Simple improvement to banking regulations
Arnold Kling looks at the failure of Silicon Valley Bank and argues for mark-to-market accounting for banks.
When interest rates go up, the value of a portfolio of fixed-rate bonds or mortgages goes down. Roughly speaking, if the bank paid $100 to buy a long-term bond with an interest rate of 2-1/2%, and now the interest rate on a comparable bond is 5%, the bank’s bond is worth about $50.
The regulators should make you mark down the value of your assets to their current market value and force you to shore up your capital. They should make you stop paying dividends and executive bonuses, for one thing. You should not be allowed to make any more risky loans, because of the moral hazard: if the risk pays off, you return to profitability; if it goes badly, then the taxpayers take a bigger hit via the deposit insurance fund. You have an incentive to take desperate gambles.
Also, he points out that banks always fail if people think they might fail:
“Mortality can be fatal” means that if you are a bank, or a government, and too many people think that you are about to die, you’re dead. If you think that your bank is insolvent, and you are not covered by deposit insurance, you run on the bank. If enough people rush to withdraw funds, the bank dies.
It seems like forcing mark-to-market accounting for banks would greatly exacerbate the mortality of banks, which is what we're trying to avoid. Because it will create large and arbitrary swings in solvency that are transparent to everyone. This would clearly lead to people jumping to the "bank is in trouble" conclusion which becomes a self-fulfilling prophecy.
Seems like a better way would just be to increase capital requirements based on a general rule (e.g. interest rates and market values). It's a given that banks will toe whatever line you draw, so draw one that hits the sweet spot between allowing actual risk and causing unnecessary panics.