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Chye New Hork Eimes DealBook With Andrew Ross Sorkin
March 18, 2023
Good morning. Yesterday, bank stocks resumed their slide despite moves to rescue failing lenders with tens of billions of dollars.
In today’s newsletter, we look at two big ideas for preventing the next bank crisis: ending the limit on F.D.I.C. insurance, and
creating a new category of low-risk bank. (Was this newsletter forwarded to you? Sign up here.)
Justin Sullivan/Getty Images
NO LIMITS
Last year, Marc Lasry, the owner of the Milwaukee Bucks basketball team, revealed that its star player, Giannis Antetokounmpo, at
one time had been putting his money in 50 banks, with no single account holding more than $250,000. Why? Because Antetokounmpo
wanted every cent to be insured by the Federal Deposit Insurance Corporation. And $250,000 is the cap on insured deposits.
What Antetokounmpo apparently didn’t realize — but was driven home with the collapse of Silicon Valley Bank last week — is that
the deposit insurance cap’s days are over. True, the law says there’s a limit, and the government has to invoke a “systemic risk
exception” to back uninsured deposits. But when a bank is on the verge of failing, the specter of systemic risk always exists.
“Ever since the S.&L. crisis in the 1980s, everyone gets rescued,” said the-new-york-times Petrou, a co-founder of Federal
Financial Analytics, referring to depositors.
Robert Hockett, a financial regulation expert at Cornell University, believes it’s time to make the overarching guarantee
explicit. And he’s not alone: Within the next few days, Representative Ro Khanna, a California Democrat, is expected to introduce
a bill that proposes raising or removing the F.D.I.C.’s coverage cap.
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Hockett and others argue that insuring all deposits could improve the banking system. They say it wouldn’t introduce moral hazard,
because putting deposits at risk is not what keeps banks in check. Instead, what’s supposed to keep bankers from acting too
recklessly is the knowledge that if their bank fails, shareholders and bondholders will be wiped out, executives will be
investigated and, in many cases, the government will try to claw back compensation.
Deposit insurance has long been funded by the banks themselves. Since 2005, their contributions have been “risk-priced,” meaning
the more risk a bank takes, the higher the premiums it pays. Larger banks pay more than smaller banks. Hockett’s scheme would
obviously require larger contributions — and tighter regulations — but he envisions a similar tiered system. He also envisions a
return of measures like stress tests, which Congress eliminated for midsize banks during the Trump administration.
Explicitly insuring all deposits, Hockett says, could prevent a run on a troubled bank, because customers would know ahead of time
that their money was safe. It could also help preserve small and midsize banks. Although SVB plainly mismanaged its risk, the bank
catered to a sector it understood well: venture capitalists and start-ups. Its loan portfolio was not the problem. Other smaller
banks also specialize in particular sectors and are willing to make loans that the big behemoths might not be. That needs to be
encouraged, Mr. Hockett says.
Not everyone thinks deposits should be free of risk. Sheila Bair, who was the chair of the F.D.I.C. during the financial crisis,
practically groaned when I brought up the idea of insuring all deposits.
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Otasc ! 5 REASONS o, YOU NEED THE MOTION PANTS 7
“These were big tech companies like Roku whining and crying about their uninsured deposits,” she said. “If a $200 billion bank can
bring down the banking system, then we don’t have a stable, resilient system.”
Bair went on to say that she thinks the banking system is “mostly resilient” and that the real problem was that the regulators
didn’t communicate well enough to the public that the crisis was limited to a small group of banks.
Still, Hockett’s idea has some lawmakers on board. We’ll see if it flies. — Joe Nocera
IN CASE YOU MISSED IT
President Biden asks Congress for new tools to target executives of failed banks. One aspect of the plan would broaden the
F.D.I.C.’s ability to seek the return of compensation from executives of failed banks, a power currently limited to the largest
banks.
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UBS is reportedly in talks to acquire Credit Suisse. The Swiss National Bank and the Swiss regulator FINMA organized the talks,
according to the Financial Times. Credit Suisse said on Thursday that it would borrow as much as $54 billion from the Swiss
National Bank after its shares tumbled 24 percent to a new low.
Goldman Sachs eyes a big payout. The Wall Street giant tried to help Silicon Valley Bank arrange a last-minute capital raise to
save it. But it also had another role: Goldman bought $21.4 billion of debt from the failed bank (which the failed lender booked
at a cost of $1.8 billion), and is set to make more than $100 million by selling the bonds.
A Silicon Valley Bank customer’s view of the collapse goes viral. A number of tweets by Alexander Torrenegra, founder and C.E.O.
of a recruitment site and an investor on the Colombian version of “Shark Tank,” revealed what it was like to be cut off as the
bank imploded.
DO WE NEED A NEW TYPE OF BANK?
The conversation in Washington about how to regulate banks in the wake of Silicon Valley Bank’s collapse is well underway, with
disagreements about how to bail out failed lenders and prevent another crisis.
But to Lowell Bryan, a former head of McKinsey & Company’s banking practice, the answer lies in a debate that was held three
decades ago. His proposal: Create a new type of low-risk bank.
U.S. banking should be divided by levels of riskiness, Bryan argued in the 1990s. Deposits at “core banks” would be insured by the
government, but these lenders would be allowed to participate only in low-risk businesses.
Wholesale banks would draw funding from private investors but wouldn’t be protected by the government. If they made fatal
missteps, the government would intervene to prevent widespread panic, but the firms would fail and investors would be punished.
(Bryan has argued that big financial companies could own both kinds of banks — so long as the depository lender was adequately
protected from its wholesale counterpart.)
The attraction of this system, Bryan told DealBook in an interview, is that it fundamentally limits the risks in the banking
industry in a way that complex requirements for liquidity and capital measures don’t.
“The central issue is, if you give a federal guarantee, you have to put real limits on the ability to raise deposits,” he said.
Consider what happened at banks that have failed recently. Silicon Valley Bank increased its deposit base to $175 billion, while
investing that money in a bond portfolio that was vulnerable to rising interest rates. It also extended $74 billion in loans to
largely one risky sector, tech start-ups.
Meanwhile, Silicon Valley Bank pushed hard for regulatory exemptions that allowed it to pursue potentially lucrative, but
dangerous, financial bets.
Bryan’s idea has been tested before. At McKinsey in the 1980s and 1990s, he was a prominent proponent of the core bank concept,
writing books and testifying before Congress on the matter. He assembled an unusual coalition, including Representative Chuck
Schumer, Democrat of New York and now the Senate majority leader; NationsBank, a predecessor of Bank of America; J.P. Morgan,
before it merged with Chase Manhattan; and Goldman Sachs.
Opposing them was a group that included Jay Powell, a Treasury Department official in the George H.W. Bush administration who’s
now the Federal Reserve chair, and Sandy Weill, the architect of what became Citigroup. They argued that American lenders
benefited from relaxed regulations that allowed them to diversify their businesses, and they won. Rewrites of U.S. banking rules
allowed the creation of both enormous universal banks and smaller lenders that could still take on risks.
Protecting depositors ensures faith in the overall banking system, Bryan said. But banks can’t be allowed to operate with an
essentially unlimited protection against the consequences of risk. He contends that what he’s calling for is clear and narrow,
capable at this point of winning bipartisan support.
“There’s not a need to rewrite everything,” he said.
‘IF I RULED AS OFF-LIMITS ANYTHING I’D WORKED ON WHEN I WAS IN CONGRESS, I GUESS I’D BE A MONK.’
— Barney Frank, the former liberal congressman and an architect of the landmark Dodd-Frank act to reform financial regulation,
defending his decision to serve on the board of Signature Bank. Regulators closed the New York-based lender last weekend after
many depositors withdrew their money following the collapse of Silicon Valley Bank.
ON OUR RADAR: ‘AGE OF EASY MONEY’
There’s a short explanation of what caused the collapse of Silicon Valley Bank: When Moody’s informed the bank’s chief executive
this month that its bonds were in danger of being downgraded to junk, a failed attempt to raise money incited panic and a run on
deposits. But “Age of Easy Money,” a PBS documentary released this week, details a much longer answer that starts with the
financial crisis in 2008. The “Frontline” correspondent James Jacoby details how the Fed’s rescue interventions after the crisis,
and later during the pandemic, fueled the longest bull market in history — and the underlying conditions for SVB’s failure.
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Andrew Ross Sorkin, Founder/Editor-at-Large, New York @andrewrsorkinRavi Mattu, Managing Editor, London @ravmattuBernhard Warner,
Senior Editor, Rome @BernhardWarnerSarah Kessler, Deputy Editor, Chicago @sarahfkesslerMichael J. de la Merced, Reporter, London
@m_delamercedLauren Hirsch, Reporter, New York @LaurenSHirschEphrat Livni, Reporter, Washington D.C. @el72champs
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