US regional banks: Deposit insurance measure will ease credit crunch -Dlight News

US regional banks: Deposit insurance measure will ease credit crunch

Small US banks have big problems. Currently, their focus is on survival. That’s why America’s Mid-Size Bank Coalition has called for an expansion of deposit insurance to stem outflows. But even after stability is restored, the lending capacity of regional banks will be severely constrained. It will hurt the US economy.

This A request to expand federal deposit insurance Deposits of more than $250,000 for the next two years show that distrust in US banks has its own momentum. The MBCA argues that the move will immediately prevent an exodus of deposits.

It should not come to this. Opponents of risk-free deposits are rightly concerned about moral hazard.

Temporary guarantees may also be required. Former FDIC Chair Sheila Baer says A flight of deposits can make even the biggest banks bigger, while otherwise healthy lenders run into trouble.

Regulators and politicians will do their best to avoid that risk. Besides potentially extending deposit insurance, they are providing access to sufficient liquidity. Yet even if they succeed in calming the immediate crisis, smaller US banks will bear the brunt.

The point is not just that regional banks’ advantages over larger rivals – more relaxed regulations and lower capital requirements – are likely to be reconsidered. It is also possible that some deposits transferred in the current panic may not return.

If regional banks are left with a small “sticky” deposit base, they can, in theory, draw liquidity from the Fed’s bank portfolio funding program. However, its relatively high cost – a one-year overnight indexed swap plus 10 basis points – makes it an unpopular source of new loans, Jefferies analysts say.

It points to a credit crisis that will affect Main Street, not Wall Street. Regional banks helped boost small businesses. Even before the latest bank was up and running, their willingness to lend had waned. Extending the guarantee on deposits will further benefit them. It won’t avoid the next credit crunch, but it will make it less severe.

The Lex team is interested in hearing more from readers. Please let us know what you think about increasing the deposit guarantee in the comments section below.

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