management or of regulatory vigilance but a manifestation of deeper systemic and institutional weaknesses. The Geneva Report and the discussion underscored that without bold, integrated reforms—and most important, significant increases in equity capital requirements to reduce systemic leverage—financial systems will remain prone to crises with costly spillovers for economies and taxpayers alike.
Watch the full discussion here.
About the Hoover Prosperity Program
The Hoover Prosperity Program conducts evidence-based research on the institutions and policies that foster economic prosperity amid today’s public policy challenges. The program is dedicated to producing research that empowers citizens and policymakers to make informed decisions a core question: What combination of laws, institutions, policies, and regulations is most likely to foster long-term economic prosperity?
About the Financial Regulation Working Group
Which financial regulatory reforms promote economic prosperity? And why do societies find it so difficult to create financial systems that are both efficient and stable? The Financial Regulation Working Group convenes an interdisciplinary network of scholars from economics, finance, law, political science, and history. Our goal is to spur research addressing these pivotal questions and disseminate the findings to the research community, policymakers, and the wider public. The Financial Regulation Working Group is an initiative of the Hoover Prosperity Program.
