SVB collapse: Biden administration boxes itself in on universal deposit insurance
Sarah Westwood
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Biden administration officials have put themselves in an awkward position after the Silicon Valley Bank fiasco by vowing to bail out its wealthy clients — without offering any similar assurances to depositors in the rest of the banking industry.
Treasury Secretary Janet Yellen attempted to straddle that line on Thursday when she said other regional banks should not necessarily expect to have the Federal Deposit Insurance Corporation cover losses for all accounts in the event of a collapse.
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Her comments came as some lawmakers on Capitol Hill weigh the prospect of insuring all deposits — not just the first $250,000 of an eligible deposit, as FDIC rules currently require.
“I just believe that you can’t have depositors worrying about getting their money back,” Sen. Mitt Romney (R-UT) told Semafor on Thursday. “Anytime that’s going to be the case, you’re going to present some risks to the sector.”
Romney is one of several lawmakers and policy experts questioning what the SVB bailout means for the future of deposit insurance.
For starters, SVB had lobbied Congress directly that its size and portfolio did not qualify it as one of the banks deemed “too big to fail,” and SVB successfully pressed to be relieved of requirements placed on banks large enough to earn that designation.
Now, the Biden administration is arguing SVB was, in fact, too big to fail without risking a broader financial meltdown.
And the bank’s unusually wealthy clientele — technology companies, venture capitalists, and start-up founders in Silicon Valley — poses a problem of political optics for the Biden administration.
If a similarly sized bank with less well-connected customers were to collapse tomorrow, and the federal government did not offer to repay deposits over $250,000, Biden’s team could well face accusations of favoring coastal elites over working people.
“Had this been a regional bank in Texas specializing in oil and natural gas ventures, those depositors would surely be out of luck,” Wall Street Journal columnist Kimberly Strassel speculated this week.
The Biden administration has offered few explanations about why it believed SVB and a New York City-based institution, Signature Bank, which also collapsed last week, could have brought down broader swaths of the economy.
When Biden delivered a speech on Monday about the decision to insure all deposits at both banks, he mentioned only that his team had analyzed “the impact [SVB and Signature Bank] could have on jobs, some small businesses, and the banking system overall.”
Biden administration officials have spent far more time assuring the public that the banking system remains stable than elaborating on why the pair of bank failures posed a systemic risk.
Critics have suggested they never did.
“By selectively changing the rules after the fact for SVB, the U.S. government is now incentivizing greater risk-taking by corporations in the future, teaching large depositors at smaller banks that they can simply throw money at risky banks without diversifying or conducting diligence, just like many tech startups did here,” Vivek Ramaswamy, an entrepreneur and Republican presidential candidate, wrote in a Newsweek op-ed this week.
Ramaswamy argued that the “normal rules of the road,” specifically that the FDIC will cover only $250,000 or less for each deposit if a bank’s executives make bad bets and cause a collapse, should have applied to SVB because the government had already made a determination that the bank was not too big to fail.
Congress voted in 2018 to remove the most burdensome requirements for banks of roughly SVB’s size and smaller because lawmakers decided those banks did not pose systemic risks.
SVB’s failure did not appear to be a result of systemic problems, either. The bank’s undiversified customer base left it especially vulnerable to downturns in the industry of its clients in the technology sector, which has suffered layoffs and revenue losses in recent months.
Bank executives also made a decision to pour money into long-term investments that they needed to hold on to for years in order to make a profit. When interest rates rose, the value of those long-term investments fell; as more clients started withdrawing money to weather the turbulence in the tech industry, SVB sold the investments early and at a massive loss to try to cover the withdrawals.
Experts say Signature Bank was done in 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 the same time. Signature Bank’s depositors got spooked by the disaster they witnessed with SVB only days earlier.
Universal deposit insurance, its proponents say, could guard against future bank runs by eliminating the sense of panic that preceded the collapse of both banks this month.
If customers feel confident that their money is safe no matter what happens to their bank, the argument goes, then they won’t rush to retrieve their money when their bank struggles financially. That could give banks breathing room to recover from mistakes that might otherwise prove fatal.
Community banks that don’t have connections like SVB and Signature Bank could also benefit from universal deposit insurance.
In the week after the collapses, financial advisers reported that legions of depositors at smaller banks were expressing interest in moving their money to a bigger institution, where federal regulations are stricter and a bailout, in the event of a crisis, is more likely.
Yellen’s testimony on Thursday that in the future, smaller banks should not expect the FDIC to cover uninsured deposits is likely to make that situation worse.
Lawmakers from both sides of the aisle have expressed interest in insuring all deposits, or at least increasing the amount of money the FDIC is obligated to cover.
Sen. JD Vance (R-OH) told Semafor that he is “certainly open to” the idea of universal deposit insurance.
“Everybody understands implicitly that if [JP Morgan] fails tomorrow, its depositors are gonna get a bailout from the federal government,” Vance said. “Clearly, a $300 million bank in southern Ohio is not going to get a bailout from the federal government.”
Sen. Elizabeth Warren (D-MA) said this week that the FDIC should raise its limit above $250,000 and consider higher levels for small business deposits than for individual deposits.
But universal deposit insurance, or even significantly increased FDIC protection, carries risk as well.
If bank executives know the government will guarantee their depositors get paid no matter what happens, they could be incentivized to take greater risks. The so-called “moral hazard” problem could free banks from the most serious consequences of their actions if they make gambles that don’t pay off.
Universal deposit insurance could also put taxpayers on the hook for massive amounts of money in the event of a catastrophe.
The Biden administration has said no taxpayer money will go toward bailing out SVB and Signature Bank; instead, the FDIC will cover deposits out of a fund that other banks pay into.
However, if multiple, larger banks were to fail simultaneously in the future and the government had guaranteed all depositors would get their money back, the Treasury Department may have to backstop the FDIC, and that could cost the federal government dearly.
For now, the Biden administration appears to be trying to have it both ways on deposit insurance.
Yellen said on Thursday that “Americans can feel confident that their deposits will be there when they need them,” echoing what Biden said earlier in the week.
Later in the same hearing, though, she acknowledged that all banks will not necessarily receive the same help as SVB and Signature Bank.
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The fence-sitting is likely an effort to prevent stampedes of customers from rushing to their banks to withdraw money that not every institution may have the ability to pay out immediately against the difficult economic backdrop, without committing the Biden administration to a position — universal deposit insurance — that would represent an overhaul of the banking system.
But Biden may face pressure to lay out a more specific position on how high he thinks FDIC coverage should be as regulators continue to sift through the wreckage of the SVB collapse.