#S&L – Federal Financial Analytics

17 04, 2023

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

Eliza Allen2023-04-17T12:02:05-04:00April 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 …

FedFin Analysis: Whom and What the FDIC and Fed Can Save How

Arezou Rafikian2023-03-24T17:05:38-04:00March 24th, 2023|The Vault|

Recent editorials and other media have often said that the FRB and/or FDIC have powers or taken actions that is not the factual case as we understand it. Members of Congress also appear sometimes willing to make assertions about what agencies can do now even if it is unclear if there is statutory authority to do so. We have provided individual clients with key clarifications, but do so now more generally to support strategic and advocacy decision-making. Of particular importance is the authority the FDIC is said to have or lack related to uninsured deposits; as detailed below, the agency actually has significant authority to do so as well as even to back BHC debt, as long as certain stringent conditions are met. As detailed in FSM Report RESCUE65, Congress limited both the FDIC and Fed in hopes that….

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

Karen Petrou: Three Fast, Urgent Fixes to U.S. Bank Supervision and One Major Change to End Bailouts

Eliza Allen2023-03-20T11:35:24-04:00March 20th, 2023|The Vault|

In the wake of recent bank failures, much has rightly been said about how supervisors failed to act even though warning claxons blared. Nothing that happened to Silvergate, SVB, or Signature is due to forces beyond supervisory control, but there are deep, structural weaknesses in how banks have long been supervised. How long? I went back to my 2001 Senate Banking testimony about what was then the largest-ever failure to find that many of the lessons that should have been learned never sunk in.

Given that this hearing was in 2001, a good deal of what I said about bank capital requirements was about Basel I and is thus long out of date. However, one key point isn’t: the capital triggers used to spark prompt corrective action (PCA) were and are an unduly-simplistic way to identify the need for rapid supervisory intervention.

Silvergate, SVB, and Signature were all “well” capitalized right up to the brink of collapse because each of the banks in its own way arbitraged the capital rules to enormous – and obvious – advantage. Nothing in law or rule bars bank supervisors from stepping in well before PCA ratios sink but nothing seems to stir supervisors to do so. 1991’s PCA requirements were an important advance at the time, but it was outdated only a decade later. Now, it’s a dangerous supervisory distraction.

What else noted in 2001 remains an urgent fix? Over two decades ago, I urged the FDIC to reinstate the high-growth early-warning system it …