Concerns about US banking system fuel discussion about higher deposit insurance

Denver The heads of the major US banks meet in Washington on Tuesday. The meeting of the banking lobby Financial Services Forum had been planned for a long time. But two current questions will dominate the conference: What could a new rescue plan for the ailing First Republic Bank look like? And does US deposit insurance need to be increased to restore confidence in the banking system?

Currently, deposits of $250,000 per customer per bank are guaranteed by the FDIC. But a discussion has been sparked in Washington about how the ceiling could be raised.

The Ministry of Finance is also apparently dealing with the issue and is examining whether it would have the option of guaranteeing deposits for a certain period of time in an emergency, as the Bloomberg news agency reported on Monday evening. The ministry, which is headed by former Federal Reserve Chair Janet Yellen, sees no need to do so yet. But you want to be prepared for emergencies, it said. Actually, this would require the necessary majorities in Congress, but it could be that Yellen could have some leeway via emergency measures. Since the weekend, various scenarios have been played out by both the Democrats, the party of US President Joe Biden, and the Republicans.

Preventing widespread panic in the banking system

The Association of Medium-sized US Banks (MBCA) had brought up a proposal at the weekend, according to which the deposit insurance FDIC should completely guarantee the deposits of medium-sized institutions for two years. This would immediately prevent the withdrawal of customer funds from the smaller banks. In addition, insurance would stabilize the banking sector and significantly reduce the likelihood of further bank failures.

US authorities had exceptionally guaranteed all SVB and Signature Bank deposits to prevent a broader panic in the banking system. But that would only be possible if the governing bodies of the Fed and the FDIC voted in favor with a clear majority and if the Treasury Secretary and the US President also gave the green light.

According to the latest FDIC data, US deposits total $17.9 trillion. Of these, 7.4 trillion or a good 41 percent are insured. Fully guaranteeing deposits of that magnitude would require “banks to put more money into the deposit insurance fund,” said Robert Hockett, an economics professor at Cornell University in upstate New York. He has drawn up a proposal that would allow banks to pass on part of the insurance premiums to customers.

This would particularly affect customers who park large sums of cash at their bank. “And overall, as is already the case: institutes with riskier business models will be asked to pay more,” says Hockett.

First Republic Bank

After the SVB bankruptcy, the bank from San Francisco is also badly hit.

(Photo: Reuters)

Former FDIC chief Sheila Bair, on the other hand, could envisage fully guaranteeing only certain company accounts for a certain period of time. “They perform an important function in the real economy, so there are good reasons that deposit insurance should fully guarantee them in turbulent times.”

That is definitely heard in politics. “Raising the deposit insurance ceiling would be a good move,” said Democratic Sen. Elizabeth Warren, a member of the Senate Banking Committee and considered an influential critic of the financial industry.

Warren is open to a significant increase. “It could be $2 million, or $5 million, or 10 million,” she said on CBS. “Middle-sized companies need to be able to rely on having access to their money at all times to pay salaries and other bills.” Even some Republicans could join such an initiative.

Avoid new bank failures

Bankers and regulators are working flat out to reassure bank customers and shareholders. They want to prevent another bank failure in the USA after Silvergate, the Silicon Valley Bank (SVB) and Siganture. The First Republic Bank from San Francisco is still in focus. On Monday it became known that the bank CEOs around Jamie Dimon, head of America’s largest bank JP Morgan Chase, are looking for a new solution for the regional bank. As recently as Thursday, eleven major banks had transferred deposits worth $30 billion to the ailing institution. The unusual initiative should help to strengthen confidence in the bank. But she wasn’t successful.

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The papers of the First Republic Bank collapsed again on Monday. The paper ended trading down 47 percent and has lost around 90 percent in value in the past two weeks. According to media reports, Dimon and other bank bosses are now considering converting all or part of the $30 billion into equity to strengthen the position of First Republic Bank. The rescue of the bank would be an important symbol for savers as well as for investors, stressed Sarat Sethi, portfolio manager at Douglas C. Lane on the US stock exchange broadcaster CNBC. “If you let this bank fail, there will be more bank failures.”

After the takeover of Credit Suisse by UBS at the weekend, the markets in the USA have calmed down somewhat. The three major stock indices, the Dow Jones, the broader S&P 500 and the tech-heavy Nasdaq, ended Monday sharply higher. The prices of other regional banks also recovered. PacWest, which had also come under significant pressure in recent weeks, gained ten percent. “Nevertheless, the mood is still extremely tense,” emphasized a New York banker.

There could be new uncertainty for the industry on Wednesday. Then the next interest rate decision by the US Federal Reserve (Fed) is due. Originally, Fed Chair Jerome Powell wanted to raise interest rates again, which are currently in a range of 4.5 to 4.75 percent. A further interest rate hike could further increase the unrealized losses in the bond portfolios of many banks. That was also a core problem that led to the bankruptcy of the SVB a week ago and scared off investors and bank customers. Additional liquidity programs by the Fed have not yet been able to restore stability in the sector.

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