The sound and fury of demands for universal deposit insurance are growing with Bill Ackman and Elon Musk the latest to join the calls for this ultimate step and as we detailed last night, Bloomberg reports Washington is studying just how to guarantee all $18 trillion in US deposits (with just $125 billion in the FDIC’s Deposit Insurance Fund).
“US officials are studying ways they might temporarily expand Federal Deposit Insurance Corp. coverage to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis.”
But since US Treasury Secretary Janet Yellen’s embarrassing and confusing comments about who gets saved and who doesn’t (and who decides) during testimony before the Senate Finance Committee, it appears Washington thinks trotting out the little old lady once more to reassure nervous depositors is the right path back to financial stability.
As Reuters reports, in excerpts of prepared remarks to an American Bankers Association conference, Yellen said government steps taken in recent days to protect uninsured deposits in two failed banks and create new Federal Reserve liquidity facilities have shown a “resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe.”
But she immediately switches to try to quell any ‘picking winners’ sentiment by assuring her audience that:
“The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system,” Yellen said.
And crucially, she claims they will rescue ALL depositors again…
“And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Of course, there is the obligatory – ‘do not worry, there is nothing to see here’ comment (or “it’s contained”)…
“The situation is stabilizing. And the U.S. banking system remains sound,” Yellen said.
“The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized.”
Tell that to First Republic Bank shareholders…
Specifically, the Treasury chief didn’t directly address the issue of temporarily expanding federal deposit insurance to cover all deposits in the excerpts released by the Treasury Department.
“Treasury is committed to ensuring the ongoing health and competitiveness of our vibrant community and regional banking institutions,” she said.
Of course, the only path to this is actual legislation, which means Congress (i.e. no executive order)…
“Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules,” the House Freedom Caucus said in a statement, and we are confident most of the progressive wing will not be too excited about bailing out billionaires and corporations with orders of magnitude more in the bank than the FDIC limit.
…and that means, don’t hold your breath for any blanket unlimited size deposit insurance.