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A New ‘Subprime Is Contained’ Moment?
There was no rest for the weary Wednesday, as regional bank shares in the US continued to look unstable a day on from a harrowing rout+.
The ongoing tumult raised the stakes for Jerome Powell, who, to quote Ricky Ricardo, "had a lot of explainin' to do" following May's FOMC meeting.
There's a long list of legitimate questions that might fairly be asked of the Fed in the context of recent bank drama. Michael Barr tried to answer a lot of those questions last week with an internal review of the
I have no horse in this race (no deposits above any insurable amount), but it seems to me a simple enough problem. Gubmint insures the deposits in a bank for any amount, in return for bank agreeing to proper and appropriate regulation and oversight, enough so that the gubmint is unlikely to be on the hook ever. You (Mr. Bank CEO) want to be less regulated? Fine, but we won’t insure your deposits above the current $250k. Raising insured amount does solve the banking house of cards issue altogether, but it seems like it would help address one issue that can lead to the runs.
“doesn’t solve”, not “does solve”, in the last sentence.
Or put all checking accounts at the Fed and have the Fed pay banks a small fee to administer them. When people go to the bank to open their Fed checking account, the bank can then sell customers on savings products, term deposits and so on.
I don’t think the bank business model would survive moving demand deposits from banks to the Fed.
Not sure the current bank business model is going to survive. Period.
Interesting idea.
Perhaps something like this will occur by the natural process of banking being concentrated into progressively smaller number of progressively larger banks. Extended to asymptote, you have one very large bank, backed by the Fed as too large to fail, which produces a synthetic version of your proposal.
If anyone is interested in banks’ use (non-use) of hedging,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4410201
Banks are disincentivized to hedge HFM because the hedging G/L hits earnings.
Banks don’t much hedge AFS either.
The paper doesn’t seriously examine why banks make these decisions; in my opinion, attributing it to “gambling” is facile.
My guess is that the cost of hedging has something to do with it.
As far as I’m concerned, at this time Social Media is the X-factor, and I sure hope the Biden administration, Treasury, and Fed don’t underestimate the threat and get caught flat footed…again…
Can the FDIC run out money and fail?
The FDIC levies banks generally to fund deposit insurance payouts on failed banks, and can/does impose heavier levies on large banks. That’s not an infinite pot of money, but I’d think the biggest banks can pay enough to cover quite a number of small bank deposit payouts. It’ll hit their earnings and capital, though.
Even in a messy bank failure, only a portion of deposits will require FDIC payouts, and eventually the bank’s assets will be sold off to recoup much of the payout.
The FDIC can also borrow from the Fed, and that pot of money is deep indeed.
I guess it would be better to have some actual calculations, which I don’t, but the FDIC running out of money seems pretty far down the list of things to fear.
The FDIC sounds similar to the US Pension Benefit Guarantee Corp (PBGC). It is funded in a similar fashion. The Congress has been forced to “shore it up” more than once.
One reason was that the much-esteemed corporate raiders who bought steel companies and other old-line companies with large legacy pension liabilities. They just put the companies into bankruptcy and dumped the pension obligations on the PBGC which eventually were passed along to the taxpayer. Mmmm… that sounds familiar doesn’t it? Private profits, socialized losses.
A possible distinction is that those pension plans were broadly underfunded, i.e. insolvent as stand-alone entities, and relied on income stream from the companies.
Banks are solvent, at least the great majority are. Even small and weak PACW is nominally solvent (assets less PPE and intangibles, minus liabilities, is slightly positive), which means after haircuts it is only modestly insolvent.