by Former FDIC Chair Sheila Bair discusses the fallout from SVB’s failure and assesses the stability of the regional banking system in “The Claman Countdown.”
Former Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair said Monday that regional banks appear stable, but urged regulators to provide greater clarity about why they provided systemic risk exemptions for uninsured deposits in failed Silicon Valley Bank; and Signature Bank.
Bair, who chaired the banking regulator during the 2008-2009 financial crisis, appeared in FOX Business Network’s “The Claman Countdown.” on Monday and told host Liz Claman that he believed the regional banking system was “reasonably stable” and added: “The problem with these systemic risk exceptions is that they suggest something bigger and broader is going on.”
“Specifically Silicon Valley Bank, it was an unusual situation. They had an unusual deposit base, rapid growth, tremendous interest [rate] risk management – there are just a lot of idiosyncratic things about this bank that led it to fail,” Bair said. I don’t know if that’s the case or not, but the markets obviously believe it exists and, more worryingly, uninsured depositors believe it exists.”
SILICON VALLEY BANK: FED TELLS SUPERVISORY VICE CHAIRMAN TO INVESTIGATE WHAT CAUSED COLLAPSE
The headquarters of Silicon Valley Bank in Santa Clara, California, on March 10, 2023. SVB became the biggest U.S. bank failure in more than a decade after its long-time customer base of tech startups grew restless and drained deposits. (Philip Pacheco/Bloomberg via Getty Images/Getty Images)
Bair explained: “I think we need better clarity and communication about what the concern is and if there is a concern that we’re going to have a large backlog of unsecured deposits – I don’t see that – but if the regulators see that, I think they do something really systemic, not just these isolated things for a few banks because that just puts pressure on the other banks that don’t have the systemic risk designation.”
Typically, the FDIC covers deposits at insured financial institutions up to $250,000, and amounts above that limit are considered uninsured, leaving those depositors on the hook for losses on their uninsured deposits in the event of a bank failure. After the failure of Silicon Valley Bank and Signature Bank, the Federal Reserve, the Treasury Department and the FDIC announced that all depositors – even those with accounts above the limit – at those two institutions would be supported by the FDIC due to an exemption of systemic risk approved by regulatory authorities.
The move was intended to head off concerns that business customers of those banks would be upset because much of their working capital used for things like payroll and operating expenses would be out of reach as it was held in accounts above the FDIC-insured limit.
HOW THE SILICON VALLEY BANK BURNED
An FDIC sign is posted in a window at a Silicon Valley Bank branch in Wellesley, Massachusetts, on March 11, 2023. (AP Photo/Peter Morgan/AP Newsroom)
Claman asked Bair whether the systemic risk exemption granted to the two banks amounted to a “bailout” of uninsured depositors.
“Well, it’s a bailout — different people define ‘rescue’ in different ways,” Bair said. “We have a set of rules, we are very supportive of the banks. Deposit insurance is one of the things we let the banks have – they pay a premium for it, it’s capped at $250,000. If we change those rules for a few banks and then give them more coverage than anyone else has, or was entitled to under the law, I think that’s a bailout.”
“Banks will pay for it, all banks pay into this special assessment when you make a systemic risk exception, including community banks, big banks – it’s weighted toward the big banks, but community banks will pay into that as well.” Bair said. “I don’t think anybody believes that community banks are going to get a systemic risk exemption to protect their uninsured deposit. So there’s a lot of fairness and equity issues around that, and I sympathize with the regulators. make some quick decisions, but, boy me, I think we need better communication and clarity about why these two institutions were systemic, and if there’s a broader problem, why aren’t you taking broader steps.”
FEDS ACT ON FAILED SILICON VALLEY BANK, MOVE TO PROTECT UNINSURED DEPOSITORS
Federal Reserve Board Chairman Jerome Powell (Alex Wong/Getty Images/File/Getty Images)
Claman noted that billionaire investor Bill Ackman, who is the founder and CEO of hedge fund Pershing Square Capital Management, has asked the FDIC and other bank regulators to immediately extend insurance to all deposits, including those that normally would were uninsured: “I don’t “I see evidence that it is necessary, although sometimes there is a fear, even if the banks are basically OK, that it might make things worse.”
Bair explained how during the financial crisis the FDIC temporarily expanded the deposit guarantee to cover all accounts, including those over the $250,000 limit, to cover the types of transaction accounts that businesses use for payroll and operational expenses that require larger balances.
| Heart | Security | last | Change | Change % |
|---|---|---|---|---|
| SIVB | SVB FINANCIAL GROUP | 106.04 | -161.79 | -60.41% |
| SBNY | SIGNATURE BANK (NEW YORK NEW YORK) | 70.00 | -20.76 | -22.87% |
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He noted that Congress told the FDIC it had to end the program without express authorization from Congress, and the agency has a simplified way to request that authority. All banks paid into this program and received protection.
Bair said, “If they feel they had to go that route — and that’s a big one, because I don’t really see it — but if they feel they have a widespread problem, it seems to me that, yes, they should do a broad-based program which would be equal and protect all banks”.
