Fed Tools to Stop Bank Runs
Lenders with a lot of uninsured deposits should be required to have high-quality assets ready at the Fed’s emergency lending facility.
Bank runs remain thankfully rare, largely because deposits up to $250,000 are guaranteed by the Federal Deposit Insurance Corp.
Yet customers with larger, uninsured balances are still prone to flee at signs of danger.
Those deposits amounted to almost 45% of the total as of 2022. (In NYCB’s case, the latest figures were $22.9 billion, or 28%.)
Some uninsured deposits are in business accounts used to pay workers and suppliers; it’s the other, nonoperational accounts that tend to be flightiest in a crisis.
The Federal Reserve’s traditional tool for this task is the discount window. The problem is that the window has acquired a stigma over the years, making banks reluctant to access it for fear of spooking creditors, depositors and investors.
Instead, they’ve turned to alternative lenders such as the Federal Home Loan Banks, public-private hybrids that, unlike the Fed, can face their own funding challenges during market disruptions.
SVB lost about a quarter of its uninsured deposits in one day and expected to lose more than twice that the following day. At that rate, it’s fair to suppose most nonoperational uninsured deposits are a flight risk.
Banks should be required to hold enough high-quality collateral at the Fed to cover the withdrawal of all their nonoperational uninsured deposits.
The Federal Home Loan Banks offer loans to Wall Street that are too cheap
The Economist 14 February 2024
https://englundmacro.blogspot.com/2024/02/the-federal-home-loan-banks-offer-loans.html
FDIC Says It Should Have Done More to Supervise First Republic Bank
https://englundmacro.blogspot.com/2023/09/fdic-says-it-should-have-done-more-to.html
More Deposit Insurance Won’t Make Banks Safe - Dudley - Mervyn King
https://englundmacro.blogspot.com/2023/07/more-deposit-insurance-wont-make-banks.html
Financial Crises Are a Feature of the US System
The Silicon Valley Bank autopsies are over, but the problems still remain.
It’s a year since the failures of Silicon Valley Bank and Signature Bank – and the renewed cries of “never again.”
More relevant to today’s battles is what happened in the 1980s and 1990s when economic and political pressures along with advances in technology spurred a wave of regulatory changes and created much larger banks that did business nationally.
The process of approving mergers gave political activists the chance to extract concessions, particularly around increasing the availability and affordability of credit for homebuyers
The process of approving mergers gave political activists the chance to extract concessions, particularly around increasing the availability and affordability of credit for homebuyers
This great banking bargain and the expansion of home ownership since the 1980s always involved taxpayer subsidies, they just weren’t obviously visible.
They were paid through minimal interest rates on deposits, government sponsorship of Fannie Mae and Freddie Mac and ultimately the implicit state support for the banking system because of its critical role in the economy.
These subsidies evolved over the 20th century and were exploited by banks, interest groups, politicians and, really, everyone else.
SVB still happened, but the system is probably much safer than it was. However, it’s also easy to be complacent about the short life of last March’s problems.
Don’t forget how quickly the Treasury pledged to look after uninsured deposits, or that the Fed immediately opened a program for cash-strapped banks to swap government bonds for funding at face value. These prevented other potential bank runs.
The US has suffered regular banking crises over the centuries and more than 560 banks have failed just since 2000.
The regulatory response to SVB, the Fed’s proposed rule changes, is already in deep trouble politically. Chair Jerome Powell now suggests they could be withdrawn. The Recoup Act, too, might well be neutered, just like previous similar attempts.
Paul J. Davies Bloomberg 8 mars 2024
https://www.bloomberg.com/opinion/articles/2024-03-08/financial-crises-are-a-us-feature-not-a-bug
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