A new era in deposit insurance?

Has deposit insurance changed forever? Regulators boldly protected all depositors at Silicon Valley Bank and Signature Bank when they failed. Is 100 percent coverage of bank deposits now the norm?

Certainly, that is going to be the expectation. How do you protect all depositors in two high-profile bank failures and then refuse to do so when the next one comes along? Years ago, when we talked about too-big-to-fail, we meant the bank, but now I wonder if we mean the depositor. I hope not. Imagine the public outcry if government officials said we need to protect $100 million depositors but allow the ones with $300,000 to take a loss. 

But I have to wonder, whatever happened to moral hazard? Why did regulators feel compelled to return every dime to depositors who ignored the insurance limit? A haircut of 10 or 15 percent would have maintained some level of discipline in the system. But now that the government has said that everything is insured, who’s going to bother to pay much attention to the condition of their bank? Regulators, who may have benefitted from customers closely scrutinizing their financial institutions, will now be entirely on their own looking for signs of mismanagement or worse.  

Which leads me to my next point: The failures of SVB and Signature do not warrant additional bank rules. It didn’t take long for some politicians to call for more regulations, or for the most stringent regulatory supervision to be applied to more banks. More regulation is not the answer. SVB and Signature did not fail due to a lack of supervision or too few rules. Bad asset/liability management is a bad business strategy in any bank, no matter the size or regulatory obligations. It is a fool’s errand to think we can regulate away all bank failures. 

I remember how hard the community bank lobby worked to raise the deposit insurance limit to $250,000 from $100,000. That was back during the Dodd-Frank Act debate, when we thought the insurance cap made a difference. Looking forward, Congress will need to make the law match reality surrounding bank deposits. Community bankers need to stay alert. For years, too-big-to-fail meant community banks paid more for deposits as they competed with mega banks that customers perceived as safer. If a new deposit safety landscape is emerging, then community bankers will need to be intimately involved in the deliberations to make sure their portion of the industry is treated fairly.