Regulators get detailed daily information on a bank’s positions, including values. On failure to have adequate capital, all financial contracts the bank is involved in could cease and their value be fixed - converting them to simple debits and credits for the liqidator to sort out, no longer subject to market movements. Where the fair values turn out to be badly wrong, the regulator should pick up the tab for doing a bad job!

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages.”

1776!

It is in the banks interests to have a healthy economy though. There is no point in the banks earning lots of money if it becomes worthless thanks to inflation, or if it is going to lead to their business drying up in a few years. Unfortunately thanks to competition there is nothing the banks can do to protect the economy that makes good business sense. That’s where the government’s role comes in. The government has not set up a framework with the bailouts that helps the economy, and the banks are certainly not going to be benevolent.