No limits
Last year, Marc Lasry, the owner of the Milwaukee Bucks basketball team, revealed that his star player, Giannis Antetokounmpo, at one time kept his money in 50 banks, with no account having more than $250,000. Why? Because Antetokounmpo wanted every penny insured with the Federal Deposit Insurance Corporation. And $250,000 is the cap for insured deposits.
What Mr. Antetokounmpo apparently didn’t realize — but was driven home by the collapse of Silicon Valley Bank last week — is that the days of the deposit insurance limit are over. True, the law says there is a limit and the government must apply a “systemic risk exception” to cover uninsured deposits. But when a bank is on the brink of failure, the specter of systemic risk is always there.
“Since S.&L. crisis in the 1980s, everybody will be bailed out,” said Karen Petrou, co-founder of Federal Financial Analytics, referring to depositors.
Robert Hockett, an expert on financial regulation at Cornell University, believes the time has come to make the umbrella guarantee explicit. And he’s not alone: In the next few days, Rep. Ro Khanna, D-Calif., is expected to introduce a bill proposing to increase or eliminate the cap on FDIC coverage.
Mr. Hockett and others argue that insuring all deposits could improve the banking system. They say it would not introduce moral hazard because risking deposits is not what keeps banks in check. Instead, what should prevent bankers from acting too recklessly is the knowledge that if their bank fails, shareholders and bondholders will be wiped out, managers will be investigated, and in many cases the government will try to recover compensation.
Banks have long financed deposit insurance themselves. Since 2005, their contributions have been “at risk”, which means that the more risk a bank takes, the higher the premium it pays. Larger banks pay more than smaller banks. Of course, Mr. Hockett’s scheme would require larger contributions — and tighter regulation — but he envisions a similar tiered system. He also envisions the return of measures such as stress tests that Congress repealed on mid-sized banks during the Trump administration.
Explicitly insuring all deposits, Mr 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 catered to a sector it understood well: venture capitalists and start-ups. Her loan portfolio was not a problem. Other smaller banks also specialize in specific sectors and are willing to provide loans that the big behemoths might not. 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, practically groaned when I brought up the idea of insuring all deposits.
“It was the big tech companies like Roku that were whining and crying about their uninsured deposits,” she said. “If a $200 billion bank can destroy the banking system, then we don’t have a stable and resilient system.”
Ms. Bair went on to say that she thought the banking system was “mostly resilient” and that the real problem was that regulators had not adequately communicated to the public that the crisis was confined to a small group of banks.
Still, Hockett’s idea is on the minds of several lawmakers. We’ll see if it flies. —Joe Nocera
IN CASE YOU MISSED IT
President Biden is asking Congress for new tools to target failed bank managers. One aspect plan would expand the FDIC’s ability to seek restitution from failed bank executives, a power currently limited to the largest banks.
UBS is reportedly in talks to acquire Credit Suisse. The meeting was organized by the Swiss National Bank and the Swiss regulator FINMA, 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 sees a big payoff. A Wall Street giant tried to help a Silicon Valley bank arrange a last-minute capital raise to save it. But it also had another role: Goldman bought $21.4 billion in debt from a failed bank (which the failed lender booked at a cost of $1.8 billion) and is poised to cash in more than 100 million dollars by selling bonds.
A Silicon Valley Bank customer’s take on the collapse has gone viral. Number tweets Alexander Torrenegra, founder and CEO of a recruiting site and investor on Colombia’s version of “Shark Tank,” revealed what it was like to be cut off when the bank imploded.
Do we need a new type of bank?
The debate in Washington about how to regulate banks in the wake of the collapse of Silicon Valley Bank is in full swing, with disagreements over how to save 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.
American banking should be divided according to risk levels, Mr. Bryan claimed in the 1990s. Deposits at “core banks” would be insured by the government, but these lenders could only participate in low-risk businesses.
Wholesale banks would draw finance 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 firms would fail and investors would be punished. (Mr. Bryan argued that the big finance companies could own both kinds of banks — as long as the depository creditor was adequately protected from its wholesale counterpart.)
The appeal of the system, Mr. Bryan told DealBook in an interview, is that it fundamentally limits risk 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 get deposits,” he said.
Consider what happened in the banks that failed recently. Silicon Valley Bank increased its deposit base to $175 billion, investing that money in a bond portfolio that was vulnerable to rising interest rates. It also got longer $74 billion in loans to mainly one risky sector, technology start-ups.
Meanwhile, Silicon Valley Bank pushed hard for regulatory exemptions which allowed her to make potentially lucrative but dangerous financial bets.
Mr. Bryan’s idea has been tested before. At McKinsey in the 1980s and 1990s, he was a a prominent proponent of the basic concept of the bank, writing books and testifying on the matter before Congress. He assembled an unusual coalition, including Representative Chuck Schumer, Democrat of New York and now Senate Majority Leader; NationsBank, predecessor of Bank of America; JP Morgan before it merged with Chase Manhattan; and Goldman Sachs.
Opposing them was a group that included Jay Powell, a Treasury official in the George HW Bush administration who is now chairman of the Federal Reserve, and Sandy Weill, the architect of what became Citigroup. They argued that American lenders benefited from relaxed regulations that allowed them to diversify their business, and they won. Rewrites of American banking rules allowed the creation of both huge universal banks and smaller lenders who could still take risks.
Depositor protection ensures confidence in the overall banking system, said Mr. Bryan. But banks cannot be allowed to operate with essentially unlimited protection against the consequences of risk. He claims that what he is calling for is clear and narrow, able to win bipartisan support on this point.
“There’s no need to rewrite everything,” he said.
“If I was going to rule as illegal on anything I worked on when I was in Congress, I’d probably be a monk.”
— Barney Frank, former liberal congressman and architect of the landmark Dodd-Frank financial regulatory reform bill, advocating his decision to serve on the Signature Bank board. Regulators last weekend shut down the New York-based lender after many depositors withdrew their money following the collapse of Silicon Valley Bank.
On our radar: “The Age of Easy Money”
He is here short explanation on what caused the collapse of Silicon Valley Bank: When Moody’s informed the bank’s CEO this month that its bond rating was at risk of being downgraded to junk, the failed attempt to raise money sparked panic and a drop in deposits. But”The age of easy money,” a PBS documentary released this week, details a much longer response that begins with the financial crisis of 2008. “Frontline” correspondent James Jacoby details how the Fed’s bailouts after the crisis and later during the pandemic fueled the longest bull run. market in history — and the underlying conditions for SVB failure.
Sarah Kessler contributed reporting.
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