The federal bailout of depositors at Silicon Valley banks was organized with historic speed and may have saved the U.S. economy from a devastating wave of bank failures, but it also highlighted the potential need for dramatic changes to the U.S. deposit-insurance system and banking regulations. more broadly. In a hearing before the Senate Finance Committee on Thursday, lawmakers asked Treasury Secretary Janet Yellen a question on many Americans’ minds: Should regional-bank depositors expect the federal government to bail them out if their bank should fail? According to the letter of the law, Yellen responded that she should: Guarantee uninsured deposits only if your bank’s failure poses a “systemic risk” to the US economy. read more: Yellen says banking system ‘sound’, as analysts see little chance for new rules for crisis-hit sector Of course, no one thought the failure of a mid-sized regional bank posed a threat to the entire US economy until last week, and It is reasonable to expect that future regulators will rely on the systemic-risk exception in the law to again justify the hard-earned savings of US individuals and businesses. What’s more, it was the Silicon Valley bank’s reliance on uninsured deposits — above the $250,000 insurance cap provided by the Federal Deposit Insurance Corporation — that made it vulnerable to a bank run in the first place. That’s why Republican Sen. Mitt Romney of Utah and Sen. Some lawmakers, including Elizabeth Warren, are warming to the idea of implementing universal deposit insurance, a Semaphore report said. A major concern for other powerful lawmakers is how to pay for it, though most Americans can hardly imagine having $250,000 in a bank account. The Democratic chairman of the Senate Finance Committee, Sen. of Ohio. A Sherrod Brown spokesperson told MarketWatch that Brown believes “any changes to deposit insurance should protect small businesses and workers, not large investors.” Robert Hockett, who teaches financial law and economics at Cornell Law School, argues that because lawmakers reformed the FDIC system to fund it with risk-based pricing, it would be relatively easy to lift the cap entirely. “We already base insurance rates on banks’ risk profile,” Hockett told MarketWatch. “Risky banks pay higher premiums like smokers pay higher premiums for health insurance.” Hockett advocates removing the cap entirely, allowing banks to assess fees on large accounts to cover the cost of additional insurance and preventing banks from assessing those fees on small accounts. An added benefit of this approach is that it would shrink the so-called shadow banking system or the network of nonbank intermediaries such as money-market funds that businesses rely on as cash-management tools, Hockett argues. “There will be a lot less money flowing into the shadow banking sector, and that’s a good thing,” he said, adding that the opacity of the shadow banking system makes it difficult for regulators and peers to gauge its financial health. The banking industry will likely fight to remove the cap on deposit insurance, as increased fees could eat into profits. The status quo gives the industry an implicit guarantee that deposits will be insured, while the cost of that insurance is borne by more responsible banks and other US taxpayers. Additionally, the move toward unlimited deposit insurance could open the door to more radical reforms in the banking industry, such as the introduction of retail banking accounts at the Federal Reserve. Dean Baker, a senior economist at the left-leaning Center for Economic Policy Research, argued for the move in a recent blog post, writing that modern technology makes it possible for governments to operate a single payment network. A patchwork of private systems used today. Why allow private banks to fund themselves with cheap consumer deposits when the government is guaranteeing those deposits anyway? “We will have a Fed-run system for conducting most common financial transactions, replacing the banks we currently use,” Baker wrote. “However, we will continue to have investment banks, such as Goldman Sachs and Morgan Stanley, borrowing from the financial markets and lending money to businesses, as well as underwriting stock and bond issues,” he added. “While investment banks still need regulation to prevent abuses, we need not worry about their failure to shut down the financial system.” While the complementary nature of unlimited deposit insurance and government-sponsored retail banking may dissuade some in Congress from supporting it, Republicans have strongly opposed Federal Reserve retail accounts in recent years. For instance, Republican Rep. of Minnesota. Tom Emmer said last year that retail fed accounts would put the U.S. “on a treacherous path similar to China’s digital dictatorship.” However, a public system subsidizing private bankers with implicit deposit insurance may also be unsustainable.
