Banker’s Hours: Discipline needed in deposit insurance enforcement
A big item in the implosion of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in the nation’s history, has been the high percentage of deposits that were uninsured by the FDIC because they were above the statutory insurance limit of $250,000 per account holder.
This has prompted a lot discussion and commentary on the deposit insurance program which dates back to 1934. A recent piece on the op-ed page of the Wall Street Journal noted that the deposit insurance concept was never meant to help rich people or big businesses. It was for the rest of the country, which had lost faith in the banking system, and with good reason. Around 9,000 banks went broke in the U.S. during the Great Depression. (Kind of puts our present dithering over a couple institutions failing in perspective, doesn’t it?)
It wasn’t just necessary to restore confidence. The nation’s money supply had to be gotten out of the mattresses and into circulation. It worked, and the insurance limit has been ratcheted up to its present level. Back in 1961, when I got out of the military and into mortgage lending, the limit was at a whopping $10,000. Actually, that was quite a bit in those days; we bought our first house in 1962 for $11,500, and loved it — all 750 square feet. Actually, that 87% ratio of deposit insurance to entry level housing price still holds in many markets.
The wealthy can do without the coverage, but the rest of us, and the nation’s economy, can’t. For the good of all, including financial institutions themselves, deposit insurance discipline needs to be enforced by financial regulators.
It could certainly have been so in the instance of Signature and SVB. Both operations were sailing along at over 80% of total deposits over the insured limit, and those deposits were very hot money, meaning that their nature made them at risk of withdrawal given the current economic conditions. The regulators knew this, and they could have obviated the risk by the simple means of a so called supervisory letter mandating increased capital (net worth providing a cushion against rapid withdrals.
That could have easily been accomplished by both banks. They were the darlings of the financial industry, and their stock was flying high. New investors would have lined up to buy stock, and then the managers could have pared down the uninsured percentage over, say, 18 months. But the FDIC backed away from this, as bank regulators often do. In their defense, they are subject to a lot of pressure, from Congress which is lobbied by powerful constituents, to top of the line legal counsel hired by the institutions to relieve regulatory pressure. And, unfortunately, I’ve seen, up close and personal, that banks’ outside auditing firms can fail to raise concerns when they should.
Here’s what I’ve concluded, from reading about the Great Depression, and serving in the trenches during the savings and Loan debacle of the mid-1980s and the Great Meltdown of 2008: it’s human nature to wiggle around statute and regulation for profit and fun any way we can. Who among us hasn’t been on an Interstate and pressed that pedal a bit closer to the metal to get the speedometer 15 clicks above the posted speed limit? Laws can be passed to make certain that the train wreck never happens again. The Financial Institution Reform, Recovery and Enforcement Act (FIRREA) was enacted after the S&L crisis.
And, the famous one thousand page Dodd-Frank Act became law so that fiscal and economic insanity never overcame the banking business ever, ever again. Didn’t work, did it? There must be someone on the bridge steering the ship, or the financial industry will hit the iceberg every time.
In conclusion, I just have to put on the record a piece of evidence that you’re all probably already aware of, but the irony is just irresistible:
Guess who was on the Board of Directors of Signature Bank, and collected a nice stipend in 2022 of almost $122,000 in director fees as well as over $180,000 in stock?
The co-sponsor of the Dodd-Frank Act, that was to eliminate banky hanky-panky for all time to come: Barney Frank himself.
You can’t make this stuff up; you can look it up, though.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is email@example.com
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