#deposit insurance

20 07, 2023

FedFin on: Senate Banking Kicks Deposit-Insurance Reform Down the Road

2023-07-21T17:03:13-04:00July 20th, 2023|The Vault|

In the wake of today’s Senate Banking deposit-insurance reform hearing, it seems certain that there will be no legislation in the near term and most likely in this Congress to increase FDIC-insurance thresholds.  Although the FDIC recommended a new approach to transaction accounts in its policy review following recent bank failures (see Client Report DEPOSITINSURANCE119), Senators on both sides of the aisle demurred.  Chairman Brown (D-OH) made it clear that any change in FDIC-coverage limits is conditioned on final, tougher bank regulations, essentially telling banks that successfully opposing new rules means keeping FDIC coverage as is….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

15 05, 2023

Karen Petrou: How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

2023-05-15T11:52:36-04:00May 15th, 2023|The Vault|

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk.  The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion:  the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation.  In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death.  Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits.  The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …

24 04, 2023

Karen Petrou: The Price of Higher FDIC Protection and How to Prevent It

2023-04-24T10:40:22-04:00April 24th, 2023|The Vault|

Last week’s memo stirred up a lot of comment about ways to provide at least some private-sector deposit insurance.  The consensus is that, while nothing is easy about a private-sector backstop for federal coverage, the concept warrants careful consideration because all the other reform ideas on their own are still more problematic.  This isn’t just because proposals for expanded federal coverage – my own included – extend the federal safety net at resulting moral hazard.  In some cases, as I said, this risk is worth taking because some depositors warrant protection.  Still, there’s sure to be a price for more federal coverage – super-costly premiums and/or more bank regulation – that argue for market-based solutions to the greatest extent compatible with social welfare and stable finance.

This trade-off was most recently addressed last week by John Vickers, a former U.K. regulator.  Commenting on proposals across the pond akin to those in the U.S. to expand the sovereign deposit backstop, Mr. Vickers cautioned that added coverage should come with higher regulatory capital to ensure that banks do not take undue advantage of the comfy quilt into which the current, porous safety net would be transformed.

The U.K. deposit insurance system is different than that in the U.S., most notably by the absence of costly, ex ante bank premiums for the privilege of deposit-insurance coverage.  However, the U.S. risk-based premium system that sets bank premium payments is asset – not insured deposit – based.  As a result, coverage could go up considerably …

17 04, 2023

Karen Petrou: Why FDIC Privatization Isn’t a Pipe Dream

2023-04-17T12:02:05-04:00April 17th, 2023|The Vault|

As night follows day, so proposals to privatize the FDIC have again followed bank failures.  While debate over deposit-insurance privatization was, is, and will be an ideological tug of war between free-market conservatives and government safety-net progressives, it’s nonetheless an important option that warrants careful analysis as the FDIC yet again faces huge losses, banks are charged crippling and procyclical premiums, and talk turns to still more federal coverage at still greater risk not just to insured banks, but also to taxpayers.  Pure FDIC privatization remains impossible, but target risk transfers warrant careful, but quick consideration.

Privatization was last seriously discussed when Congress rewrote FDIC coverage in 2006.  This was a halcyon time when the FDIC was so sanguine about all the rules put in place after the S&L and bank crises that its 2007 study confidently predicted that systemic risk was a thing of the past, uninsured deposits would never again be covered, and the Deposit Insurance Fund more than sufficed for any systemic situation.

Of course, the great financial crisis that began later that same year put the lie to all this happy talk.  Privatization proposals now aren’t anywhere near as happy nor do they repeat past assertions that, with FDIC privatization, the nation could also dispense with bank regulation.  Instead, and for good reason, talk has now returned to private options because, without them, moral hazard seems sure to be embedded in a financial system that is still more shadowy.

A modern rethink of FDIC privatization must …

28 03, 2023

FedFin Assessment: Policy Implications of FDIC-Resolution Innovations

2023-04-03T12:48:36-04:00March 28th, 2023|The Vault|

As noted yesterday, the FDIC’s recent rescues have had several unusual features with implications not only for future policy, but also for pending special assessments to replenish the DIF for the $22.5 billion estimated costs to the Deposit Insurance Fund.  Analyzed here, new tools – e.g., voluntary liquidation, equity-appreciation rights, lines of credit – have determine the extent to which this estimate holds, how FHLB advances are treated in future resolutions, and the role the FDIC may play in companies that acquire failed IDIs….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

27 03, 2023

Karen Petrou: Another SVB Casualty:  U.S. Biomedical Research

2023-03-27T10:27:35-04:00March 27th, 2023|The Vault|

As seems always the case when fear has the banking system in its maw, myths have proliferated that are now also magnified and amplified by viral social media.  One such myth about Silicon Valley Bank has it that most of its depositors were high-wealth, high-tech folk whom the government should never bail out.  In fact, many depositors had no choice but to park all their funds at SVB, a more-then-dubious practice at the bank that almost brought biomedical research to its knees.  Had these depositors been forced to bear losses, treatments and cures for life-threatening and-changing diseases would have stalled, likely for years.  We need not only to prevent future researchers from being put at such risk by a single bank, but also to change the biomedical-funding model from one at the mercy of high-cost equity investors to a stable sector for which lower-cost debt is readily at hand for any researcher with demonstrable ability to repay.  Think what debt funding did for sustainable energy via green bonds and you’ll see what a like-kind model for “biobonds” could do to speed urgently-needed treatments and cures.

The link between SVB and biomedical research is not the stuff of moral-hazard myth, but rather a complex tale of a specialized institution serving a sector that came to hold unique sway over a vital public good:  lengthening life and easing suffering.  Providing banking services to venture capital (VC) is a high-risk business unless a financial institution devotes expensive intellectual capital to the sector and …

15 03, 2023

FedFin Assessment: Post-SVB Deposit Insurance Reform

2023-03-15T16:58:47-04:00March 15th, 2023|The Vault|

Cementing prior denouncements of 2018 Dodd-Frank “rollbacks” into legislative action, 17 Democratic senators and 31 House Members today took direct aim at Trump-era banking policy by introducing legislation that would repeal Title IV of the Economic Growth, Regulatory Relief, and Consumer Protection Act.  But, while this initiative is gaining considerable attention, its legislative prospects are dim – indeed, even Senate Banking Committee Chairman Brown (D-OH) suggested as much

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

 …

28 06, 2022

FedFin on: DIF Premium Assessments

2023-01-25T13:58:14-05:00June 28th, 2022|The Vault|

The FDIC is proposing to raise base Deposit Insurance Fund (DIF) assessments by two basis points (BPS) to replenish the DIF by the statutory deadline to reflect deposit inflows that the FDIC no longer expects to be temporary.  Even after the DIF reaches its minimum ratio, the added assessments would continue to restore the fund to a more ample reserve.  This will increase costs at insured depository institutions (IDIs), in some cases likely by sizeable amounts likely to alter business strategy in ways that might dampen economic growth….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

29 03, 2022

FedFin: Global Securities Regulators Diss DeFi

2023-03-27T15:46:19-04:00March 29th, 2022|The Vault|

As promised, this report provides an in-depth analysis of IOSCO’s new paper on decentralized finance, one sure to advance the FSB’s efforts to bring DeFi systems under greater regulatory scrutiny due to the findings we here detail.  In the U.S., President Biden’s crypto-focused executive order (see FSM Report CRYPTO26) highlights DeFi’s risk with regard to illicit finance.  IOSCO’s work on this report was headed by the SEC, suggesting rapid U.S. action not only on this concern, but also on many other risks by the Commission, as well as the FSOC and other U.S. agencies…

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

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