Senator Bill Hagerty (R, TN) and Treasury Scott Bessent disagree with The Wall Street Journal‘s editorial How to Make Banks Less Safe, an editorial with which I also disagreed. However, Hagerty and Bessent are wrong in their proposed solution.

They insist that the recent intermediate-sized bank “failures” (my euphemism quotes) stemmed from an intrinsic imbalance in protection for banks.

What explained the flight? A competitive imbalance: the biggest banks benefit from a perceived government guarantee that smaller institutions lack.

That protection imbalance is the Dodd-Frank entrench[ment of] the biggest banks as “too big to fail,” as Hagerty and Bessent correctly identified. Their solution is wrong, though.

…fortify our community banks against existential headwinds by raising the Federal Deposit Insurance Corp. limit. This would put community banks on a more even playing field with their larger competitors, and provide small businesses more certainty to maintain their payroll and other operating accounts with community banks in times of stress.

The correct answer is to take the “too big to fail” protection away from the allegedly systemically important banks and put them on the level of play on which their smaller competitors operate. There is no such thing as too big to fail in a competitive free market. Instead, hold all banks, regardless of size, to the quality of their management teams and those teams’ risk decisions. Do this further in large part by leaving the FDIC’s insurance cap at $250,000. The big players using the big banks will do a better job of moving among banks that are better led than others.

The market, which is individuals, small business, and international behemoths, will in its aggregate do a far better job of identifying well- and poorly-run banks, and imposing performance discipline on all of them, than can any government decision-making, which by design, is rife with political input rather than limited to economic input.