President Biden has long positioned himself as a champion of the middle class, but his administration’s bank bailouts have the potential to become a generous gift to the rich. The most controversial aspect of the emergency rescue of Silicon Valley Bank and Signature Bank was the decision to fully compensate all depositors of those banks, even sophisticated millionaires and billionaires who presumably were fully aware that the amounts they were holding in their accounts were well above the usual $250,000 limit that the government insures.
Now other bank executives are understandably asking: Are all their customers’ deposits fully insured as well? Treasury Secretary Janet L. Yellen pretty much said yes this week when she told the American Bankers Association that it is "our resolute commitment to take the necessary steps to ensure that deposits’ savings and the banking system remain safe” and that "similar actions could be warranted” if other institutions face runs like Silicon Valley Bank did.
A blanket government backing of all deposits in the United States would be a mistake. It would encourage risk-taking at banks because they know the government would step in if they faltered. Even worse, such sweeping action would protect wealthy Americans — and would be funded through fees that banks pay to the Federal Deposit Insurance Corporation, which means, indirectly, by anyone with a bank account. How many more billionaires such as Peter Thiel, who had $50 million parked in Silicon Valley Bank, should average bank account holders be expected to bail out?
“Unlimited [deposit] insurance ... would be very expensive to do. It would be assessed on the banking system, backstopped by taxpayers, and would primarily help very, very wealthy people,” former FDIC chair Sheila Bair said in a PostLive interview. Nor is there a clear precedent. In prior bank failures, depositors sometimes got only half their money back.
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There is a better approach. The goal should be to protect the savings of the middle-class bank customers and of the small and midsize businesses that are key to economic dynamism and growth. These are the people and firms for whom the FDIC’s safety net was designed during the Great Depression, when thousands of banks failed, leaving their customers stranded. They do not have the financial sophistication, or the armies of financial analysts, to assess bank balance sheets and suss out the likelihood that a bank is going to fail.
To achieve this goal, the FDIC should continue to insure accounts up to $250,000 and add an emergency provision to fully back all “transaction accounts” that businesses use to make payroll and cover other basic needs. In so doing, it would protect the vast majority of U.S. deposits. It would also stabilize the banking system. This is exactly the approach that the FDIC took during the 2007-2009 financial crisis to help buttress the system during a more extreme crisis. Though such a move would require increasing the fees that banks pay to the FDIC, it would be manageable, especially if the coverage is temporary.
It is unclear how much the Biden administration can do on its own to expand, beyond temporarily, deposit insurance. The Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in 2010 required congressional approval for any broad and permanent move. Given that every lawmaker has many companies in their districts who need this type of protection, it is likely that there will be significant support for increasing coverage for business transaction accounts.
A strong banking system is integral for the economy, but the federal government should stop short of endorsing too-rich-to-fail bank customers. Deposit insurance should protect the savings — and wages — of the middle class.
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