By Peter Reagan
Most Americans don’t spend their evenings reading bank regulation testimony.
I don’t blame them. Between work, family, bills and everything else life throws at us, very few people have the time or patience to track the fine print of financial regulation.
The trouble is, those boring rules can become very important very quickly – especially when risk builds quietly inside the banking system.
Some of us are wired to notice these obscure policy stories. Most people quite reasonably are not.
It’s division of labor in the economy. They might learn information that they can use from me, while I can appreciate that they can replace my car’s transmission, which I have no business even trying to do.
So, going back to people’s (lack of) interest in economics and monetary theory… I do have a great interest in these topics, so a recent news story got my attention… and gave me flashbacks to nearly twenty years ago.
Testifying before Congress
What is going on is that the “regulatory chiefs” of the FDIC (Federal Deposit Insurance Corporation), the Office of the Comptroller of the Currency, and of the Federal Reserve are scheduled to testify before Congress about regulations (no surprise, I know).
Specifically, according to Reuters, they’ll be making the case for reducing regulations on banks.
Their reasoning? To create an environment for economic growth, and there is a certain logic to that. After all, reduced regulations in some areas could mean that loans would be more easily granted, and this could help people who otherwise might not be able to get access to that capital to actually start or expand their businesses.
And the flip side of deregulation is historically also true: increased regulation often has a dampening effect on both the economy and on innovation in sectors that are highly regulated.
The Bank Policy Institute essentially implied that in an article in which they stated that regulations on banks, even when put into place to help consumers, can have the effect of making loans harder to get.
And ask anyone in business: loans, for many businesses, are what they have to look at in order to start or expand their business. So, if loans are harder to get, then the number of new businesses decreases as does the number of growing businesses.
The statement wasn’t made so clearly, but I suspect that this is another step encouraged by the Trump administration to get the economy growing at a more rapid pace. And to be fair, that is a goal most Americans can support. The harder question is whether faster growth built on looser financial rules also means more hidden risk.
Frankly, most Americans want the economy to thrive no matter who controls Washington. I certainly do. The question is not whether growth is good. The question is what kind of risk we accept in the name of growth.
Balancing risks and rewards
The concern is not imaginary. Many analysts have argued that weak oversight, excessive leverage, poor lending standards and badly designed incentives all helped set the stage for the 2007–2008 financial crisis. Deregulation was part of that broader debate – but the deeper issue was risk that had been allowed to build out of sight.
The “Great Recession,” we call it, or sometimes just the Global Financial Crisis.
Put another way, some people get very alarmed by the idea of deregulating banks because they don’t want a repeat of that crisis situation.
And who can blame them? During that time period, home building slowed down, GDP fell 4.3%, and unemployment doubled. It was both the deepest and the longest lasting recession since World War II.
And people who went through it remember that the recession just seemed to show up all of a sudden. It came as a surprise.
While some of that surprise may have been because not everyone pays attention to the news, and the news doesn’t always report these kinds of boring (but important) stories, a big part of the reason that the recession snuck up on people is because…
… risk is invisible… until it isn’t.
If you don’t know what to look for, you don’t know when a danger is heading towards you, and even if you do know what to look for, not all risks are so easy to spot.
That is the basic promise of financial regulation: to limit risks ordinary people cannot reasonably see for themselves.
Most Americans cannot examine a bank’s balance sheet, model its exposure to bad loans or judge whether its managers are taking too much risk. They have to trust that someone is watching.
If you lean towards free market thinking and wonder why people want more government regulations on industries, for most of those people, this is why. They’re aware on some level that they don’t know how to see what’s coming for them, so they’re depending on government regulations to protect them from that threat.
The problem with that thinking is that regulations can’t protect you from every threat, and a big reason for that is because…
Focusing on regulations is focusing on the wrong thing.
Even when well intended, regulations are trying to put guardrails on a situation.
Regulations are guardrails. They matter. But guardrails do not change the driver’s destination.
The deeper issue is incentives. If a bank is rewarded for taking bigger risks during good times, and then rescued when those risks go bad, no rulebook can fully solve the problem.
Regulations aren’t the solution precisely because they fail to address the underlying problem, which is incentives.
Banks are businesses. Like other businesses, they are rewarded for growth. But unlike a local hardware store or auto parts shop, a large bank’s mistakes can ripple through households, businesses and the broader financial system.
The difference with banks compared to your local auto parts store is that when a bank makes an unwise decision in order to grow, it can affect all of their customers and other people, too, who are affected by disruptions of the banking system.
Your parts store just closes down when it makes a bad decision, and you find another one to drive to or order from.
With bank bailouts and other regulatory shenanigans of banks, banks have an incentive to do whatever they can do to grow because they have little to no reasons not to. History has shown that when large financial institutions become important enough to the system, Washington often feels pressure to step in during a crisis. That creates a dangerous incentive problem: gains can remain private during the boom, while losses can become everyone’s problem when things break.
That does not mean banks face no consequences. Some fail. Executives can lose jobs. Investors can lose money.
But the largest institutions often operate with a different kind of safety net than ordinary Americans do. And that is what makes the incentive structure so troubling.
Regulations on banks are supposed to prevent that growth at all costs thinking on the part of banks and bank managers.
This unchecked and without consequence growth of banks matters to you and me even if it doesn’t really matter to the people who should be keeping that in check because we are the ones who pay for it. I mean, nobody wrote a check payable to “Bank Bailout,” but we absorbed the fallout anyway: Tighter credit, job losses, money-printing and the subsequent inflation – and years of economic uncertainty after the crisis has supposedly passed.
We want bank growth, but the lack of consequences for them makes this financially dangerous.
This does not mean Americans should panic about banks. FDIC-insured bank deposits have a specific role in everyday life. We need checking accounts, debit cards, bill pay and access to cash.
But it is fair to ask a broader question: Should every dollar of long-term savings depend on the same financial system, the same institutions and the same policy decisions? Remember, we aren’t just talking about bank deposits now – we’re talking about the entire debt-based financial system. We’re talking about every IOU and promise to pay, the promises that most people call “assets.” Because they are just as dependent on the system running smoothly than my ATM card.
That is where physical precious metals can play a useful role. Obviously, they are not a substitute for a bank account. However, owning physical gold and silver is one way to diversify your savings outside a financial system teetering on a mountain of leverage, credit and promises. Unlike virtually every other financial asset, physical precious metals aren’t complicated! They don’t come with waivers and 600-page prospectus documents. Their value doesn’t depend on someone else’s promise. They’re one of the very few real assets you can own outright, with no intermediary or institutional involvement.
To find out more about how diversifying into precious metals can benefit you (and do it in a tax-advantaged way), get a free copy of our 2026 Precious Metals Info Kit. It is designed to help you understand the options, the benefits, the risks and the process of owning physical precious metals. It’s always smart to get the facts before you make any decisions.