The Federal Deposit Insurance Corporation (FDIC) is expected to lose about $13 billion due to the second-largest retail bank failure in America's history, First Republic Bank, which JPMorgan Chase mostly took over on May 1st.

The ongoing banking crisis, which began with the collapse of Silicon Valley Bank and Signature Bank, has resulted in plunging stock prices for regional banks such as PacWest and Western Alliance.

While these banks have reported relatively stable deposit bases and don't sit on mountains of soured loans, analysts believe they face a crisis of confidence, which could spook depositors and upend their ability to operate normally.

US regulators should urgently address the rules allowing small banks to operate with thin safety cushions and stress-test the whole system for risks from rising interest rates, following European standards.

As more failures are likely to require capital injections, the government should craft deals that could benefit taxpayers, such as taking equity stakes in joint ventures with acquiring banks. This approach would be more effective than propping up insolvent institutions with backdoor subsidies.

Source: Visual Capitalist

At the same time, the FDIC has released a report saying it would consider changes to its rules, potentially providing higher levels of insurance to business payment accounts to maintain depositor confidence without creating moral hazard problems.

In response to the ongoing crisis, regional banks like Zions have had executives invest in their falling stocks. Banks like PacWest and Western Alliance have been eager to open their books to reassure investors. This transparency is crucial in restoring confidence in the financial sector, as losing faith in a financial institution can be hard to repair.

The banking sector may benefit from increased transparency and communication with the public to address concerns and restore confidence. This could involve providing regular updates on the financial health of banks and the steps taken to improve their stability. This transparency may help prevent the spread of unfounded rumors or panic, which can exacerbate a crisis of confidence.

Another potential solution is encouraging and facilitating mergers and acquisitions among banks, which can create more robust and well-capitalized institutions. This consolidation process can help improve the banking sector's resilience and ensure that it is better prepared to face future financial challenges.

No matter the final course of action, policymakers and regulators must monitor and address the role of short sellers in contributing to market volatility. While short selling can provide valuable market signals and promote price discovery, it can also contribute to market instability when it becomes excessive or manipulative. Regulators should consider implementing appropriate measures to prevent market manipulation and maintain orderly market functioning.

Regulators, policymakers, and banks must work together to implement measures that ensure the long-term health and resilience of the banking sector, which is essential for economic growth and stability.

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