In the wake of the failures of Silicon Valley Bank and Signature Bank – the second and third largest bank failures in US history – members of Congress are debating what should be done to prevent future failures. Some have considered a new proposal to provide a government guarantee to bank deposits of any size.
It is a mistake. The current limit, $250,000 per person, is more than enough for any individual banking needs. An unlimited guarantee for banks that their loans to depositors will always be 100 percent backed by the government is an invitation for banks to print money with the credibility of Uncle Sam, but for their own personal profit. It’s a government benefit that will help the wealthiest of us, at a cost to the rest of us.
Some have linked any such expansion to a corresponding increase in the stringency of bank supervision and regulation. The failure of Silicon Valley Bank certainly shows how much more stringent bank supervision needs to be. But a quick look at banking history shows that linking the extension of public guarantees with tighter supervision is bound to fail.
When Congress increases insurance guarantees, as it has done several times in the past, it is often accompanied by a commitment to greater regulatory scrutiny. And then the banks, better organized and perhaps able to navigate the halls of politics with more acumen and dexterity than any other interest group, work to reduce the harshness of those policies. Bank supervision and regulation – largely discretionary functions that rely heavily on presidential appointments that set the tone for how that discretion is exercised – inevitably fall prey to these pressures.
On the other hand, bank guarantees are forever. From the first days of federal deposit insurance in 1933 until today, the government has never, even once, reduced its official guarantees for banks. Guarantees only move in one direction, always up, even as supervision and regulation regularly fall by the wayside.
We don’t have to look far to see this dynamic game. Not only after sweeping guarantees of the entire banking system—all depositors, rich or poor, as well as money market funds, insurance companies and everyone else that made the 2008 financial crisis so extraordinary and so politically toxic—Congress passed a per-depositor Increased deposit insurance from $100,000 to $250,000. In 1934, the limit was $2,500; Correcting for inflation, the limit would have been roughly $40,000 in 2008.
According to the Federal Reserve, the average US bank balance in transactional accounts is approximately $42,000 as of 2019. The current deposit limit is so high that we cannot say that it is intended to protect someone like the average saver.
After raising the limit, Congress deliberated extensively before signing Dodd-Frank into law to ensure, in the words of Barack Obama, that “no more taxpayer-funded bailouts – period”. Will be.” To help meet that commitment, Dodd-Frank established a number of different regulatory and supervisory tools that were meant to keep banks safe, healthy, and fair to their customers. But within a few years, Congress rolled back supervisory discretion for some of the very banks that are now at the center of the current crisis.
As far as it goes, a system of public guarantees for bank loans would only mean pain for our economy, our financial system, and perhaps most importantly, our politics.
If banks actually paid the full value of the insurance for the $18 trillion in deposits in the country, as some of those promoting the idea propose, in good times it would represent a huge pile of cash that that the bankers and their lobbyists will almost certainly insist. back to them for their own purposes. They will be most successful in this endeavour; They always have. What will emerge from that success is an unfunded mandate to protect the wealthiest citizens, the price we all paid together. Economically, this is a deeply regressive policy. Politically it is also toxic. Headlines that remind us all that multi-millionaires receive taxpayer bailouts while the average citizen struggles to scrape by will only increase in frequency.
Critics of the current regime have an important point: It makes no sense to treat wealthy individuals and small businesses the same way. Multi-millionaires and billionaires do not require the same federal guarantees as a small company trying to make monthly payroll.
Some have wisely suggested that we therefore focus exclusively on the types of accounts that would receive full government support. For those small businesses that are struggling to meet payroll and don’t know or want to employ the cash-management expertise of large corporations, we must extend protections.
But the same umbrella should not reach the rich. In fact, Congress should lower the protection level to $200,000 per depositor per bank for wealthy individuals and expand it to $2 million for small businesses, an easy reminder of the magnitude of the difference between the two groups. The sequence is These amounts are more than enough to cover any necessary banking relationships and put depositors in the driver’s seat to practice good risk management, which Silicon Valley Bank depositors failed to do. Reducing protections for individual depositors would also send a strong signal that our historical practice of shifting public target positions to bank guarantees could be reversed.
These changes are not meant to solve the problem of bailouts, a problem that is only as good as the regulators and supervisors who enforce our laws. They are instead sounding the alarm. Our present deposit insurance system is not working. Rather than admit defeat on the entire enterprise and provide low-cost insurance for underregulated banks without limits, let us consolidate a system that has worked well within limits through most of its history.
Peter Conti-Brown is Professor of Financial Regulation at the Wharton School of the University of Pennsylvania. He is working on a book on the history of bank supervision in the US.
Times is committed to publishing variety of letters to the Editor. We want to hear what you think about this or any of our articles. here are some Advice, And here is our email: [email protected],
Follow the opinion section of The New York Times Facebook, Twitter (@NYTopinion) And Instagram,
Source