“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 easy enough to summarize. Treasury and the Fed plainly intend to protect all deposits (SVB style) until they believe the specter of contagion no longer poses a systemic risk. But this is a rare case when doing something is actually easier than saying it.

Yellen (and Powell) can’t come out and tell lawmakers they’re temporarily claiming for themselves the right to take actions which are tantamount to an act of Congress.

But, at the same time, not alluding to such actions risks exacerbating a panic, which could force Treasury and the Fed to do the very thing they’d rather not have to do — namely, guarantee all deposits via the ESF and ad hoc liquidity facilities, and let Congress complain about it.

The situation felt a semblance of stable on Monday after First Citizens agreed to buy SVB. But, as Goldman’s Phillips and Krupa noted, markets are likely to remain “uneasy” for a while given “confusion about the government’s position on deposit guarantees, concerns regarding depositor confidence in light of this confusion, and uncertainty about the prospects for smaller banks in light of the first two issues.”

Main Street is justifiably wary of the suggestion that public policy should be made based on petulant market behavior, but unpalatable as this is, the feedback loops are real. “Uncertainty that weighs on bank share prices [and] in turn reduces depositor confidence risks a self-reinforcing cycle,” Goldman went on to say, adding that there are “no good options for executive action.”

The figure below is very helpful, or at least it was for me. It shows various avenues for protecting deposits, describes the scope of such protections and gives you a sense of whose approval is needed.

We’ve already seen the systemic risk exception employed, but as indicated, there are problems with it. The guarantee is merely implicit — in a strict sense, it applies only to closed banks, with caveats. Currently, the assumption is that given the circumstances, any bank failure would be viewed as potentially systemic, and thereby the SRE would be invoked. But nobody knows for sure.

The “Liquidity Event Determination” is worth a recap. Here’s Goldman with the brief history, and also with some color on the pitfalls:

The Liquidity Event Determination (LED): Congress established this authority in the Dodd-Frank Act in 2010 in response to FDIC’s decision in 2008 to establish the Temporary Liquidity Guarantee Program (TLGP), which relied on the SRE to broadly backstop bank debt and uninsured deposits. Dodd-Frank limited that authority to only closed banks and requires the FDIC to use the LED for a broad guarantee. However, the LED has disadvantages. First, the president must request congressional approval to use the SRE. While Dodd-Frank lays out an expedited process to vote on approval, this nevertheless presents a major obstacle. Second, the current situation in financial markets might not meet the definition of a “liquidity event”: “…an exceptional and broad reduction in the general ability of financial market participants to sell financial assets without an unusual and significant discount; or to borrow using financial assets as collateral without an unusual and significant increase in margin; or an unusual and significant reduction in the ability of financial market participants to obtain unsecured credit.” Third, the LED authorizes the FDIC to guarantee uninsured deposits but limits this only to deposits held in noninterest-bearing transaction accounts. This could put smaller banks at a disadvantage if large banks declined to participate in the program and instead continued to pay interest on deposits. Given all of these disadvantages, it seems unlikely that the president would ask to cover deposits under this authority.

As for the ESF idea, I covered that here+ last week. Suffice to say that although there’s precedent (the pre-TARP money market guarantee in 2008), and although Congress’s subsequently adopted limits on ESF deployment only apply to money market funds, using the ESF could be a political nightmare. As Goldman wrote, it’d “run counter to the intent of Congress” (to the extent it’d amount to Yellen backing deposits the FDIC can’t back) and it’d also amount to putting taxpayer money on the line.

Ultimately, Americans should hope this doesn’t become a real, national crisis. Because, as I’ve written in these pages time and again, the US doesn’t really have much in the way of a functioning legislature, and it’s arguably even more dysfunctional now than it’s ever been. At the risk of adopting an overly pessimistic view, there’s not much to suggest the current Congress would respond expeditiously to a crisis unless that crisis were truly existential (e.g., the original COVID relief legislation).

Also, as Goldman mentioned, ad hoc measures adopted by Treasury and the Fed likely reduce the incentive for Congress to act. “In theory, another bout of acute banking stress — additional bank failures and/or an accelerated run on deposits — could provoke a near-term response from Congress [but] with the seemingly very high probability that the FDIC, Treasury and Fed would cover all uninsured deposits in further bank failures, an immediate response from regulators could limit the urgency for a quick legislative intervention,” Phillips and Krupa wrote.

Keep that latter point in mind when you hear politicians on both sides of the aisle malign unilateral action by “unelected” bureaucrats. Maybe — and I’m just tossing this out there — if America’s elected officials prioritized legislating in the best interest of the body politic over weaponizing the levers of government against the other party, the technocrats and bureaucrats wouldn’t have to spend their days putting out fires. Relatedly, the odds of technocrats and bureaucrats making poor decisions with unintended consequences would be greatly reduced if every other decision they’re compelled to take weren’t made under some kind of duress.