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Great American Deposit Debate Spotlights Legislative Gridlock
"Biden, Powell and Yellen have said virtually everything they can say about the FDIC's backing of uninsured deposits," Goldman's Alec Phillips and Tim Krupa wrote, in an expansive Monday note documenting various options for "supporting" the US banking system.
Janet Yellen drew criticism from all corners last week for what some characterized as mixed messaging around the administration's commitment to safeguarding deposits in excess of the FDIC insurance limit.
Her communications' challenge is
Thanks.
The stats you cited in “All Deposits Under $250,000” suggesting that the FDIC Insurance Fund is woefully unprepared to fund a nationwide deposit bailout was sobering.
It’s similar to the insurance backing many municipal bonds. Or the Pension Guarantee fund which had to be “topped up” a few times. (Partly due to corporate raiders buying a company, restructure in bankruptcy and then dumping the accumulated pension obligations on the fund.)
Municipal insurers were undermined by guaranteeing mortgage related derivatives in the taxable market. Defaults were low and the risks were priced properly in the standard insurance contracts for municipal bonds. The possible exception was Puerto Rico, and the insurance companies by and large were able to handle those losses.
The Congress and regulators need to figure out something. The bifurcated risk system with SIFI fixed the largest banks but let the horse out of the barn for the system as a whole. Part of that was the watering down of Dodd-Frank in 2018. The regulators probably need to cover depositors and banks for larger amounts in a different way by working with Congress and possible private insurers for larger amounts in a first loss system. Regualtions and bank audits probably need to be tightened up as well. This go around was probably small compared to other risks lurking out there- commercial real estate, shadow banks, crypto etc.