I recently bemoaned the Fed’s failure before and after SVB’s collapse to demand source-of- strength backstops from the parent holding company. That these would have materially reduced the FDIC’s cost and thus that of the large banks picking up this tab is still more obvious by the fact that it took the Justice Department to bar big pay-outs to the parent company’s executives. Clearly, there’s still money to be made, just not for anyone else. However, the source-of-strength question takes on still more immediate importance in light of the highly worrisome case of Hawaii Electric. It owns American Savings Bank (ASB), a $9.6 billion insured depository. Some parent-company investors somehow think ASB will bail out the beleaguered Maui electric utility, redefining who is the source of strength. ASB can’t, but that doesn’t mean the insured depository is safe and sound. Without downstreamed parent-company cash in hand to protect it from the utility’s travails, the insured depository and thus the FDIC are sure to suffer.

Yet another formidable post on the Bank Reg Blog lays out the history of how it came to be that an public utility owns an insured depository. Barriers between banking and commerce that Congress didn’t close for BHCs in 1956 were shuttered in 1970 and 1987, leaving only industrial loan companies and unitary thrift holding companies (i.e., parent companies such as Hawaii Electric) as the only ones allowed to own insured depositories. Unitary thrifts were prospectively barred in 1999 and several large grandfathered ones did themselves in during the great financial crisis, (see for bad examples WaMu and GE Capital). This leaves only little-bitty unitary thrifts such as Hawaii Electric’s, but that doesn’t mean the risk is immaterial. Anything but.

Many have blamed the unthinkable scale of Maui’s devastation on Hawaii Electric’s failure to act quickly and properly when high winds knocked down sparking power lines. Equity markets are clearly betting on what is priced as certain bankruptcy, leaving ASB in the hands of a trustee investors are also betting will have its hands full with a lot of immediate problems above and beyond figuring out what to do with ASB. Thus, value is said to remain in Hawaii Electric’s carcass that investors believe they will realize.

And so they might if the utility’s thrift remains well-capitalized and liquid and can eventually be sold. But can American Savings Bank withstand stress? That remains very much to be seen.

Worrisomely, the thrift holds $1.7 billion in uninsured deposits. These may stay put because the agencies have promised that all uninsured deposits will be protected. However, as anyone but an uninsured depositor knows, this is an empty promise absent another systemic designation. The proclamation expressly protecting uninsured depositors applies only to SVB and Signature. Further, uninsured-deposit outflows aren’t the only cause of recent bank failures. First Republic died even though depositors stood firm. Like it, ASB has problems beyond immediate illiquidity, most notably the potential for catastrophic losses due to the scope of Maui’s destruction to much of ASB’s collateral and many customers.

These are the kind of risks that bank supervision is meant to anticipate, mitigate, and if worst comes to worst, offset via a source-of-strength payment. If supervisors failed yet again and missed them here, then supervisors will have still more deserved hell to pay.

But, bank supervisors cannot be blamed for failing to anticipate a parent utility company’s risk nor can they do so for many parent companies allowed by the FDIC to own insured depositories with only a promise that the parent stands behind the bank under stress. When a parent company is a BHC or SLHC, the Fed can and indeed it must be sure that the parent company is a viable source of strength ahead of time. When the parent is a nonbank, this is harder, but can and should be done. Until it is, insured depositories at the beck and call of commercial or nonbank financial companies will be cash cows for parent companies milked dry ahead of the FDIC.