How Should U.S. Bank Regulators Respond to the COVID-19 Crisis?

Drawing on lessons from the 2007–2009 Global Financial Crisis (GFC) and a simple conceptual framework, we examine the response of U.S. bank regulators to the COVID-19 pandemic. We argue that the current regulatory strategy of “watchful waiting” — the same strategy that was used during the early stages of the GFC — poses unnecessary risks to the financial system and broader U.S. economy. Instead, promoting an early recapitalization of the banking system, by stopping dividends and by encouraging new equity issues, would be a more prudent way to manage the vulnerabilities the pandemic has created. We close by suggesting additional measures that we believe regulators should take in both the short and long run.