Unlimited
Last year, Marc Lasry, the owner of the Milwaukee Bucks basketball team, revealed that his star player, Giannis Antetokounmpo, had at one point been putting his money into 50 banks, without a single account holding more than $250,000. Because? Because Antetokounmpo wanted every penny insured by the Federal Deposit Insurance Corporation. And $250,000 is the cap on insured deposits.
What Antetokounmpo apparently failed to realize, but was made clear by the collapse of Silicon Valley Bank last week, is that the days of the deposit insurance cap are over. True, the law says there is a limit, and the government has to invoke a “systemic risk exception” to support uninsured deposits. But when a bank is on the brink of failure, there is always the specter of systemic risk.
“Since S.&L. crisis in the 1980s, everyone gets bailed out,” said Karen Petrou, co-founder of Federal Financial Analytics, referring to depositors.
Robert Hockett, an expert in financial regulation at Cornell University, thinks it’s time to make the blanket guarantee explicit. And he’s not alone: Within the next few days, Rep. Ro Khanna, a Democrat from California, is expected to introduce a bill proposing to increase or eliminate the FDIC coverage limit.
Hockett and others argue that insuring all deposits could improve the banking system. They say it would not introduce moral hazard, because putting deposits at risk is not what keeps banks in check. Instead, what is supposed to prevent bankers from acting too recklessly is the knowledge that if their bank fails, shareholders and bondholders will be wiped out, executives will be investigated and, in many cases, the government will try to recover The compensation.
Deposit insurance has long been financed by the banks themselves. Since 2005, its contributions have been “risk-valued,” meaning that the more risk a bank takes, the higher the premiums it pays. Bigger banks pay more than smaller banks. Mr Hockett’s scheme would obviously require larger contributions and stricter regulations, but he envisions a similar tiered system. He also envisions the return of measures like stress tests, which Congress scrapped for midsize banks during the Trump administration.
Explicitly insuring all deposits, Hockett says, could prevent a run on a troubled bank, because customers would know in advance that their money is safe. It could also help preserve small and medium-sized banks. Although SVB clearly mismanaged its risk, the bank was serving a sector it understood well: venture capitalists and start-ups. His loan portfolio was not the problem. Other smaller banks also specialize in particular sectors and are willing to make loans that the big giants might not. That should be encouraged, Hockett says.
Not everyone thinks that deposits should be risk free. Sheila Bair, who was chair of the FDIC during the financial crisis, practically groaned when I brought up the idea of insuring all deposits.
“These were big tech companies like Roku complaining and crying about their uninsured deposits,” he said. “If a $200 billion bank can bring down the banking system, then we don’t have a stable and resilient system.”
Ms Bair went on to say that she believes the banking system is “mostly resilient” and that the real problem was that regulators did not communicate well enough to the public that the crisis was confined to a small group of banks.
Still, Hockett’s idea has some lawmakers on board. We’ll see if he flies. —Joe Nocera
IN CASE YOU MISSED IT
President Biden asks Congress for new tools to attack bankrupt bank executives. an aspect of The plan it would expand the FDIC’s ability to seek compensation returns from failed bank executives, a power currently limited to the largest banks.
UBS is reportedly in talks to acquire Credit Suisse. The Swiss National Bank and the Swiss regulator FINMA organized the talks, according to the Financial Times. Credit Suisse said on 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 is aiming for 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 had another role: Goldman bought $21.4 billion of debt from the failed bank (which the failed lender recorded at a cost of $1.8 billion), and is ready to make more than $100 million selling the bonds.
A Silicon Valley Bank client’s vision of collapse goes viral. A number of tweets by 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 isolated when the bank imploded.
Do we need a new type of bank?
The conversation in Washington over how to regulate banks after the collapse of Silicon Valley Bank is well underway, with disagreements over how to bail out failed lenders and prevent another crisis.
But for Lowell Bryan, former head of McKinsey & Company’s banking practice, the answer lies in a debate that took place three decades ago. His proposal: Create a new type of low-risk bank.
US banking should be divided by risk levelsMr Bryan argued in the 1990s. Deposits at “central banks” would be insured by the government, but these lenders could only engage in low-risk business.
Wholesale banks would raise funds from private investors but would not be protected by the government. If they made fatal mistakes, the government would step in to prevent widespread panic, but companies would fail and investors would be punished. (Bryan has argued that large financial firms could own both types of banks, provided the depository lender was adequately protected from its wholesale counterpart.)
The appeal of this system, Mr. Bryan told DealBook in an interview, is that it fundamentally limits risks in the banking industry in a way that complex liquidity requirements and capital measures do not.
“The central issue is that if you give a federal guarantee, you have to put real limits on the ability to collect deposits,” he said.
Consider what happened to banks that have recently failed. Silicon Valley Bank increased its deposit base to $175 billion, while investing that money in a bond portfolio that was vulnerable to rising interest rates. It also spread $74 billion in loans mainly to a risky sector, the new technology companies.
Meanwhile, the Silicon Valley bank lobbied hard for regulatory exemptions that allowed him to place potentially lucrative, but dangerous, financial bets.
Mr. Bryan’s idea has been tried before. At McKinsey in the 1980s and 1990s, he was a prominent proponent of the concept of central banking, writing books and testifying before Congress on the subject. He assembled an unusual coalition, including Rep. Chuck Schumer, D-N.Y. and now Senate Majority Leader; NationsBank, a predecessor of Bank of America; JP Morgan, before merging with Chase Manhattan; and Goldman Sachs.
Opposing them was a group that included Jay Powell, a Treasury Department official in the George HW Bush administration who is now the chairman of the Federal Reserve, and Sandy Weill, the architect of what became Citigroup. They argued that US lenders benefited from relaxed regulations that allowed them to diversify their businesses, and they won. Rewrites of US banking rules allowed for the creation of huge universal banks and smaller lenders that could still take risks.
Depositor protection guarantees confidence in the banking system in general, said Mr. Bryan. But banks cannot be allowed to operate with essentially unlimited protection against the consequences of risk. He maintains that what he is asking for is clear and narrow, capable at this point of winning bipartisan support.
“There is no need to rewrite everything,” he said.
“If I declared anything I worked on when I was in Congress banned, I guess I’d be a monk.”
— Barney Frank, former liberal congressman and architect of the landmark Dodd-Frank bill to reform financial regulation, advocating your decision to serve on Signature Bank’s board of directors. 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: ‘Easy money era’
There is a brief explanation What caused Silicon Valley Bank to collapse: When Moody’s informed the bank’s chief executive this month that his bonds were in danger of being downgraded to scrap, a failed attempt to raise money sparked panic and a run on deposits. But “easy money era”, a PBS documentary released this week, details a much longer response that begins with the 2008 financial crisis. “Frontline” correspondent James Jacoby details how the Fed’s bailout interventions after the crisis, and later during the pandemic, they fueled the longest uptrend. market in history, and the underlying conditions of SVB’s bankruptcy.
Sarah Kessler contributed reporting.
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