Whatever one terms the turmoil in U.S. banking, Harry Davis says he’s got the remedy: Guarantee all bank deposits.
It shouldn’t matter if those deposits are at the smallest local bank or the four giant mega-banks, says Davis, a finance professor at Appalachian State University for more than 40 years and longtime economist for the N.C. Bankers Association. The Federal Deposit Insurance Corp. needs to make clear that all the $17.8 trillion in domestic deposits are safe.
Until then, Davis expects investor confidence in the U.S. banking system will remain jittery and more money will flow to the four “too big to fail” giants: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo. He says that’s unfair.
The issue mounted after the March-April failures of Silicon Valley Bank, Signature Bank and First Republic Bank, three of the 30 largest U.S. lenders, and the KBW Nasdaq Regional Banking Index sunk in early May to its lowest level since 2016 (excluding the COVID-19 panic in early 2020.)
The Federal Reserve stepped in to make depositors whole at the three failed banks and, by extension, to buck up confidence. Only investors and senior bank executives felt any real sting.
“The feds did the right thing,” says Davis. “They stepped in and guaranteed everything, and no one lost a dime of their deposit. And no one is going to lose a deposit, not next year, not for the next 100 years.
“If you’re going to save the depositors at (Silicon Valley Bank)
and First Republic, then you can’t turn around and not do it for the bank across the street,” he adds. “Everyone knows this. I know it. The Fed knows it. The bag boy at the grocery store knows it.”
The problem is that it’s not written down in the law, Davis says. “So what we need is some clarity.”
Insuring all deposits would be costly to the 4,700 banks that pay for the FDIC’s Deposit Insurance Fund. Covering all domestic deposits would mean increasing the fund from $125.5 billion to $240 billion. That equates to a 1.35% reserve ratio. Many bankers oppose higher fees, Davis says.
The recent bank failures followed depositor runs due to a toxic mix of rapidly rising interest rates that devalued assets and a high percentage of uninsured deposits. At Signature and Silicon Valley, the percentage of uninsured deposits topped 90%. Sixty-eight percent of First Republic’s deposits were uninsured.
The FDIC insures deposit accounts up to $250,000 each. The insurance amount is 100 times what it was at the agency’s inception in 1933, but it hasn’t kept pace with the nation’s wealth. Uninsured deposits peaked at 46.6% of deposits
As problems at individual banks emerged, depositors with uninsured accounts pulled money out. That panic was aided by mobile banking and fueled by social media. “I think Silicon Valley (Bank) was basically tweeted out of existence,” says Davis.
Changing the deposit insurance law would require an act of Congress, and several lawmakers have called for new limits, including $1 million per account. The FDIC issued a May white paper that lists three options: increasing the current limit, raising the limit on corporate accounts, or adopting unlimited coverage.
“Put it at $1 million, $2 million, $5 million. It really doesn’t matter,” Davis says. “It wouldn’t have stopped what just happened and it doesn’t make any difference. We know the Fed is going to guarantee all depositors.”
Unlimited coverage has its pitfalls, critics argue. It might lead to greater risk-taking and affect competing deposit instruments, including treasury bills and bonds.
Alas, the professor doubts his idea will prevail in Congress. “More likely is they’ll raise the limit again and hope it all works out all right.” ■