The federal bailout of depositors at Silicon Valley Bank was staged with historic speed and may have saved the US economy from a devastating wave of bank failures, but it also highlights the potential need for a dramatic overhaul of the US deposit insurance system and the banking regulations. most widely.
At a hearing before the Senate Finance Committee on Thursday, lawmakers asked Treasury Secretary Janet Yellen a question that is on the minds of many Americans: Should regional bank depositors expect the federal government to bail them out if your bank go bankrupt?
Yellen responded as the letter of the law states she should: Uninsured deposits will only be secured if your bank’s failure poses a “systemic risk” to the US economy.
See more information: Yellen says banking system is ‘solid’ as analysts see little chance of new laws for crisis-hit sector
Of course, no one thought that the failure of a mid-sized regional bank would pose a risk to the entire US economy until last week, and it would be reasonable to expect that regulators in the future might be able to rely on the systemic risk exception in the law for yet another instead justify protecting the hard-earned savings of US individuals and corporations.
What’s more, it was Silicon Valley Bank’s reliance on unsecured deposits — those above the $250,000 insurance limit provided by the Federal Deposit Insurance Corp. – which made it susceptible to a bank run in the first place.
That’s why some lawmakers, including Republican Senator Mitt Romney of Utah and Senator Elizabeth Warren of Massachusetts, are excited about the idea of enacting universal deposit insurance, according to a report by Semafor.
A major concern for other powerful lawmakers is how to pay for it, as the vast majority of Americans can hardly imagine having $250,000 in a bank account. A spokesperson for Senator Sherrod Brown of Ohio, the Democratic chairman of the Senate Finance Committee, told MarketWatch that Brown believes “any changes made to deposit insurance should protect small businesses and workers, not big investors.”
Robert Hockett, who teaches monetary law and economics at Cornell Law School, argues that since lawmakers reformed the FDIC system to be funded with risk-based pricing, lifting the cap entirely would be relatively easy.
“We already base insurance rates on the banks’ own risk profiles,” Hockett told MarketWatch. “Risker banks pay higher premiums, just as smokers pay higher health insurance premiums.”
Hockett advocates lifting the cap altogether, allowing banks to assess fees on larger accounts to defray the cost of additional insurance, and preventing banks from assessing those fees on smaller accounts.
An added benefit of this approach is that it would reduce the so-called shadow banking system, or the network of non-bank intermediaries such as money market funds that companies rely on as cash management tools, argues Hockett.
“A lot less money would flow into shadow banking, and that’s a good thing,” he said, noting that the opacity of shadow banking makes it difficult for regulators and counterparties to assess its financial health.
The banking industry would likely fight a move to raise the deposit insurance cap, as rising rates could hurt profits. The status quo gives the industry an implicit guarantee that deposits will be insured, while the cost of that insurance is borne by more responsible banks and other American taxpayers.
Furthermore, a move toward unlimited deposit insurance could open the door to even more radical reform of the banking sector, such as the introduction of retail bank accounts at the Federal Reserve.
Dean Baker, a left-leaning senior economist at the Center for Economic Policy Research, defended this step in a recent blog post, writing that modern technology makes it feasible for the government to run a single payments network at a much lower cost than patchwork of private systems used today. Why allow private banks to finance themselves with cheap consumer deposits when the government is guaranteeing those deposits anyway?
“We would have the system run by the Fed to do the vast majority of normal financial transactions, replacing the banks we use now,” Baker wrote.
“However, we would still have investment banks like Goldman Sachs and Morgan Stanley that would borrow in the financial markets and lend money to companies, as well as underwrite stock and bond issues,” he added. “While investment banks still require regulation to prevent abuse, we need not worry that their failure will shut down the financial system.”
The complementary nature of unlimited deposit insurance and government-sponsored retail banking may dissuade some in Congress from supporting it, given the vehement opposition to Federal Reserve retail bills that Republicans have voiced in recent years.
Republican Representative Tom Emmer of Minnesota, for example, said last year that the retail Fed bills would put the US “on an insidious path similar to China’s digital authoritarianism.”
However, the current system of publicly subsidized private bankers with implicit deposit insurance is probably not sustainable either.