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Opinion I was president of Barclays. Here’s why we need to save regional banks.

The Federal Deposit Insurance Corporation logo is displayed outside a First Republic Bank branch in Santa Monica, Calif., on Monday. (Patrick T. Fallon/AFP/Getty Images)
5 min

Bob Diamond is chief executive of Atlas Merchant Capital. He was on the board and president of Barclays from 2005 to 2012 and chief executive from 2011 to 2012.

Over the past two weeks, we have seen the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation step in to guarantee all deposits at two banks and coordinate additional deposits at a third. This was sound policy, but further action is needed if the U.S. regional and specialist banking model is going to survive. That’s why Treasury Secretary Janet L. Yellen’s comments Tuesday that the U.S. government will back deposits at smaller American banks, if needed, are a move in the right direction.

In the aftermath of the 2008 financial crisis, my mantra as president of Barclays was: How do we balance making banks safer and sounder, while also driving economic growth and job creation?

Asking myself this same question today, I see an obvious course of action: Restore confidence and stability in regional and specialist banks by expanding federal deposit protections and ensuring adequate regulatory supervision. This would do much to stem the flow of deposits out of these institutions and into the large banks, allowing well-run banks to thrive and providing security for U.S. depositors.

It is not simply a question of supporting banks, but of supporting consumers, small businesses and homeowners across the country. Smaller banks have knowledge and expertise that their larger peers do not. They are intimately familiar with the economic conditions and needs of their customers in specific regions or industries. A regional bank in a rural area might be more willing to lend to farms and agricultural businesses than a larger national bank that might not have the same understanding of the local economy. In fact, roughly 40 percent of bank lending in the United States comes from those outside the largest 25 institutions.

Regional and specialist banks also play an important role in supporting small and medium-size businesses. These businesses often have difficulty obtaining financing from larger banks, which tend to focus on larger, more established corporations. Smaller, more focused banks, on the other hand, are more likely to lend to small businesses and are able to do so at a significantly lower cost. In addition to providing loans, regional banks can offer services tailored to the needs of small businesses, such as payroll processing and merchant services. By providing this critical support to small businesses, regional and specialist banks help to drive job growth and support local economies.

Critics will point to the potential consequences of deposit concentration risk. If a large depositor or group of depositors were to withdraw its funds from a smaller bank, it could cause a liquidity crisis and put the bank at risk of failure. Even if the bank does not fail, the sudden loss of deposits could severely limit its lending capacity, hurting the local economy and potentially leading to a decline in property values.

These risks are not new and have been effectively addressed by policymakers in the past. Expanding deposit protections would do much to mitigate the worst risks in the near term. Furthermore, the question of deposit concentration within individual banks must be weighed against the risks of concentration across the banking sector as a whole. After 2008, roughly half of all American deposits were held in just five big banks. This is an already remarkably high level of concentration, the result of consolidation in the industry that left depositors with fewer banks to choose from. Without coordinated policy action, there will be even less choice, and the share of deposits held in just a handful of banks will rise further.

Were that to happen, the regional and specialist banking model in the United States would effectively be dead, with thousands of jobs lost and consumers, small businesses and savers left with a banking oligopoly unable to cater to their needs or give them the same attention and support.

What is to be done? Americans might forget that the reason we have so many banks is that we have deposit insurance. But at present, the $250,000 FDIC cap on insured deposits is too low. At the very least, this cap should be raised considerably, and the specific guarantees given to depositors at Silicon Valley Bank and Signature Bank should be extended to other small and medium-size banks.

The most effective option, however, would be for federal regulators to extend FDIC insurance to all deposits, at least temporarily. This would be in line with the recommendation made last week by a coalition of midsize banks.

It is important to keep in mind that such a policy would be funded by FDIC-regulated banks, not the taxpayer. Creditors, shareholders and company management would not be bailed out or enjoy any additional protections. The rigors of the market would remain in place.

This is a very different situation from the one in 2008. Banks have faced significantly more restrictive capital and regulatory actions and have increasingly become more and more like utilities. This was underlined during the pandemic, when banks effectively acted as agents of government fiscal support. Extending existing deposit insurance reflects this changed status and does so while allowing banks to fail without putting depositors at risk.