Fearing contagious bank runs around the country, the government is trying to assure Americans that money is safe in the bank, and not just the ones that are considered too big to fail. Treasury Secretary Janet Yellen clarified on Tuesday that the government could rescue smaller community banks if needed.
“Our intervention was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffered deposit runs that pose the risk of contagion,” Yellen said.
Yellen’s statements may have calmed some fears that regulators would choose “winners and losers” in the banking turmoil. Some, like Sen. James Lankford of Oklahoma, have raised concerns that the federal government is creating a crisis of confidence in smaller banks by sending the message that larger banks will be fully protected.
LEARN MORE: Will federal regulators secure deposits at all failing banks like they did at SVB?
Following the second and third largest bank failures in U.S. history, the FDIC took over both Silicon Valley Bank and Signature Bank, making all insured and uninsured deposits available within days. But former FDIC chair Bill Isaac said the government went too far.
“I do not believe they should have given 100% guarantee to the uninsured depositors. That was a mistake,” Isaac told Straight Arrow News. “There are a lot of small banks that are saying, ‘Why are they doing that for them and not us?’ And I think that’s a good question for them to be asking.”
Isaac, who served as FDIC chair from 1981 to 1985, said if he were in charge, he would have recommended that all deposits over the insured $250,000 get less than the full dollar amount.
“We would give them something like 80 cents on the dollar, some number upfront, and maybe a receivership certificate for anything above that,” he said. “If we collected more, they could ultimately – the large depositors – could ultimately collect the initial amount. But in the meantime, they got 80% of their money, which should have not been a big problem in the economy.”
Isaac said he disagreed that fully backstopping the two banks was necessary, as Yellen has said. But he did say the government acted in a resolute manner and that he didn’t doubt them when they have said they’re “not going to let the system come down.”
“I hope we are stabilizing; I don’t see any reason why we shouldn’t, the banking system in general is in pretty good shape with reasonable capital,” he said. “I do believe that there are some institutions, we’ve just seen three of them, that were out of control, were not properly being run, not properly being supervised. And so I think we may have some more of those around to deal with. But as far as the industry in general, the industry in general is just fine.”
Some lawmakers are proposing sweeping changes to bank regulation and insurance, including increasing the FDIC insurance cap a significant amount from the current $250,000.
“I think that lifting the FDIC insurance cap is a good move,” Sen. Elizabeth Warren, D-Mass., said. “Now the question is, where’s the right number? Is it $2 million? Is it $5 million? $10 million? Small businesses need to be able to count on getting their money to make payroll.”
“I think that would be a horrible idea and would destroy the free enterprise system that we have developed and the banking system that supports it,” Isaac said.
Instead, he said he had recommended an idea back when he was FDIC chair that would fully insure 100% of deposits for business checking accounts that did not bear interest, saying it would be a huge benefit to the country and small business.
“There’s a tendency for people to get panicky, but there’s no reason to, the government can stop what’s happening here,” Isaac said of the banking turmoil. “The question is, how are we going to do it? Are we going to do it safely and soundly? Are we going to come up with another bad idea or two?”
LEARN MORE: Why are banks collapsing and is your money safe in the bank?
