– Robert Bench, a former Deputy Comptroller of the Currency in the Reagan administration, is a senior fellow at the Boston University School of Law Morin Center for Banking and Financial Law. The views expressed are his own. –
Financial Institutions inherently are fragile, simply because they are intermediaries exposed to both exogenous and endogenous forces.
Externally, they are vulnerable to wars, weather, or worn-out economic conditions. Internally, they always are susceptible to excessive risk takings as well as inadequate controls over operations.
Therefore, financial institutions historically have projected strength two ways. First and most obvious have been their buildings, designed of granite, with strong doors and deep vaults, to show the institution was a “fortress” against troubled times. Less obvious, but more importantly, they maintained “fortress balance sheets” comprised of high levels of capital, high levels of liquidity, and massive “hidden” and “inner” reserves.
Accounting, tax, and regulatory policies accommodated salting away profits in good times, so they would be available to draw down during bad times, which were sure to occur. The policy bias in both the private and public sectors was to preserve stability within the “public utility” that is the financial system.