On CNN March 14, Roger Altman, a former deputy Treasury secretary in the Clinton administration, said that American banks were on the verge of being nationalized:
What the authorities did over the weekend was absolutely profound. They guaranteed the deposits, all of them, at Silicon Valley Bank. What that really means " is that they have guaranteed the entire deposit base of the U.S. financial system. The entire deposit base. Why? Because you can't guarantee all the deposits in Silicon Valley Bank and then the next day say to the depositors, say, at First Republic, sorry, yours aren't guaranteed. Of course they are.
" So this is a breathtaking step which effectively nationalizes or federalizes the deposit base of the U.S. financial system.
The deposit base of the financial system has not actually been nationalized, but Congress is considering modifications to the FDIC insurance limit. Meanwhile, one state that does not face those problems is North Dakota, where its state-owned bank acts as a "mini-Fed" for the state. But first, a closer look at the issues.
Bail In, Bail Out, or "Socialism for the Rich"?
On Friday, March 10, Silicon Valley Bank (SVB) was put into receivership by the Federal Deposit Insurance Corporation (FDIC). The FDIC announced that deposits over the $250,000 insurance limit would get an advance dividend within the next week, and would receive a receivership certificate for the rest of the funds. Most of the depositors were venture-backed startups that needed to keep large deposits in the bank to meet payroll and pay suppliers, and over 95% of the deposits were uninsured and at risk of being lost. It was basically a "bail in" of the uninsured deposits, which would be recoverable only if funds were available after the bank's assets had been sold.
But that arrangement lasted only two days. On March 12, Signature Bank was put into receivership; and the FDIC, Treasury and Federal Reserve jointly announced that all of the deposits at the two banks, not just those under the insurance limit, would be available for withdrawal on demand.
At a Senate Finance Committee hearing on March 16, Treasury Secretary Janet Yellen said that the guarantee would not apply to all deposits at all banks. Rather, the determination would be made on a case-by-case basis.
In a Bloomberg News interview on March 16, former FDIC Chair Sheila Bair criticized that decision. She observed that the two banks getting special treatment were not "systemically important," and that the cost of the expanded guarantee was to be covered by a special assessment against all insured banks, including the small community banks that provide essential credit to local businesses. She argued that if guarantees were going to be given over the $250,000 limit, they should apply to deposits everywhere.
Meanwhile, on March 12, the Federal Reserve announced that it had set up a special purpose vehicle of the sort arranged for COVID relief in March 2020, called the Bank Term Funding Program (BTFP). Like the COVID special purpose vehicles, it would be backstopped with $25 billion from the Exchange Stabilization Fund (ESF), a fund set up in 1934 to stabilize the exchange value of the dollar. The BTFP was to be available to any bank needing it, and many banks obviously did. Over $300 billion in short-term loans were withdrawn from the Fed's various facilities just in the week after SVB's collapse.
This money is not, however, the sort of "free lunch" provided to troubled banks in the last financial crisis. The money is to be advanced as a loan for up to a year, at a hefty interest rate as of March 22 of 4.88%. According to a Federal Reserve press release, advances will be made to "eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress."
"Valued at par" means that banks can hold their long-term federal securities to maturity while acquiring ready cash against them to meet withdrawals, without having to "mark to market" and sell at a loss.
The Systemic Flaw
So what caused this crisis, and what can be done to remedy it?
In the midst of the 2008 economic crisis, former Fed Chair Alan Greenspan conceded that there was a flaw in his perception of the financial operating system. For 40 years, he had believed that banks could "self regulate" responsibly, a presumption that had proven to be flawed.
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