Biden administration officials put themselves in an awkward position after the Silicon Valley bank fiasco by promising to bail out their wealthy customers — without offering similar assurances to depositors in the rest of the banking industry.
Treasury Secretary Janet Yellen tried to push that limit on Thursday when she said other regional banks shouldn’t necessarily count on the Federal Deposit Insurance Corporation to cover losses on all accounts in the event of a collapse.
SVB COLLAPSE: SORTING FACT FROM FICTION IN THE SILICON VALLEY BANK BLAME GAME
Her comments came as some lawmakers on Capitol Hill weighed the prospect of insuring all deposits — not just the first $250,000 of an eligible deposit, as FDIC rules currently require.
“I just think depositors can’t worry about getting their money back,” Sen. Mitt Romney (R-UT) told Semafor on Thursday. “Any time that’s the case, you’re going to pose some risks to the sector.”
Romney is one of several lawmakers and policy experts wondering what the SVB bailout means for the future of deposit insurance.
First of all, the SVB had brought it straight to the attention of Congress that its size and portfolio did not qualify it as one of the banks deemed “too big to fail”, and the SVB successfully pushed to be relieved of requirements that imposed on banks large enough to merit the designation.
Now the Biden administration is arguing that the SVB was indeed too big to fail without risking a broader financial meltdown.
And the bank’s unusually wealthy clientele — tech companies, venture capitalists, and start-up founders in Silicon Valley — presents the Biden administration with a problem of political optics.
If a similarly sized bank with less-connected customers collapsed tomorrow and the federal government didn’t offer to repay deposits over $250,000, Biden’s team could well be accused of favoring coastal elites over blue-collar workers.
“Had this been a regional bank in Texas specializing in oil and natural gas companies, those depositors would certainly have been out of luck,” Wall Street Journal columnist Kimberly Strassel speculated this week.
The Biden administration has offered few explanations as to why it believed SVB and a New York City-based institution, Signature Bank, which also collapsed last week, could have brought down larger parts of the economy.
When Biden gave a speech on Monday about the decision to insure all deposits at both banks, he only mentioned that his team analyzed “the implications.” [SVB and Signature Bank] could have on jobs, some small businesses and the banking system as a whole.”
Biden administration officials have spent far more time reassuring the public that the banking system remains stable than explaining why the two bank failures posed a systemic risk.
Critics have indicated they never did.
“By selectively changing the rules for SVB after the fact, the US government is now encouraging future corporate risk-taking by teaching large depositors in smaller banks that they can simply throw money at risky banks without diversification or due diligence like many tech startups here,” wrote Vivek Ramaswamy, an entrepreneur and Republican presidential candidate, in a Newsweek op-ed this week.
Ramaswamy argued that “normal traffic rules,” specifically that the FDIC will only take $250,000 or less on each deposit if a bank’s executives make bad bets and cause a meltdown, the SVB should apply since the government already has one decided that the bank wasn’t too big to fail.
Congress voted in 2018 to remove the most onerous requirement for banks roughly the size of SVB and smaller because lawmakers ruled that these banks did not pose systemic risk.
Systemic problems also do not appear to have caused the bankruptcy of the SVB. The bank’s undiversified client base made it particularly vulnerable to downturns in the industry of its clients in the technology sector, which has suffered layoffs and slumped revenue in recent months.
Bank managers also made the decision to put money into long-term investments that they had to hold on to for years to make a profit. As interest rates rose, the value of these long-term investments fell; As more customers began withdrawing funds to weather the tech industry turmoil, SVB sold assets early and at massive losses to try to cover withdrawals.
Experts say Signature Bank was attacked by the same thing that ultimately sealed SVB’s fate: a bank run, which occurs when depositors panic and too many try to withdraw their money at once. Signature Bank depositors were spooked by the disaster they had experienced with SVB just days earlier.
Universal deposit insurance, its proponents say, could prevent future bank runs by removing the sense of panic that preceded both banks’ collapses this month.
If customers are confident that their money is safe no matter what happens to their bank, the argument goes, then they won’t rush their money when their bank has financial problems. That could give banks room to recover from mistakes that could otherwise prove fatal.
Unaffiliated community banks such as SVB and Signature Bank could also benefit from universal deposit insurance.
In the week after the collapses, financial advisors reported that legions of depositors from smaller banks had expressed an interest in transferring their money to a larger institution where federal regulations are stricter and a bailout in the event of a crisis is more likely.
Yellen’s statement Thursday that smaller banks should not expect the FDIC to cover uninsured deposits going forward is likely to make this situation worse.
Lawmakers from both sides of the aisle have expressed an interest in insuring all deposits, or at least increasing the amount of money the FDIC is required to cover.
Senator JD Vance (R-OH) told Semafor that he was “certainly open to the idea of universal deposit insurance.”
“Everyone implicitly understands that if [JP Morgan] fails tomorrow, its depositors will receive a bailout from the federal government,” Vance said. “A $300 million bank in southern Ohio is clearly not going to get a federal bailout.”
Sen. Elizabeth Warren (DMA) said this week that the FDIC should raise its limit above $250,000 and consider higher levels for small business deposits than for deposits by individuals.
But the universal deposit insurance or even the significantly increased FDIC protection also harbor risks.
Knowing that the government guarantees their depositors will be paid no matter what, bank managers could be incentivized to take greater risks. The so-called “moral hazard” problem could relieve banks of the most serious consequences of their actions when they make bets that don’t pay out.
Universal deposit insurance could also hook taxpayers for massive sums in the event of a disaster.
The Biden administration has said no taxpayer money will go toward bailouts of SVB and Signature Bank; Instead, the FDIC covers deposits from a fund that other banks contribute to.
However, if several major banks simultaneously failed in the future and the government had guaranteed that all depositors would get their money back, the Treasury Department might have to support the FDIC, and that could cost the federal government dearly.
For now, the Biden administration appears to be trying to do both on deposit insurance.
Yellen said Thursday that “Americans can have confidence that their deposits will be there when they need them,” echoing what Biden said earlier in the week.
However, later in the same hearing, she conceded that not all banks would necessarily receive the same help as SVB and Signature Bank.
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The fence-sitting is likely an attempt to prevent throngs of customers from rushing to their banks to withdraw money that every institution may not be able to pay out immediately given the troubled economic backdrop, without committing the Biden administration to a position — universal deposit insurance — that would mean an overhaul of the banking system.
However, Biden may come under pressure to offer a more specific position on what he thinks FDIC coverage should be as regulators continue to sift through the wreckage of the SVB collapse.