During the Great Depression, 9,000 of the nation’s 25,000 banks failed as depositors as everyone rushed to withdraw their funds amidst great panic about the liquidity of banks. The Federal Deposit Insurance Company (FDIC) was established in June 1933 to ensure deposits, resolve banks that fail and reduce the likelihood of another run on the banks. Subsequent actions by the FDIC created banks that were “Too-Big-To-Fail.” The failure of large banks can cause instability but the FDIC must allow them to occur, say James R. Barth, the Lowder Eminent Scholar in Finance at Auburn University, and Apanard Prabha, an economist in the Financial Research group at the Milken Institute.

Before 1950, if a bank was failing, the FDIC could either liquidate a bank and pay off insured depositors or arrange for the bank’s acquisition by a healthy bank. After 1950, the FDIC was allowed to infuse funds into banks to address any temporary funding problems.

Banks do not need more regulators. To ensure that catastrophic financial contagion like the United States experienced in 1930 and 2007 does not happen again, regulators need to enforce existing regulations instead of creating new ones. Policymakers must allow big banks to fail and the FDIC’s new liquidation authority to wind down banks without huge injections of taxpayer money.

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