From the WSJ editorial page
Janet Yellen’s Blurred Lines on Bank Depositors
Are all deposits insured or not? Only she seems to know.
By The Editorial BoardFollow
March 23, 2023 6:44 pm ET
Treasury Secretary Janet Yellen on Thursday walked back her comments from the day before that walked back her remarks the day before about providing a de facto guarantee on all U.S. bank deposits. Who’s on first? The Administration’s mixed signals are becoming another threat to the financial system.
The essence of financial stability is market confidence, which requires clear, consistent rules. But Ms. Yellen is muddling the rules and the Administration’s message. On Tuesday she said protecting uninsured depositors over $250,000 could “be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Yet on Wednesday she told the Senate that she had not considered or discussed “blanket insurance or guarantees of deposits.” She knows she doesn’t have the authority to guarantee all deposits without approval from Congress, which may explain her flip-flop.
After bank stocks tanked, Ms. Yellen did another U-turn and told the House on Thursday that “we would be prepared to take additional actions if warranted.” So now no one is sure whether uninsured depositors will be covered other than at the giant banks that have been deemed too big to fail.
Some history is relevant here. Congress in 1991 barred the Federal Deposit Insurance Corp. (FDIC) from protecting uninsured depositors unless Treasury in consultation with the President invoked a “systemic risk” exception with two-thirds support of the FDIC board of directors and the Federal Reserve Board.
The FDIC during the thick of the 2008 financial crisis broadly interpreted this exception and set up a temporary program that guaranteed non-interest-bearing deposits in transaction accounts. But the 2010 Dodd-Frank Act purposefully narrowed regulators’ discretion to do so again by limiting the systemic-risk exception to institutions under FDIC receivership.
Treasury hasn’t clearly explained why protecting uninsured depositors at Silicon Valley or Signature banks was necessary to prevent a systemic risk. The Administration ostensibly feared more bank runs. No doubt there would have been some turmoil, but the example of rich depositors taking a modest haircut would have been a useful lesson.
Investors and depositors are more discerning than regulators think. Not all small and midsize banks suffered large deposit outflow or stock selloffs after SVB collapsed. Those hit hardest had a large share of uninsured and fickle deposits, high interest-rate duration risk, and heavy exposure to tech and commercial real estate.
The Independent Community Bankers of America said its members didn’t report widespread withdrawals in response to the SVB and Signature failures, and many saw an increase in deposits. Large depositors probably spread their money around to multiple banks to minimize risk. Community banks tend to maintain higher capital levels, which should make them safer.
A redistribution of deposits to sound banks would be good for the financial system even if it stressed weaker banks. Federal Home Loan Banks, the Federal Reserve discount window and the Fed’s new Bank Term Funding Program provide otherwise healthy banks with liquidity to weather panics like this one.
***
But midsize banks have been lobbying regulators for a blanket guarantee of all deposits. News reports earlier this week said Treasury staff were reviewing whether they had emergency authority to do so without the consent of Congress, such as by using the Exchange Stabilization Fund. All of this makes Ms. Yellen’s denials in her Senate testimony appear even less credible.
She has now created the expectation that all deposits at all banks will be covered. But nobody knows what the Administration will do since Ms. Yellen also said Wednesday that regulators will decide on a case by case basis. This means it will be up to political discretion, which is the worst of all worlds for confidence.
Regulators didn’t guarantee uninsured deposits at the Silvergate Bank after it failed, no doubt because of its crypto ties. But Ms. Yellen on Wednesday suggested regulators might protect those at other small banks if they deem it necessary to prevent contagion. The Dodd-Frank systemic-risk exception that was intended to constrain regulators has become meaningless.
Such progressives as Sen. Elizabeth Warren are now calling for broader protections of rich depositors, which they want to use as an excuse to impose more regulation that will enshrine too big to fail for more banks. What the banking system needs most now is market confidence and discipline. Mixed signals from regulators are undermining both.
Janet Yellen’s Blurred Lines on Bank Depositors
Are all deposits insured or not? Only she seems to know.
By The Editorial BoardFollow
March 23, 2023 6:44 pm ET
Treasury Secretary Janet Yellen on Thursday walked back her comments from the day before that walked back her remarks the day before about providing a de facto guarantee on all U.S. bank deposits. Who’s on first? The Administration’s mixed signals are becoming another threat to the financial system.
The essence of financial stability is market confidence, which requires clear, consistent rules. But Ms. Yellen is muddling the rules and the Administration’s message. On Tuesday she said protecting uninsured depositors over $250,000 could “be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Yet on Wednesday she told the Senate that she had not considered or discussed “blanket insurance or guarantees of deposits.” She knows she doesn’t have the authority to guarantee all deposits without approval from Congress, which may explain her flip-flop.
After bank stocks tanked, Ms. Yellen did another U-turn and told the House on Thursday that “we would be prepared to take additional actions if warranted.” So now no one is sure whether uninsured depositors will be covered other than at the giant banks that have been deemed too big to fail.
Some history is relevant here. Congress in 1991 barred the Federal Deposit Insurance Corp. (FDIC) from protecting uninsured depositors unless Treasury in consultation with the President invoked a “systemic risk” exception with two-thirds support of the FDIC board of directors and the Federal Reserve Board.
The FDIC during the thick of the 2008 financial crisis broadly interpreted this exception and set up a temporary program that guaranteed non-interest-bearing deposits in transaction accounts. But the 2010 Dodd-Frank Act purposefully narrowed regulators’ discretion to do so again by limiting the systemic-risk exception to institutions under FDIC receivership.
Treasury hasn’t clearly explained why protecting uninsured depositors at Silicon Valley or Signature banks was necessary to prevent a systemic risk. The Administration ostensibly feared more bank runs. No doubt there would have been some turmoil, but the example of rich depositors taking a modest haircut would have been a useful lesson.
Investors and depositors are more discerning than regulators think. Not all small and midsize banks suffered large deposit outflow or stock selloffs after SVB collapsed. Those hit hardest had a large share of uninsured and fickle deposits, high interest-rate duration risk, and heavy exposure to tech and commercial real estate.
The Independent Community Bankers of America said its members didn’t report widespread withdrawals in response to the SVB and Signature failures, and many saw an increase in deposits. Large depositors probably spread their money around to multiple banks to minimize risk. Community banks tend to maintain higher capital levels, which should make them safer.
A redistribution of deposits to sound banks would be good for the financial system even if it stressed weaker banks. Federal Home Loan Banks, the Federal Reserve discount window and the Fed’s new Bank Term Funding Program provide otherwise healthy banks with liquidity to weather panics like this one.
***
But midsize banks have been lobbying regulators for a blanket guarantee of all deposits. News reports earlier this week said Treasury staff were reviewing whether they had emergency authority to do so without the consent of Congress, such as by using the Exchange Stabilization Fund. All of this makes Ms. Yellen’s denials in her Senate testimony appear even less credible.
She has now created the expectation that all deposits at all banks will be covered. But nobody knows what the Administration will do since Ms. Yellen also said Wednesday that regulators will decide on a case by case basis. This means it will be up to political discretion, which is the worst of all worlds for confidence.
Regulators didn’t guarantee uninsured deposits at the Silvergate Bank after it failed, no doubt because of its crypto ties. But Ms. Yellen on Wednesday suggested regulators might protect those at other small banks if they deem it necessary to prevent contagion. The Dodd-Frank systemic-risk exception that was intended to constrain regulators has become meaningless.
Such progressives as Sen. Elizabeth Warren are now calling for broader protections of rich depositors, which they want to use as an excuse to impose more regulation that will enshrine too big to fail for more banks. What the banking system needs most now is market confidence and discipline. Mixed signals from regulators are undermining both.
