I was vacationing with family last week and paid little attention to flighty bank deposits or gyrating bank stocks. Fortunately, there were no new bank runs, but markets and regulators remain nervous about what’s to come. Up in the air: whether current bank troubles will cause a broader credit crunch that slows the economy.

But my question for the morning is this: Once the crisis is past, who will enforce discipline in the banking system? The likely candidates all seem to have disqualified themselves:

• Depositors. It was probably foolish to think that uninsured depositors would be a prime source of discipline for misbehaving banks, particularly in a case like Silicon Vally Bank, where customers were effectively required to hold deposits at the bank in return for loans and services. But by promising to bail out all the failed banks’ depositors, regulators have taken depositor discipline almost entirely off the table. (I say “almost” because regulators are still waffling on exactly who is covered by the deposit guarantee.)

• Investors. Kudos to the short sellers who saw this coming, and profited as a result. But their numbers were too small to be an effective police force against bank misbehavior.

• Regulators. We now know it was an error (if not an act of policy malpractice) to set $250 billion as the threshold for “systemically important” banks. The failed banks fell below that level but were declared systemically important all the same. Even more disturbing is the revelation that regulators probably wouldn’t have caught the problem anyway. Why? Because their “stress tests” didn’t deal with a rapidly rising interest rate scenario.

That last revelation is particularly disturbing. (You can read more about it in Shawn Tully’s excellent piece here.) We’ve known for over a decade that we were in a historically unprecedented era of low interest rates–and that a return to the norm would be likely, if not inevitable. So why would the Fed not “stress test” banks for the effects of higher rates? The Wall Street Journal attempts to explain the failure this weekend here. But it still boggles the mind.

Market failure is the best argument for imposing regulation. And regulatory failure is the best argument for imposing market discipline. But what happens when both fail? That’s the unanswered question.

More news below.

Alan Murray
@alansmurray

TOP NEWS

Twitter’s new valuation

Elon Musk has offered equity grants to Twitter employees, which values the company at $20 billion. This is significantly less than the $44 billion Musk paid to acquire the social media platform. The move may be an effort to retain staff amidst recent job cuts and uncertainty about the company's future. Bloomberg

Remote work still strong

Despite pressure to return to the office from execs, new data from economists show that remote work is picking up steam in U.S. metro areas. Job postings for roles that are “remote-friendly” are at record level highs. Investors worry that the current banking crisis and the desire for remote work will harm commercial real estate owners. Bloomberg

Wine funding fears

The collapse of Silicon Valley Bank has left wineries, which heavily relied on its wine division receiving more than $4 billion in loans, in a sticky situation. The relationship between start-ups and wine worked because of the clubbiness and the opportunities for generating relationships. At its crash, SVB was sitting on $1.2 billion in wine loans. Financial Times

AROUND THE WATERCOOLER

Lawmakers rebuff TikTok influencers trying to stop ban: ‘There’s absolutely no reason that an American technology company can’t do that’ by Haleluya Hadero and The Associated Press

Elon Musk has watched Twitter plummet in value and OpenAI soar after he parted ways with it by Steve Mollman

Investors brace for week of turmoil amid banking woes, interest rate hikes: ‘Things break when central banks tighten too much’ by Ye Xie and Bloomberg

The pandemic made homeownership harder for everyone. But single women are hurting the most by Alicia Adamczyk

Chance to host semiconductor factories under CHIPS Act has Oregon reconsidering rules against urban sprawl by Andrew Selsky and The Associated Press

This edition of CEO Daily was edited by Jackson Fordyce.