Two Big Ideas for Preventing Another Banking Crisis
How should bank regulation change in the wake of Silicon Valley Bank’s collapse?
Last year, Marc Lasry, the owner of the Milwaukee Bucks basketball team, revealed that its star player, Giannis Antetokounmpo, at one time had been putting his money in 50 banks, with no single account holding more than $250,000. Why? Because Antetokounmpo wanted every cent to be insured by the Federal Deposit Insurance Corporation. And $250,000 is the cap on insured deposits.
What Mr. Antetokounmpo apparently didn’t realize — but was driven home with the collapse of Silicon Valley Bank last week — is that the deposit insurance cap’s days are over. True, the law says there’s a limit, and the government has to invoke a “systemic risk exception” to back uninsured deposits. But when a bank is on the verge of failing, the specter of systemic risk always exists.
“Ever since the S.&L. crisis in the 1980s, everyone gets rescued,” said Karen Petrou, a co-founder of Federal Financial Analytics, referring to depositors.
Robert Hockett, a financial regulation expert at Cornell University, believes it’s time to make the overarching guarantee explicit. And he’s not alone: Within the next few days, Representative Ro Khanna, a California Democrat, is expected to introduce a bill that proposes raising or removing the F.D.I.C.’s coverage cap.
Mr. Hockett and others argue that insuring all deposits could improve the banking system. They say it wouldn’t introduce moral hazard, because putting deposits at risk is not what keeps banks in check. Instead, what’s supposed to keep bankers from acting too recklessly is the knowledge that if their bank fails, shareholders and bondholders will be wiped out, executives will be investigated and, in many cases, the government will try to claw back compensation.
Deposit insurance has long been funded by the banks themselves. Since 2005, their contributions have been “risk-priced,” meaning the more risk a bank takes, the higher the premiums it pays. Larger banks pay more than smaller banks. Mr. Hockett’s scheme would obviously require larger contributions — and tighter regulations — but he envisions a similar tiered system. He also envisions a return of measures like stress tests, which Congress eliminated for midsize banks during the Trump administration.
Explicitly insuring all deposits, Mr. Hockett says, could prevent a run on a troubled bank, because customers would know ahead of time that their money was safe. It could also help preserve small and midsize banks. Although SVB plainly mismanaged its risk, the bank catered to a sector it understood well: venture capitalists and start-ups. Its loan portfolio was not the problem. Other smaller banks also specialize in particular sectors and are willing to make loans that the big behemoths might not be. That needs to be encouraged, Mr. Hockett says.
Not everyone thinks deposits should be free of risk. Sheila Bair, who was the chair of the F.D.I.C. during the financial crisis, practically groaned when I brought up the idea of insuring all deposits.
“These were big tech companies like Roku whining and crying about their uninsured deposits,” she said. “If a $200 billion bank can bring down the banking system, then we don’t have a stable, resilient system.”
Ms. Bair went on to say that she thinks the banking system is “mostly resilient” and that the real problem was that the regulators didn’t communicate well enough to the public that the crisis was limited to a small group of banks.
Still, Hockett’s idea has some lawmakers on board. We’ll see if it flies. — Joe Nocera
IN CASE YOU MISSED IT
President Biden asks Congress for new tools to target executives of failed banks. One aspect of the plan would broaden the F.D.I.C.’s ability to seek the return of compensation from executives of failed banks, a power currently limited to the largest banks.
UBS is reportedly in talks to acquire Credit Suisse. The Swiss National Bank and the Swiss regulator FINMA organized the talks, according to the Financial Times. Credit Suisse said on Thursday that it would borrow as much as $54 billion from the Swiss National Bank after its shares tumbled 24 percent to a new low.
Goldman Sachs eyes a big payout. The Wall Street giant tried to help Silicon Valley Bank arrange a last-minute capital raise to save it. But it also had another role: Goldman bought $21.4 billion of debt from the failed bank (which the failed lender booked at a cost of $1.8 billion), and is set to make more than $100 million by selling the bonds.
A Silicon Valley Bank customer’s view of the collapse goes viral. A number of tweets by Alexander Torrenegra, founder and C.E.O. of a recruitment site and an investor on the Colombian version of “Shark Tank,” revealed what it was like to be cut off as the bank imploded.
Do we need a new type of bank?
The conversation in Washington about how to regulate banks in the wake of Silicon Valley Bank’s collapse is well underway, with disagreements about how to bail out failed lenders and prevent another crisis.
But to Lowell Bryan, a former head of McKinsey & Company’s banking practice, the answer lies in a debate that was held three decades ago. His proposal: Create a new type of low-risk bank.
U.S. banking should be divided by levels of riskiness, Mr. Bryan argued in the 1990s. Deposits at “core banks” would be insured by the government, but these lenders would be allowed to participate only in low-risk businesses.
Wholesale banks would draw funding from private investors but wouldn’t be protected by the government. If they made fatal missteps, the government would intervene to prevent widespread panic, but the firms would fail and investors would be punished. (Mr. Bryan has argued that big financial companies could own both kinds of banks — so long as the depository lender was adequately protected from its wholesale counterpart.)
The attraction of this system, Mr. Bryan told DealBook in an interview, is that it fundamentally limits the risks in the banking industry in a way that complex requirements for liquidity and capital measures don’t.
“The central issue is, if you give a federal guarantee, you have to put real limits on the ability to raise deposits,” he said.
Consider what happened at banks that have failed recently. Silicon Valley Bank increased its deposit base to $175 billion, while investing that money in a bond portfolio that was vulnerable to rising interest rates. It also extended $74 billion in loans to largely one risky sector, tech start-ups.
Meanwhile, Silicon Valley Bank pushed hard for regulatory exemptions that allowed it to pursue potentially lucrative, but dangerous, financial bets.
Mr. Bryan’s idea has been tested before. At McKinsey in the 1980s and 1990s, he was a prominent proponent of the core bank concept, writing books and testifying before Congress on the matter. He assembled an unusual coalition, including Representative Chuck Schumer, Democrat of New York and now the Senate majority leader; NationsBank, a predecessor of Bank of America; J.P. Morgan, before it merged with Chase Manhattan; and Goldman Sachs.
Opposing them was a group that included Jay Powell, a Treasury Department official in the George H.W. Bush administration who’s now the Federal Reserve chair, and Sandy Weill, the architect of what became Citigroup. They argued that American lenders benefited from relaxed regulations that allowed them to diversify their businesses, and they won. Rewrites of U.S. banking rules allowed the creation of both enormous universal banks and smaller lenders that could still take on risks.
Protecting depositors ensures faith in the overall banking system, Mr. Bryan said. But banks can’t be allowed to operate with an essentially unlimited protection against the consequences of risk. He contends that what he’s calling for is clear and narrow, capable at this point of winning bipartisan support.
“There’s not a need to rewrite everything,” he said.
‘If I ruled as off-limits anything I’d worked on when I was in Congress, I guess I’d be a monk.’
— Barney Frank, the former liberal congressman and an architect of the landmark Dodd-Frank act to reform financial regulation, defending his decision to serve on the board of Signature Bank. Regulators closed the New York-based lender last weekend after many depositors withdrew their money following the collapse of Silicon Valley Bank.
On our radar: ‘Age of Easy Money’
There’s a short explanation of what caused the collapse of Silicon Valley Bank: When Moody’s informed the bank’s chief executive this month that its bonds were in danger of being downgraded to junk, a failed attempt to raise money incited panic and a run on deposits. But “Age of Easy Money,” a PBS documentary released this week, details a much longer answer that starts with the financial crisis in 2008. The “Frontline” correspondent James Jacoby details how the Fed’s rescue interventions after the crisis, and later during the pandemic, fueled the longest bull market in history — and the underlying conditions for SVB’s failure.
Sarah Kessler contributed reporting.
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