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The Biden administration is at pains to describe its weekend rescue of Silicon Valley Bank as anything but a bailout, but experts agree that the move will have wide-ranging implications for the banking sector for years to come, with some going so far as to say the action represents a repudiation of the post-financial crisis consensus on U.S. bank regulation.
See also: Biden says Americans can have confidence that banking system is safe
“The spirit of Dodd-Frank is dead,” Peter Conti-Brown, co-director of the Wharton Initiative on Financial Policy and Regulation at the University of Pennsylvania, told MarketWatch, referring to the financial reform law passed in the wake of the 2008 financial crisis, which was intended to “protect the American taxpayer by ending [bank] bailouts.”
“After the very first bank of any consequence failed, the immediate reaction was to guarantee all deposits, without even waiting a day” to gauge whether such guarantees were necessary, a move that saved not only the sophisticated depositors at Silicon Valley Bank but also the owners, managers and creditors of other poorly managed banks that may have failed absent intervention, he added.
The move by the Federal Reserve and the Federal Deposit Insurance Corporation to ensure deposits at Silicon Valley Bank and Signature Bank, which also failed over the weekend, raises the question of whether Americans can assume that all bank deposits of any amount will be guaranteed by the government, despite the statutory cap of $250,000 per bank account.
Banks
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have historically opposed increasing deposit insurance levels, because that would mean they would have to pay more fees to cover the costs of insurance, and Congress may be reluctant to approve an increase, according to Brian Gardner, chief Washington policy strategist at Stifel.
“Some lawmakers will question a government guarantee of wealthy depositors when the average account size is well below the current deposit insurance cap,” he wrote in a Monday note to clients. “Other lawmakers will oppose the expansion of government guarantee of deposits on philosophical grounds.”
Not raising the cap, however, would mean that banks would enjoy the subsidy of an implied guarantee of customer deposits without having to pay premia to cover the insurance.
Meanwhile, depositors and banks face little incentive to engage in better risk management, Conti-Brown argued, opening up the U.S. regulatory apparatus to critiques that it protects the powerful at the expense of everybody else.
“The Fed is consumed with pushing people out of work in order to stabilize inflation, while also making sure the VC community doesn’t have to go a day without uncertainty,” he said.
In the short term, regulators will likely respond with increased oversight of large regional banks
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like Silicon Valley Bank, according to Todd Phillips, a banking law expert and fellow at the Roosevelt Institute.
“At a minimum, they are going to increase regulations on those banks with assets between $100 million and $250 million,” the same group of banks that successfully lobbied for the passage of a 2018 that encouraged the Federal Reserve to ease its oversight of all but the very largest U.S. banks, he said.
But Congress and regulators have some “soul searching to do” on how much of a role the free market should be playing in the banking sector, Phillips said, and whether regulators will be forced to rein in the freedom and profits of banks in order to finance the level of deposit insurance the public has apparently come to expect.
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