Raise bank equity or keep rolling the dice

Amit Seru Amit Seru is a senior fellow of the Hoover Institution and a professor of finance at Stanford Graduate School of Business · 25 Oct 2025

The latest disclosures from Arizona’ s Western Alliance Bank and Utah’s Zions Bank aren’t “one-off cockroaches ”. They’ re a tell. When regional lenders surface multi million-dollar losses tied to alleged borrower fraud after three years of rate-driven balance-sheet damage, it is a reminder that big parts of US banking have been blinking red for awhile.

This did not begin with fraud. It began with interest rate risk. When the US Federal Reserve tightened monetary policy in 2022, long-duration assets fell in value.

My colleagues and I estimated that this resulted in roughly $2tn of unrealised losses through early 2023— broadly equal to the banking system’ s equity buffer. US banks had roughly $9tn in uninsured deposits—pure flight risk when doubts rise.

That is how you get solvency run seven on liquid assets— rates jump, asset values fall, uninsured money runs and losses that were “unrealised” suddenly become real. Silicon Valley Bank alone saw $42bn withdrawn in hours and an extra $100bn queued for the next day.

The correct policy pivot would have been to re structure the weak and recapitalise the viable. Some banks needed consolidation or resolution and others needed to raise common equity.

Instead, Washington rolled out the big hoses. The Fed’ s Bank Term Funding Program (BTFP), backed by $25bn in Treasury credit protection, and a surge in Federal Home Loan Bank (FHLB) advances that peaked at more than $1tn, treated insolvency as if it were a shortterm liquidity hiccup.

The message was clear—government liquidity would cover capital short falls. That stabilises headlines but invites the oldest response in banking, gambling for resurrection.

When the state cushions deposit flight, the marginal loan looks free. No one should be surprised when these loans prove imprudent. The newest revelation sat regional banks are simply the next manifestation.

If this sounds obvious—gravity points down wards—it is. Yet our regulatory reflex since 2008 has been to add complexity and discretion rather than fix the core design. Supervisors rotate, standards wobble and enforcement timing becomes a coin toss.

In the dual-charter system, the same bank can be treated differently by state and federal teams, the former being demonstrably more lenient. Delay is how small problems become large ones. This is precisely why the lever that works isn’ t more complexity—it’ s more equity.

Meanwhile, the “Basel End game” measures meant to lift big bank requirements are being re opened with industry-friendly re writes likely pushing finalisation into early 2026.

Some simplification is healthy— End game chiefly tweaks risk-weight capital for large banks and does not fix interest rate risk in banking or uninsured deposit runs, sore opening it to lower effective capitalist he wrong call. Lower capital across a system still carrying rate-cycles cars misreads the moment.

Here is the uncomfortable arithmetic policy makers keep wishing away. US banks fund risky, duration-sensitive portfolios with extremely thin equity cushions. Non-bank lenders carry several times more equity and, unsurprisingly, they run less.

Raising common equity need not choke credit, it reroutes it—banks can sell loans instead of keeping them on the balance sheet and non-banks can step in.

Where costs doris eat the margin, research shows that these are mode stand out weighed by benefits of fewer crises.

The remedy is straightforward—start with the solvency test that actually matters. Mark risk realistic ally and assume a plausible uninsured deposit run. For viable franchises, enforce capital raises.

Simplify the rule book around capital, use discretion sparingly and establish thresholds that restrict payouts and, if needed, trigger resolution. Stream line the system so the same institution is not playing rule book roulette, depending on who shows up to examine it.

And stop subsidising short-term, runable funding. If you are going to guarantee it in practice, price it explicitly and pair that with higher equity so the guarantee is not a free option.

Will all this feel costly to bank shareholders? Of course. That is the point. Losses belong with risk-takers, not taxpayers. The alternative is the cycle we are in—declare victory because “contagion” did not happen, then, once the political heat fades, discover the risks banks took while the safety net was out.

The US can keep pretending complex regulation will make thinly capitalised banks safe—or it can fix the design by requiring much higher common equity and resolving the weak. Banking is not exempt from physics. We can wish gravity pointed up. It never does.