Last year, Marc Lasry, owner of the Milwaukee Bucks basketball team, revealed that star player Giannis Antetokounmpo once deposited his money in 50 banks, with no single account exceeding $250,000. Why? Because Antetokounmpo wanted every penny insured by the Federal Deposit Insurance Corporation. And $250,000 is the limit for insured deposits.
What Mr Antetokounmpo apparently failed to notice – but was driven home last week with the collapse of Silicon Valley Bank – is that the days of the deposit insurance cap are over. True, the law says there is a limit and the government must invoke a “systemic risk exemption” to protect uninsured deposits. But when a bank is about to collapse, there is always the specter of systemic risk.
“Since the S.&L. Crisis in the 1980s saves everyone,” said Karen Petrou, a co-founder of Federal Financial Analytics, referring to depositors.
Robert Hockett, a financial regulation expert at Cornell University, believes it’s time to make the overarching guarantee explicit. And he’s not alone: In the next few days, Rep. Ro Khanna, a California Democrat, is expected to introduce a bill proposing to raise or eliminate the FDIC’s coverage cap.
Mr. Hockett and others argue that insuring all deposits could improve the banking system. They say it doesn’t introduce moral hazard because the risk of deposits doesn’t keep the banks in check. Instead, what should keep bankers from acting too recklessly is the knowledge that shareholders and bondholders will be wiped out if their bank fails, executives are investigated and, in many cases, the government will seek to recover compensation.
Deposit insurance has long been financed by the banks themselves. Since 2005, their contributions have been ‘risk-weighted’, meaning the more risk a bank takes, the higher the premium it pays. Larger banks pay more than smaller banks. Mr Hockett’s plan would obviously require larger contributions – and stricter regulations – but he envisions a similar tiered system. It also envisions a return of measures like stress tests that Congress scrapped for midsize banks during the Trump administration.
Explicitly insuring all deposits, Hockett says, can prevent a run on a troubled bank because customers know in advance their money is safe. It could also help sustain small and medium-sized banks. Although SVB clearly mismanaged its risk, the bank served a sector it understood well: venture capitalists and start-ups. The loan portfolio was not the problem. Other smaller banks also specialize in certain sectors and are willing to lend that the big behemoths may not be. That needs to be encouraged, says Mr. Hockett.
Not everyone thinks that deposits should be risk-free. Sheila Bair, who chaired the FDIC during the financial crisis, groaned when I brought up the idea of insuring all deposits.
“These were big tech companies like Roku whining and crying over their uninsured deposits,” she said. “If a $200 billion bank can bring down the banking system, then we don’t have a stable, resilient system.”
Ms Bair went on to say that she believes the banking system is “largely resilient” and that the real problem is that regulators have not communicated well enough to the public that the crisis is confined to a small group of banks.
Still, Hockett’s idea has some lawmakers on board. We’ll see if it flies. – Joe Nocera
IN CASE YOU MISSED IT
President Biden is asking Congress for new tools to target leaders of failed banks. One aspect of the plan would expand the FDIC’s ability to seek compensation from executives of failed banks, a power currently limited to the largest banks.
UBS is reportedly in talks to acquire Credit Suisse. According to the Financial Times, the Swiss National Bank and the Swiss supervisory authority FINMA organized the talks. Credit Suisse said Thursday it would borrow up to $54 billion from the Swiss National Bank after its shares fell 24 percent to a new low.
Goldman Sachs expects a big payout. The Wall Street giant tried to help Silicon Valley Bank arrange a last-minute capital raise to save it. But it also played another role: Goldman bought $21.4 billion in debt from the failed bank (which the failed lender booked at a price of $1.8 billion) and is sold through the sale of the bonds earn more than $100 million.
A Silicon Valley Bank customer’s take on the collapse is going viral. A series of tweets from Alexander Torrenegra, founder and CEO of a recruitment site and investor in the Colombian version of Shark Tank, revealed what it was like to be cut off when the bank imploded.
Do we need a new kind of bank?
Talks in Washington over how to regulate banks in the wake of the Silicon Valley bank collapse are in full swing, with disagreements over how to bail out failed lenders and prevent another crisis.
But for Lowell Bryan, a former head of McKinsey & Company’s banking practice, the answer lies in a debate that began three decades ago. His proposal: create a new kind of low-risk bank.
US banking should be broken down by risk levels, Mr Bryan argued in the 1990s. Deposits with “core banks” would be insured by the government, but those lenders would only be allowed to engage in low-risk deals.
Wholesale banks would draw funds from private investors but would not be protected by the government. If they made fatal missteps, the government would step in to prevent widespread panic, but companies would fail and investors would be punished. (Mr Bryan has argued that large financial firms could own both types of banks – as long as the deposit lender was adequately protected from its wholesale counterpart.)
The appeal of this system, Bryan said in an interview with DealBook, is that it inherently limits risks in the banking industry in ways that complex liquidity and corporate action requirements don’t.
“The key issue is when you give a federal guarantee, you have to put real limits on the ability to raise deposits,” he said.
Consider what happened at banks that recently went bust. Silicon Valley Bank increased its deposit base to $175 billion and invested that money in a bond portfolio that was vulnerable to rising interest rates. It also lent $74 billion to mostly a risky sector, tech startups.
Meanwhile, Silicon Valley Bank pushed hard for regulatory exemptions that would allow it to pursue potentially lucrative but dangerous financial bets.
Mr. Bryan’s idea has already been tested. At McKinsey, he was a prominent proponent of the core banking concept in the 1980s and 1990s, writing books and testifying before Congress on the subject. He assembled an unusual coalition including Rep. Chuck Schumer, Democrat of New York and now Senate Majority Leader; NationsBank, a predecessor of Bank of America; JP Morgan before it merged with Chase Manhattan; and Goldman Sachs.
Opposite them was a group that included Jay Powell, a Treasury Department official in the administration of George HW Bush, who is now Chairman of the Federal Reserve, and Sandy Weill, the architect of what later became Citigroup. They argued that American lenders benefited from relaxed regulations that allowed them to diversify their businesses, and they won. The rewrite of US banking rules allowed for the creation of both giant universal banks and smaller lenders that could still take risks.
Protecting depositors ensures confidence in the entire banking system, Mr Bryan said. But banks cannot operate with essentially unlimited protection against the consequences of risk. He claims that what he is asking for is clear and narrow, and at this point is able to garner bipartisan support.
“There’s no need to rewrite everything,” he said.
“If I declared anything I worked on illegal while I was in Congress, I would be a monk.”
– Barney Frank, the former Liberal Congressman and architect of the landmark Dodd-Frank Financial Regulatory Reform Act, is defending his decision to serve on the board of Signature Bank. Regulators shut down the New York-based lender last weekend after many depositors withdrew their money following the collapse of Silicon Valley Bank.
On Our Radar: “Age of Easy Money”
There’s a brief explanation for the collapse of Silicon Valley Bank: when Moody’s notified the bank’s chief executive earlier this month that its bonds would be downgraded to junk levels, a failed attempt to raise money sparked panic and a rush for deposits. But “Age of Easy Money,” a PBS documentary released this week, details a much longer response, beginning with the 2008 financial pandemic that fueled the longest bull market in history — and the underlying conditions for its failure the SVB.
Sarah Kessler contributed the reporting.
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