Over just one week in 2023, depositor runs at a few U.S. banks threatened a worldwide banking crisis. Afterwards, the United States would suffer three of the biggest bank failures in the nation’s history.
In Europe, Credit Suisse became the largest financial institution to fail since the 2007-2008 global financial crisis.
In the wake of the run, lawmakers, regulators, and academics have called for significant changes to the U.S. financial regulatory framework.
Leading among these proposals are calls to improve supervisory oversight of banks, to tighten existing regulations on banks, and to increase deposit insurance limits.
But Will Thomas and colleagues at the University of Michigan – Kyle Logue and Jeffrey Zhang – now say that these proposals alone are insufficient to stop the next wave of bank collapses, and they might even exacerbate a central problem contributing to bank runs: the bankers themselves.
In a new paper – Sanctioning Negligent Bankers – they argue that proposed banking reforms should be paired with a credible sanctions regime imposed upon negligent bankers.
They propose pushing oversight duties back into the C-suite through a civil penalty designed to disgorge compensation from a bank executive whose negligence substantially increases the risk of a bank collapse.
They defend the theoretical basis for such an approach, including why a civil penalty, rather than criminal punishment, is the best solution to this problem – identify key features of our proposed liability regime, distinguishing it from previous proposals to hold bankers accountable and then identify and evaluate preliminary implementation considerations for Congress and regulators to consider.
“It is time to bring personal accountability back into the picture by pairing regulatory improvements with a credible sanction regime for bank executives,” the authors conclude. “We have described here a framework in which a well-designed negligent banker sanction – one without an insurance backstop – can bring reassurance by shifting the prospect of liability onto the group best situated to prevent it: bank executives. Implementing this framework of shifting more responsibility back onto the decisionmakers in the C-suite could lead to the financial stability desperately sought by policymakers.”
“This paper came about after discussions in the aftermath of this very lightning fast banking crisis we had in 2023 that was started by the collapse of Silicon Valley Bank,” Thomas told Corporate Crime Reporter in an interview last week. “And the three of us came together. One of us is a banking expert. One is an insurance expert, and I’m in the white collar space. And we were trying to figure out – how can we respond to bank runs?”
“The traditional story of how the United States got a handle on bank runs is through FDIC insurance,” Thomas said. “In essence, what the government has said is we want to make depositors feel comfortable participating in the national banking system. The way we’re going to do that is we are going to heavily regulate banks and financial institutions on the front end and then and on the back end, we’re going to say – if something happens, if this entity fails, don’t worry, depositors, we have your back. The government will, in essence, bail you out.”
“What we found in 2023 is that that old system, while it’s still in place, has a weakness to it. And one weakness is that the FDIC only insures up to a certain amount. They insure up to $250,000 per depositor. And most people in the United States are never going to come anywhere close to hitting that cap. 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.”
“So when that crash happened, lots of people started suggesting we need to fix this old insurance policy. That’s going to solve the banking crisis. And maybe that’s true, maybe that’s going to solve the acute problem. But what we started to worry about is – the moment you provide insurance, you create moral hazard, you create new risks. And our particular worry is, there’s already a risk about bankers not monitoring, being negligent. The kinds of reforms that everybody is clamoring for right now are only going to exacerbate that problem.”
By moral hazard, you mean that because these banks are insured, the bank executives are more likely to take risks because the government is going to bail them out?
“Exactly right. 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. So the insurance is encouraging more risk from the leaders of the banks than we probably want to see out there.”
But you’re not arguing to get rid of the insurance?
“We agree with the consensus here. Deposit insurance is great. It has been very successful at solving this very important systemic problem of bank runs in US history. On the other hand, the reason that deposit insurance has been so successful, specifically in the United States, is that the United States has always taken a carrot and stick approach. The carrot is the insurance. And the stick is aggressive ex ante regulation.”
“In other words, the banks don’t get anything for free. There is going to be oversight. Right now, there’s a lack of after the fact regulation of bankers. What we’re proposing is some kind of sanction regime for the bankers who really do screw up.”
There currently is a sanctions regime. Doesn’t bank regulation mean that there are rules of the road, and if you violate the rules of the road, you are sanctioned?
“There are some regulations out there. Most of the regulatory body is geared toward the institution, toward the bank writ large, as opposed to individual bankers. There are, in fact, some rules that apply specifically to the bankers themselves. In really extreme over the top cases, where someone is involved with embezzlement or fraud, there are criminal laws that backstop the regulations. And there are a handful of other regulatory responses.”
“One thing that we point out is, 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. They see themselves in more of a front end regulatory mode. There are not many powers for regulators to go after individual bankers, but to the extent they exist, one of the things we’re arguing is we need a sanctions regime that sort of takes away some of that discretion from the regulators.”
You argue that bank collapses are like industrial disasters. What do you mean?
“We look back at the law and economics literature about modeling out optimal enforcement practices. And I should be clear, this paper is not motivated by the idea that we need to go after the bankers because they’re evil or something like that. We just want to get a well balanced deterrence regime in place so that we get a vibrant banking economy without extra risk.”
“To do that, we look at law and economics literature to see – how do you design an optimal enforcement regime? There’s a whole literature about – how should you design enforcement to internalize the risk of a massive industrial disaster, a plane crash, an environmental explosion, something like that. What we see from that literature is that we need to do two things.”
“One, you have to have an incentive for the firm – some kind of corporate penalty that’s going to encourage the firm to police its own behavior. But that’s not enough by itself. You also have to have some kind of separate risk or sanction for the individuals inside the firm. The firm can kind of police its own employees up to a point, but you have to have this hybrid model of sanction for the firm and sanction for the individual to really get an optimal outcome.”
“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.”
And what would that sanction be?
“There are sanctions that can be imposed on bankers for outright crimes. We think that’s great. We’re not looking to sort of create new crimes, because we actually want to capture a lot of the behavior that falls short of criminal activity. We want to capture the bankers who are taking undue risks by being grossly negligent.”
“The way we’ve designed the sanction is we lay out – here are the legal standards, here are the triggers for when this thing kicks in, and here are the sanctions.”
“The basic structure is that we are looking to implement a clawback provision that says, in the event of a bank collapse, whether the bank actually collapses or is taken over by the federal government, this enforcement action automatically kicks in. And if the government can demonstrate negligence by any of the bankers that somehow contributed to that collapse, then they bankers are going to have to pay a sanction, and the sanction is going to be calculated based on how much that banker made over the past five years.”
“Think of it like a clawback. All the money that you made in your position is going to be clawed back by the government.”
[For the complete q/a format Interview with Will Thomas, 40 Corporate Crime Reporter 4(13), January 19, 2026, print edition only.]