Beyond Bailouts: University of Michigan Scholars Propose Personal Accountability for Negligent Bankers Amidst Global Financial Instability

The year 2023 witnessed a startling resurgence of financial instability, as a rapid succession of depositor runs at several U.S. banks ignited fears of a global banking crisis. Within a single week, the United States endured three of its largest bank failures in history, while across the Atlantic, Credit Suisse became the most significant financial institution to collapse since the cataclysmic global financial crisis of 2007-2008. The events sent shockwaves through markets and prompted an immediate clamor for systemic reform, with lawmakers, regulators, and academics advocating for significant overhauls to the U.S. financial regulatory framework.

Common proposals emerging from this crisis include calls for enhanced supervisory oversight of banks, stricter enforcement of existing regulations, and an increase in federal deposit insurance limits. However, a new paper from a team of University of Michigan scholars — Will Thomas, Kyle Logue, and Jeffrey Zhang — challenges the sufficiency of these widely discussed measures. In their seminal work, Sanctioning Negligent Bankers, they contend that such reforms, while potentially beneficial, are inadequate on their own to avert future waves of bank collapses. More critically, they argue that these proposals might inadvertently exacerbate a core vulnerability contributing to bank runs: the unchecked behavior of bankers themselves.

The Michigan trio posits that a crucial element is missing from the current reform discourse: a credible sanctions regime directly targeting negligent bankers. They advocate for a system that reintroduces personal accountability into the C-suite, proposing a civil penalty designed to claw back compensation from bank executives whose negligence significantly escalates the risk of institutional failure. This approach, they argue, offers a robust theoretical basis, distinguishing itself from previous proposals by focusing on civil rather than criminal penalties and aiming to shift the burden of liability onto those best positioned to prevent future crises.

The Tumultuous Year of 2023: A Chronology of Crisis

The seeds of the 2023 banking turmoil were sown in the preceding years, as a period of historically low interest rates gave way to aggressive rate hikes by the Federal Reserve to combat soaring inflation. Many banks, including Silicon Valley Bank (SVB), had invested heavily in long-duration, low-yield bonds when rates were low. As interest rates surged, the market value of these bonds plummeted, creating substantial unrealized losses on their balance sheets.

The crisis truly erupted on March 8, 2023, when SVB, a prominent lender to technology startups, announced a plan to sell a significant portion of its securities portfolio at a loss and raise capital. This disclosure triggered widespread alarm among its highly interconnected client base, many of whom held deposits far exceeding the Federal Deposit Insurance Corporation (FDIC) insured limit of $250,000. Social media amplified the panic, leading to an unprecedented digital bank run. On March 9, depositors attempted to withdraw $42 billion, an amount that would have been the largest bank run in U.S. history. By March 10, regulators closed SVB, marking the second-largest bank failure in U.S. history, with approximately $209 billion in assets.

The contagion was swift. Just two days later, on March 12, New York-based Signature Bank, another significant lender to the crypto industry and businesses with large uninsured deposits, was also closed by regulators. With $110 billion in assets, it became the third-largest bank failure in U.S. history. The failures prompted emergency action from U.S. authorities, including the Federal Reserve, Treasury Department, and FDIC, who announced extraordinary measures to backstop all deposits at both failed institutions, even those exceeding the $250,000 insured limit, to prevent broader systemic collapse. This intervention, though crucial for stabilizing the immediate crisis, raised questions about moral hazard and the perceived "too big to fail" doctrine.

The ripple effects extended beyond these initial collapses. Regional banks across the U.S. experienced significant outflows and declining stock prices. First Republic Bank, another institution with a high concentration of uninsured deposits, faced immense pressure. Despite a $30 billion lifeline from a consortium of larger banks, First Republic ultimately succumbed to depositor flight and was seized by regulators on May 1, 2023, subsequently sold to JP Morgan Chase. Its failure, with $229 billion in assets, became the largest bank failure since 2008.

Simultaneously, Europe grappled with its own crisis. Swiss banking giant Credit Suisse, long plagued by scandals and financial woes, saw its shares plummet amidst investor concerns following the U.S. failures. Despite assurances from Swiss authorities, confidence eroded rapidly. On March 19, 2023, in a desperate move to avert a full-blown collapse, the Swiss government orchestrated a forced takeover of Credit Suisse by its rival, UBS, for approximately $3.25 billion. This marked the largest failure of a systemically important financial institution in Europe since the 2008 crisis, underscoring the interconnectedness of global finance and the fragility exposed by the rapid pace of withdrawals in the digital age.

Unpacking the U.S. Regulatory Framework and Its Gaps

The 2023 crisis laid bare inherent weaknesses in a regulatory system largely designed in response to previous financial upheavals. The cornerstone of U.S. deposit protection, the FDIC, was established in 1933 in the wake of the Great Depression. Its creation was a direct response to the widespread bank runs that saw millions lose their life savings, severely eroding public trust in the banking system. By insuring deposits, the FDIC aimed to prevent future panics, ensuring that even if a bank failed, depositors would recover their funds up to a certain limit. This "carrot" of insurance proved remarkably successful in fostering stability and rebuilding confidence, allowing the national banking system to thrive.

The initial insurance limit was $2,500, a substantial sum at the time, and it has been progressively increased over the decades, most recently to $250,000 per depositor per insured bank, in response to the 2008 financial crisis. This robust insurance scheme, coupled with a comprehensive array of ex ante regulations governing capital requirements, liquidity, and risk management, forms the "stick" of the traditional U.S. approach. Banks operating under this system receive the benefit of deposit insurance but must adhere to strict rules enforced by various federal and state regulators.

However, as Will Thomas explains, the 2023 crisis exposed a critical vulnerability in this historically effective system. "What we found in 2023 is that that old system, while it’s still in place, has a weakness to it," Thomas told Corporate Crime Reporter. "And one weakness is that the FDIC only insures up to a certain amount… Most businesses are way above that cap. And Silicon Valley Bank is an example of what happens when a lot of your depositors are in the second bucket." Indeed, at SVB, an estimated 89% of its deposits were uninsured, totaling well over $150 billion. This high concentration of uninsured, corporate deposits made the bank acutely susceptible to a run, as large businesses could swiftly move massive sums of money, triggering a liquidity crisis that standard FDIC insurance was not designed to prevent at that scale.

Moreover, the existing regulatory framework, particularly in the aftermath of the 2008 crisis and the passage of the Dodd-Frank Act, has largely focused on institution-level accountability. While Dodd-Frank introduced stricter capital and liquidity rules, especially for "systemically important financial institutions," and created the Financial Stability Oversight Council, its provisions for individual accountability for bankers often fall short of addressing negligence. Although criminal laws exist for outright fraud or embezzlement, and regulators possess some powers to bar individuals from the banking industry, the consistent application of sanctions against individual executives for significant but non-criminal failures in risk management has been sporadic at best. Thomas notes, "Most of the regulatory body is geared toward the institution, toward the bank writ large, as opposed to individual bankers… it has been clear for a while that the regulators are not really interested in bringing enforcement actions against individual bankers, they don’t see themselves as sort of cops on the street." This regulatory lacuna creates a critical gap in the "stick" component of the U.S. system.

The Problem of Moral Hazard: Why Current Reforms May Fall Short

The concept of moral hazard is central to the Michigan scholars’ critique of prevailing reform proposals. Moral hazard arises when one party takes on more risk because another party bears the cost of that risk. In the context of banking, deposit insurance, and especially government interventions that protect uninsured deposits, can inadvertently create an incentive for bank executives to take on excessive risks. Knowing that depositors are protected—either by FDIC insurance or, in times of crisis, by broader government backstops—bankers may feel less compelled to prioritize the safety and soundness of their institutions over maximizing short-term profits.

Thomas articulates this dilemma clearly: "As a banker, you have two jobs. Don’t lose your depositors’ money and make a profit for the bank. You gotta balance those two jobs. Well, the government is taking that first job off the table — they are telling the bankers — don’t worry you, you can’t lose depositors money. Well, that just means you’re going to tilt hard towards — let’s do something risky and make as much money as possible."

This dynamic was demonstrably at play during the 2023 crisis. SVB executives, for instance, made significant bets on long-term, fixed-rate securities without adequately hedging against interest rate risk. Their business model also relied heavily on a concentrated base of large, uninsured corporate deposits, making the bank inherently vulnerable to rapid outflows. While these decisions were not necessarily criminal, critics argue they demonstrated a profound lack of prudent risk management, driven, in part, by the pursuit of higher returns in a competitive environment, with the implicit assumption that the systemic consequences of failure would eventually be absorbed by the public or the broader financial system.

Proposals to simply increase deposit insurance limits, while addressing the immediate concern of uninsured depositors, would, in the view of Thomas and his colleagues, only amplify this moral hazard. If more deposits are insured, bankers face even less direct pressure from their depositors to maintain conservative balance sheets, further encouraging risk-taking. While acknowledging the undeniable success of deposit insurance in preventing historical bank runs, the authors stress that this "carrot" must always be balanced by an equally robust "stick" to prevent excessive risk-taking.

The University of Michigan Proposal: A New "Stick" for Bankers

It is against this backdrop that Will Thomas, Kyle Logue, and Jeffrey Zhang present their innovative framework in Sanctioning Negligent Bankers. Their interdisciplinary collaboration, drawing on expertise in white-collar crime, insurance law, and banking regulation, seeks to introduce a missing layer of accountability for individual executives.

The core of their proposal is a robust civil penalty regime that targets negligent bankers. Unlike criminal sanctions, which require a high bar of intent (such as fraud or embezzlement), this civil regime would address "gross negligence" – situations where bankers’ actions or inactions fall significantly below the standard of care expected, substantially increasing the risk of a bank’s collapse.

The mechanism is designed to be largely automatic: in the event of a bank collapse or a government takeover (such as the actions taken with SVB or Signature Bank), an enforcement action would automatically trigger. If the government can then demonstrate that an executive’s negligence contributed materially to that collapse, the executive would be subject to a "clawback" of their compensation. The proposed sanction would be calculated based on the executive’s earnings over the preceding five years, effectively disgorging the financial gains accrued during the period leading up to the failure. Crucially, the authors emphasize that this sanction should operate "without an insurance backstop" for the executives themselves, ensuring that the personal financial consequences are direct and unavoidable.

The theoretical underpinning for this approach draws heavily from the law and economics literature on optimal enforcement practices, particularly the models used to prevent industrial disasters. Thomas explains: "We think that same model actually makes a lot of sense in the banking context. These explosions in the financial sector have massive ripple effects. So how do you get a single bank to internalize the risk of causing that kind of harm? You need to both have sanctions against the bank, which we already have, but what we’re adding is a real sanction regime against the bankers."

This "hybrid model" of enforcement recognizes that corporate penalties alone are often insufficient. While a bank might face fines or restrictions, the individuals making the key decisions within the corporation may remain insulated from direct personal financial repercussions for negligence. By imposing a personal financial risk on C-suite executives, the proposal aims to create a powerful incentive for them to prioritize prudent risk management and long-term stability, mirroring the dual accountability found effective in industries where individual actions can lead to catastrophic public harm.

Implementation Considerations and Broader Implications

Implementing such a robust sanctions regime would undoubtedly present challenges. Defining "negligence" in the complex and often opaque world of financial instruments and risk management would require careful legislative drafting and judicial interpretation. There would also be a need to balance accountability with the concern that overly punitive measures could stifle innovation or deter talented individuals from entering leadership roles in banking, creating a "chilling effect" on necessary risk-taking. However, the authors emphasize that their proposal targets gross negligence that substantially increases systemic risk, not ordinary business misjudgments.

Despite these challenges, the potential benefits are substantial. A credible threat of personal financial clawback could fundamentally alter the risk calculus for bank executives. It would foster a culture of heightened personal responsibility, compelling leaders to exercise greater diligence in assessing and mitigating risks, especially those related to asset-liability mismatches, interest rate exposures, and the composition of their deposit base. This enhanced personal accountability would, in turn, contribute to greater institutional stability, reducing the likelihood and severity of future bank failures.

Furthermore, a sanctions regime for negligent bankers could help restore public trust in the financial system. The perception that individual executives often escape meaningful consequences for failures that impose massive costs on taxpayers and the economy undermines faith in the fairness and efficacy of regulation. By linking executive compensation directly to the prudent management of systemic risk, the proposal offers a powerful signal that leadership in banking carries profound personal responsibility.

The University of Michigan scholars’ paper serves as a vital call to action for policymakers. While immediate responses to the 2023 crisis have understandably focused on institutional reforms and deposit insurance, Thomas, Logue, and Zhang argue that a truly resilient financial system requires a more complete "carrot and stick" approach. By pairing regulatory improvements with a credible, non-insurable sanction regime for executives, the framework aims to shift responsibility onto the decision-makers in the C-suite, potentially paving the way for the enduring financial stability desperately sought by policymakers and the public alike. Their work opens a critical new avenue for debate, urging Congress and regulators to consider how personal accountability can serve as a potent deterrent against the financial "explosions" that threaten global economic well-being.