Tougher liquidity and capital requirements will leave banks vulnerable to a commercial real estate crisis

 No bank is safe if depositors believe it is insolvent and withdraw their funds en masse. Nowadays this can happen with lightning speed, thanks to social media and online banking.

Regulators cannot possibly set liquidity requirements high enough to avert short-term liquidity squeezes without rendering small- and medium-sized banks unprofitable, unless banks charge much higher rates for loans. 

This would encourage disintermediation through money-market funds, commercial credit brokers, fintech and private equity, where ordinary consumers and businesses face less safety.

Higher capital requirements would reduce the losses the FDIC endures when banks fail, but those would similarly reduce bank profitability and drive deposits and lending outside the regulated banking sector.

Peter Morici MarketWatch 9 May 2023


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