Lawmakers created the Federal Deposit Insurance Corporation, also known as the FDIC, in the first years of the Great Depression in order to prevent bank runs and restore faith in the financial system. Some lawmakers are considering revisions to the present deposit insurance limit of $250,000 as the economy grapples with the second-largest bank failure in American history.
Silicon Valley Bank provided services to half of venture-backed technology and healthcare firms in the United States; the vast majority of customers therefore maintained deposits well above the $250,000 threshold backed by the FDIC, since businesses generally require larger sums of liquid assets to conduct operations and compensate employees.
When the FDIC was forced to take over the company on March 10, however, officials guaranteed deposits both above and below the $250,000 threshold in order to prevent bank runs at other financial institutions. Signature Bank, another company with a substantial majority of large depositors, collapsed on March 12 and was likewise taken over by the FDIC.
Sen. Elizabeth Warren (D-MA) and Rep. Maxine Waters (D-CA) have each suggested in recent days that the $250,000 limit should be reexamined. Lawmakers have indeed raised the deposit insurance threshold over the years: the FDIC only offered $2,500 of deposit insurance in 1934, a threshold which gradually increased to $100,000 in 1980 before reaching $250,000 with the financial reforms that occurred amid the Great Recession in 2008. The FDIC funds deposit insurance through fees on covered banks rather than taxpayer dollars.
Treasury Secretary Janet Yellen has sent mixed signals about whether officials would continue to support both insured and uninsured deposits, prompting unease among some investors.
David Bahnsen, the founder of Manhattan-based wealth management firm The Bahnsen Group, told The Daily Wire that he expects authorities to maintain assumptions that there is an “implicit” unlimited amount of FDIC coverage available while leaving the codified $250,000 threshold intact. Such an approach, however, would “improperly price risk and protection, and create a moral hazard for depositors, and indeed the broader financial system.”
He added that the creation of an explicit system centered around unlimited FDIC coverage would require congressional approval, which regulators “clearly want to avoid,” as well as increased payments from the “low-margin banking system.”
Silicon Valley Bank fulfilled withdrawal requests by selling a long-term bond portfolio that had declined in value amid Federal Reserve actions over the past year to hike interest rates, moves which followed excessive monetary stimulus in response to the lockdown-induced recession. Assets in the overall banking system are now $2 trillion lower than their book value, according to a study from analysts at the National Bureau of Economic Research.
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Bahnsen noted that the fractional reserve banking system, under which financial institutions only maintain a portion of deposits immediately available since account holders generally do not need instant access to all of their funds, will always carry some degree of bank run risk. He asserted that actions from the Federal Reserve nevertheless prompted the current volatility.
“All levered finance means financial contagion risk is a very real thing when confidence falters, and faltering confidence is the ultimate self-fulfilling prophecy,” Bahnsen continued. “The two causes of the Silicon Valley Bank implosion were the Federal Reserve’s loose policy and the Federal Reserve’s tight policy. Fractional reserve banking was a problem for Silicon Valley Bank only after the Federal Reserve policies created a boom then created a bust.”