We learned the hard way in 1932 that a crisis in confidence, which could be sparked by baseless rumors, could create a bank run that could bankrupt even a healthy bank. To protect our banking system, in 1933, the federal government created the Federal Deposit Insurance Corp. with the goal to insure depositors against loss. Eliminating the risk of loss to depositors would, in most cases, eliminate a bank run because depositors had no reason to panic and make large withdrawals. The FDIC now insures accounts up to $250,000.
But today in many regional banks, uninsured deposits exceed 50% of total deposits, and banks generally carry liquidity sufficient to satisfy redemptions of less than 10% of their deposits. We are now back in a position in which rumors create runs that can destroy healthy banks because the banks don’t have the liquidity to satisfy the demands of panicked and uninsured depositors.
We are learning the hard way something we already learned 90 years ago. In the case of First Republic Bank, its assets exceed its liabilities by a relatively decent margin even after taking into consideration write-downs on held-to-maturity bonds, according to the bank’s public filings. That does not mean it is bankrupt (in the technical sense). Its operating income exceeds its operating expenses by a comfortable margin, meaning that it is profitable and not otherwise in danger of becoming bankrupt. And yet, panicked (uninsured) depositors are making withdrawals by the truckload that are driving an otherwise profitable and solvent bank into bankruptcy due simply to a lack of liquidity. This is exactly the problem the federal government created FDIC insurance to prevent.
The Federal Reserve has agreed to (after the fact) insure all depositors of Silicon Valley Bank and Signature Bank. They have made sizable loans to First Republic, and several other large banks have made sizable deposits to replace the deposits withdrawn by worried patrons, but they have stopped short of the one move that would eliminate this crisis immediately.
They need to remove the $250,000 cap on FDIC insurance limits.
This has nothing to do with bailing out the rich, but it’s a step merely to reestablish confidence in the banks and stop the bank runs that risk collapsing First Republic Bank and many others like it – and perhaps even our entire banking system as we know it.
Additionally, this does not contribute to “moral hazard” as many pundits contend. The executives making these risky decisions still lose their jobs and the doors still close on these risky banks. This is not a bailout of the banks. This is a bailout of their customers. The Federal Reserve should still regulate banks to ensure proper capitalization and if these banks are properly capitalized, there is little risk to the FDIC in insuring those deposits.
The Federal Reserve and the U.S. treasury secretary were late to the party on inflation. As a result, they needed to increase interest rates at a pace faster than we have ever seen. Now that the rapid rate increases are causing havoc on our banks, they are proving to be late to the party again. Save First Republic Bank. Save our banking system. Eliminate dollar caps on FDIC insurance immediately. Every day we wait to make this move is a day closer to the collapse of many good, healthy banks and perhaps banking as we know it.
Christopher V. Bilotti is managing partner at NAI Advisors, a full-service commercial real estate brokerage based in Providence.