Speculation is running high that new legislation is underway to remake deposit insurance. There has been no agreement on both sides of the aisle to date. However, one thing is for sure: The recent crisis has turned the spotlight on small depositors vs. large depositors that can be classified more as investors.
Crypto company Circle was found to maintain $3.1 billion of deposits at SVB. The most likely result of the legislation would move away from the current $250,000 maximum threshold. Instead, a new federal insurance framework creating deposit insurance tiers based on deposit size is anticipated. A sliding scale of bank fees related to deposit size may be expected to further differentiate various classes of depositors. Private insurance for the largest depositors has not been ruled out.
Lawmakers have been unapologetic in their criticism of the banking regulators and question the adequacy of regulatory controls. Democratic leaders, most especially, argue that the passing of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 eased financial regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Economic Growth, Regulatory Relief, and Consumer Protection Act effectively raised the threshold from $50 billion to $250 billion under which banks were deemed too big to fail. Both SVB and Signature Bank fell below the $250 billion threshold, but their bankruptcies demonstrate the impact to the financial system.
If indeed the banks' collapse was due to mismanagement and not statutory failure, then the solutions may lie in more heightened asset and liability risk management. Renewed focus on concentrations, capital, liquidity, and interest-rate risk are some lessons learned. Special attention to duration risk to a bank's portfolio in an environment of rising interest rates is critical.
The FDIC Quarter Banking Profile for the fourth quarter of 2022 (published this February) highlighted key banking industry weaknesses resulting from unrealized losses on investment securities brought by rapid increases in market interest rate. Sudhir Jain, former National Futures Association exam director and currently managing director at Patomak Global Partners said, "When SVB liquidated its available-for-sale portfolio to meet deposit withdrawals, the market took note creating a bank run. With remaining assets locked in illiquid loans and hold-to-maturity securities, SVB's on-hand liquidity was insufficient. Liquidity, not solvency, was the key issue here."
There is no fail-safe insurance in preventing bank failures. The recent growth of innovation technology-related banking services and evolving market dynamics presents a constant challenge to regulators. Implementing a planned and contained resolution for banks with $100 billion and above are new considerations.
Amy Poster is a risk, regulatory, and governmental affairs consultant in banking and asset management and served as a senior policy advisor to the United States Treasury Special Inspector General-Troubled Asset Relief Program, or SIGTARP, during the 2008-2010 global financial crisis. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.