President Biden is in danger of a catastrophic banking crisis, unless the U.S. government can orchestrate a deal to rescue Silicon Valley Bank depositors before branches open tomorrow.
Why it matters: Bank runs kill banks, no matter how good or bad their risk management. (For a quick primer, see the famous financial-crisis documentary Mary Poppins.)
How it works: Banks don't keep deposits in a vault — they lend them out to businesses and individuals. So if depositors ask for all their money back at once, as they did at SVB, the bank is likely to fail.
- Corporate America just got a stark reminder that none of their deposits are insured above $250,000 by the Federal Deposit Insurance Corporation (FDIC).
- If SVB's depositors aren't made whole by Monday morning, hundreds of billions of dollars of corporate deposits are likely to flow out of regional banks. Most would flow into a handful of so-called systemically important banks — if they're too big to fail, they won't fail. Some might go into other ultra-safe havens like Treasury bills.
State of play: Every non-enormous bank in America is left to worry about whether it's going to be able to hold onto its corporate customers.
- Investors are worried, too. Shares of First Republic fell 34% last week, Signature Bank fell 38%, and PacWest was down 55%.
In the short term: The Biden administration must find a well-capitalized buyer for SVB's commercial business, if not also its private bank, securities and U.K. units.
- That would allow customers to access their money, including for meeting this week's payroll, and provide the sort of calm that discourages bank runs elsewhere.
- If it's unable to find a buyer, the government will come under pressure to back the uninsured deposits. That would be politically unpalatable, particularly for Silicon Valley Bank, but it's preferable to the alternative.
Where it stands: The FDIC is clearly the main entity in charge. Its leadership is acutely aware that the best way to avoid bank runs is to signal that everybody with money at SVB ended up having full access to all their funds.
- Treasury and the White House also have a role to play, by removing any regulatory obstacles to SVB being immediately acquired by the likes of a large bank such as JPMorgan or Goldman Sachs.
In the long term: During the great financial crisis, the Federal Reserve guaranteed corporate transaction accounts under something called the Transaction Account Guarantee Program (TAG). That, however, expired at the end of 2012.
- Had TAG or something similar been in place last week, SVB might still be alive today, and thousands of companies wouldn't now be worrying about their financial solvency.
Between the lines: One of the reasons for the $250,000 cap on guaranteed deposits is that insuring more deposits is generally more expensive, both for participating banks and for the FDIC.
- But it doesn't always work that way. A lower cap can mean higher insurance costs, if it causes more bank runs. In that sense, extending deposit insurance to include corporate transaction accounts could actually save the government money.
The bottom line: Look around the world, and nearly all countries are dominated by three or four banks. The U.S., with its thousands of banks, is an outlier. The FDIC's job is to shore up confidence in every last one of those banks. Right now that job is harder, and more urgent, than ever.
